Analysing the Two Sudans’ Oil Dispute

South Sudan's oil infrastructure

Six months after the secession of the Republic of South Sudan from Sudan, the two countries have still not been able to resolve a number of important outstanding issues. Prominent among these issues is the lack of agreement on the South’s use of the oil infrastructure in the North.

With the South having seceded with about 75 per cent of Sudan’s oil wealth and the crucial role that the commodity plays in Sudan’s national revenue, negotiations for an oil deal are key for the two countries. As such, mediating the oil crisis has become one of the major pre-occupations of the Thabo Mbeki-led African Union’s High-level Implementation Panel (AUHIP) on the outstanding issues between the two countries.

However, the negotiations under the auspices of the AU Panel are not progressing as expected due to entrenched disagreements over how much Juba should pay for using Sudan’s oil infrastructure, particularly the pipelines and port.

The two Horn of Africa neighbours have recently been embroiled in heated exchanges, blame-shifting and accusations over the oil issue thereby damaging relations between the two and further reducing the chances of a deal. South Sudan has accused Sudan of stealing Juba’s oil by secretly constructing another pipeline to divert oil destined for export through Port Sudan and also confiscating several million of barrels of oil.

In all, Juba claims to have lost over 3 million barrels of oil that were meant to pass through the North’s oil pipelines for export from Port Sudan. Juba’s Minister of Petroleum and Mining has subsequently threatened to sue any country or company involved in purchasing the allegedly stolen oil. Sudan, on the other hand, is charging South Sudan with being childish in its positions and presentation of issues; for acting like a donor promising to dole out support with accompanying conditionalities; and blaming Khartoum for its inability to generate profits from its share of the oil wealth.

Sudan says that the South Sudan owes it more than $1 billion in unpaid fees. Within the context of the stalemate and Khartoum’s monopoly of oil infrastructure, Juba decided to shut down its oil production whilst considering other options of profitably exporting its oil. The decision was taken by a meeting of the Council of Ministers of South Sudan chaired by President Salvir Kiir and required immediate implementation.

A feasibility study is currently being conducted to evaluate the possibility of constructing an oil pipeline through Uganda and Kenya.

Juba’s resolution to halt oil production has significant implications for the economic stability of the two countries. First, it diminishes Khartoum’s use of its monopoly of oil infrastructure as a bargaining chip in determining how much Juba should pay for using its oil infrastructure. This gives Juba an important stand in articulating its position at the negotiation table if negotiations resume. Juba’s logic of keeping the oil till it finds a more judicious means of exploiting it communicates its understanding that it is better to retain it for the future than waste it in an oil row.

Second, the crucial role that oil plays in the economy of South Sudan cannot be over-emphasised. The infant country’s economy is heavily dependent on the export of oil. Shutting down oil production implies that either Juba has an alternative source of funding or is ready to damn the consequences of an economic shutdown. This may indicate that Juba either already has or has firm assurances about alternative sources of income in the interim.

Third, the cost is clear for Khartoum as it heavily depends on oil revenue. While Juba’s resolution to halt oil production may have dire consequences for South Sudan in the short-to-medium term it may produce long-term strategic benefits. The reverse may be the case for Khartoum.

Against this backdrop there are several options for Juba to consider.

Firstly, Juba may mull the possibility of airlifting its oil provided aviation conditions and economic prudence permit. Secondly, South Sudan could consider selling its oil to private oil companies in situ at discounted prices. This would leave the responsibility for the transportation of the oil from source to desired destination in the hands of those private businesses. Thirdly, it would be useful to reel in China to support the mediation efforts of the AUHIP that appears to have Khartoum’s ear. Beijing has a vested interest in the speedy resolution of the oil crisis. An estimated 5 per cent of Chinese oil supply currently comes from the South.

Finally, the government of South Sudan facing enormous challenges of state reconstruction amidst the significant needs and expectations of its people. Juba does not have the space to wait or embark on a project that will not generate immediate revenue. Against such a backdrop, the most viable option for South Sudan may be to seek external aid in order to meet its short-to-medium-term goals while investing in the construction of alternative oil infrastructure to avoid being held hostage by Khartoum in the long-term.