Oil Deal May Win Back Sudan Some Influence Over Former Enemy

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(Bloomberg) -- Sudan lost three-quarters of its oil reserves when the south seceded in 2011. A four-year civil war in Africa’s youngest nation may be letting it reassert control.

Electricity, building materials, safe lodgings for workers -- South Sudan’s former ruler is offering them all to help restore output in a key northern region. That shows how vital sub-Saharan Africa’s third-largest oil reserves remain to Sudan, whose landlocked neighbor pays it $25 per barrel to transport the resource to the Red Sea. It could also be a strategy to discourage South Sudan from seeking other export routes.

“Sudan is adding an extra layer of dependence for South Sudan,” said Luke Patey, a researcher at the Danish Institute for International Studies. “To a certain degree, it is a reversal of the economic independence South Sudan won after separating from Sudan in July 2011.”

Coming after Africa’s longest war, fought between the mainly Muslim north and a predominantly Christian south from 1983 to 2005, South Sudan’s U.S.-brokered secession was far from a clean break. An agreement to divide oil income -- the united Sudan’s main earner -- sought to ease the economic pain for the northern government, but disputes over payments for using Sudanese pipelines in 2012 led to a shutdown of South Sudan’s then-output of 350,000 barrels a day.

Lower Output

Production had barely restarted when South Sudan plunged into a civil war in late 2013 that’s claimed tens of thousands of lives and forced 4 million people from their homes. Oil, pumped mainly by China National Petroleum Corp., Malaysia’s Petroliam Nasional Bhd and India’s Oil & Natural Gas Corp., has been produced at a rate of about 135,000 barrels a day since.

Lower output and prices have fueled the nation’s economic crisis. Facilities in Unity, one of South Sudan’s two oil-producing regions, shut down early in the war and sporadic fighting has stalled repairs. With Sudan’s assistance, they will restart in early 2018 and overall production will return to its 2011 peak within a year, according to Petroleum Minister Ezekiel Lul Gatkuoth.

Sudan, whose gross domestic product contracted the year after the south seceded, has suffered less economic damage because of the fixed rate it receives for transporting its neighbor’s oil, sometimes earning more per barrel than South Sudan. The U.S. this year partly lifted sanctions imposed on Sudan in 1997 because of its alleged sponsorship of terrorism and the African nation’s government says it expects increased investment in its own oil industry as a result.

The current arrangement with South Sudan gives Sudan its main source of hard currency and means it “is doing as well as could be expected in financial terms,” said Alex de Waal, executive director of the World Peace Foundation at Tufts University in Massachusetts.

‘Major Boost’

“Keeping the oil pipeline and associated infrastructure operational is also a major boost for Sudan’s own oilfield at Heglig as it drives down the unit costs of pumping that oil,” he said by email.

Patey said resuming Unity output would help stop South Sudan from falling again into arrears, avoiding “a situation where Sudan starts aggressively taking oil-in-kind payments through the pipeline, and escalating tensions as a result.”

Sudan’s information minister said his nation is obliged to help South Sudan. “When they need our assistance, we have to give them and in this way both countries will benefit when this oil begins flowing again,” Ahmed Bilal Osman said by phone.

Petroleum Minister Gatkuoth said in June his country is interested in exporting the oil via pipelines planned by Kenya, Uganda and Tanzania to the Indian Ocean.

Kenya is designing a pipeline from its Lokichar oilfields in the northwest to its coastal town of Lamu, while Uganda plans to export Albertine crude using a conduit traversing Tanzania.

“South Sudan would like an alternative arrangement, but doesn’t have the money or clout with oil companies for it to be a realistic prospect,” De Waal said.

©2017 Bloomberg L.P.

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