A New Oil Dispute Between South Sudan And Sudan

Courtesy of STRATFOR (subscription required), a report on the latest dispute between South Sudan and Sudan:

A New Oil Dispute Between Sudan and South Sudan
South Sudanese President Salva Kiir Mayardit. (SIMON MAINA/AFP/Getty Images)


As South Sudan and Sudan attempt to work out a more permanent settlement regarding oil revenue and border demarcation — the current agreements expire in three and a half years — both countries, but especially Sudan, may use deliberate disruptions to oil flows as leverage in negotiations. The South Sudanese government on May 20 accused Sudan of blocking South Sudan’s oil from flowing through Sudanese pipelines to the Heglig oil processing plant, a key location along the contested border. The blockage, which reportedly began May 17, is the first significant dispute between the two countries since they signed a deal in March allowing South Sudan to bring its oil production back online. Given the countries’ economic codependence and the current pressures facing each, most of the oil will likely continue to flow. But oil from one area in particular — South Sudan’s Unity state — will face a higher risk of disruption given the state’s lesser importance to overall revenues, which make it more suitable for attacks, sabotage and political maneuvering.


In retaliation for blocking the oil at Heglig, South Sudan has reduced production from a claimed level of 200,000 barrels per day (though in reality it was likely not that high) to 105,000 barrels per day. South Sudanese President Salva Kiir Mayardit was expected to visit Khartoum on May 20 but postponed the trip until mid-June, only adding to the concerns about the continued flow of South Sudan’s oil. The country has accused Sudan of using its security forces to scare off technicians from the plant. Khartoum maintains that it has done nothing to shut down the facility. China, the plant’s operator, claimed that technical problems are responsible for the stoppage, though China avoids taking sides in disputes between the two countries and likely would not publicly acknowledge it even if production were halted at Sudan’s insistence.

Sudan-South Sudan Border and Oil Fields

South Sudan’s maximum possible oil production is an estimated 350,000 barrels per day, 250,000 of which can be produced in Upper Nile state and does not transit through Heglig. The rest of the crude, about 100,000 barrels per day, is the Nile Blend produced in Unity state. Recent events show that while the two sides are attempting to paint a picture of cooperation for the international community, deep strains remain. For instance, Juba and Khartoum have not agreed on a final border demarcation, and on May 5, South Sudan said that it would reclaim Sudan’s oil-producing Abyei region “at any cost.” This followed the killing of a local tribal leader and a U.N. peacekeeper in an attack by another tribal militia that Juba accused Khartoum of “masterminding.” 

 Fields in Abyei and Unity state still remain vulnerable to attacks from various rebel groups and Sudanese armed forces, although right now there is political will on both sides to resume production. If Sudan was able to disrupt oil production or seize oil fields in Unity state without causing Juba to shut down production in Upper Nile state, then the hit to Khartoum’s finances would be limited. Furthermore, South Sudan does not have the capability to protect all of its oil infrastructure in the region, as fighting in April 2012 showed.

Both governments are dependent on revenue from oil exports, but South Sudan is in the tougher position. Prior to halting production in January 2012, oil revenue constituted 97 percent of Juba’s budget. Since that time, South Sudan has had to restrain spending and rely on its foreign exchange reserves to finance the government. As Stratfor noted in 2012, South Sudan’s reserves would run out by the middle of 2013 if it were unable to restart production, which pressured Juba to reach a settlement sooner rather than later. By comparison, oil revenue accounts for about 40 percent of Khartoum’s budget, about half of which comes from Sudanese oil fields. (The other half is from transit fees collected from Juba.) Sudan also has a larger non-energy industry tax base to gain revenue from and has weathered the drop in South Sudanese oil production thus far.

Juba has consistently tried to reach out for help from other countries to mitigate its disadvantages against Sudan. Following the recent stoppage, South Sudan brought in the Chinese ambassador hoping to use China — the largest buyer of South Sudanese crude — to pressure Sudan. This was not the first time Juba has attempted to involve China, but previous attempts have not been entirely successful. In April 2012, the South Sudanese president cut a state visit to China short after Beijing made it clear that it did not intend to intervene in the dispute. Juba has also tried to rally support from regional counterparts Kenya, Ethiopia and Uganda, but none of these countries have the ability to provide South Sudan with anything more than diplomatic support.

South Sudan must export a significant portion of its oil, and presently it has no alternative to using Sudan’s pipeline network to get that oil to market. Should tensions between South Sudan and Sudan flare up, Juba is not in a position to shut down its oil production or provoke Khartoum in a way that could invite retaliation against South Sudanese oil production. Conceivably, South Sudan could fund itself using only exports from Upper Nile state, leaving Unity state’s production offline. The recent closure of pipelines may show that Sudan is willing to test this possibility. Under this scenario, Juba would not be under the same sort of financial constraints to quickly cave into Khartoum’s demands because it could still produce 250,000 barrels per day and export it, although Sudan could block these exports due to its lesser dependence on oil revenue.

Because the current agreement between Sudan and South Sudan on oil exports and transit fees expires in three and a half years, both Khartoum and Juba are already positioning themselves for the next round of negotiations. The Nile Blend-producing fields in Heglig and Unity state could make the region useful for the countries to prod at one another in pursuing an advantage, and thus will remain at an elevated risk for the foreseeable future. Sudan will likely build up pressure around Heglig to avoid going into negotiations facing a less lucrative deal than the one signed in March. South Sudan, meanwhile, will try to build up regional support and financial backing for an alternative pipeline, possibly through Kenya, even though interest in such a project has been tepid in the past.

This entry was posted on Wednesday, May 22nd, 2013 at 8:33 am and is filed under Sudan.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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