South Sudan: Resolving the Oil Dispute

How the government of South Sudan resolves the multi-billion dollar dispute with the Republic of Sudan over oil transit fees will have a significant impact on the ability of the new government in Juba to rebuild the war-torn nation. In January, Juba closed down the daily production of 350,000 barrels of low sulphur crude, which is normally sent through a 1,600kms pipeline from the oil fields in South Sudan to export terminals in Port Sudan and on to refiners in China and the global market.  For a country that relies on oil revenues to fund 98 percent of its budget, this is a high stakes maneuver. At issue is decades of mistrust and hostility between Juba and Khartoum and, more immediately, the amount of transit fees to be paid for the oil to flow from south to north.

Khartoum wants to be paid $36 a barrel for multiple fees, including transit, transportation, processing and marine terminal usage. South Sudan has offered to pay a transit fee of between $0.63 and $0.69 for each of the two pipelines in addition to third-party fees of between $5.50 and $7.40 per barrel. In addition, Pagan Amum, South Sudan’s lead negotiator, has accused Khartoum of stealing nearly six million barrels of oil, worth more than $600 million. Even though South Sudan controls the oil extraction, the government needs to play its hand carefully to avoid a protracted loss of production and revenue while it travels through the Republic of Sudan’s territory.

Juba, nevertheless, seems prepared to take a hard line with Khartoum. In an interview with the BBC, South Sudan’s Vice President Reik Machar said that “we will definitely freeze our activities on development” and that for the next 30 months the government would be able to provide basic services, including salaries for the military of 100,000 without oil revenue. Moreover, the Finance Ministry announced that it has foreign exchange reserves to cover imports up to one year, although other analysts contend that three to six months is more likely.

The view in South Sudan is that production can remain closed until alternative pipelines are constructed to the ports at Lamu, Kenya and through Ethiopia to Djibouti. On March 2, the governments of South Sudan and Kenya broke ground on a 2,000kms pipeline to Lamu in what ultimately is envisioned to be a $24.7 billion project that will transform the border region between the two countries and Ethiopia. However, the financial and logistical implications of this project are daunting, especially since China, the U.S., the EU, India and Japan, among others, have not committed to provide any financing which increases pressure on Juba to come up with the resources. Moreover, officials in Juba are improbably hopeful the Lamu pipeline can be completed in 10 to 18 months.

Past experiences in Africa, demonstrate that such infrastructure projects often take much longer to complete than initially planned. For example, once the initial social, environmental, political and financial hurdles of the Chad-Cameroon pipeline were cleared—which took several years—a consortium led by ExxonMobil, Chevron and the World Bank spent four years and $3.7 billion to construct the 1,000kms pipeline between the two countries. The 1,768kms Baku-Tblisi-Ceyhan pipeline, which links the Caspian Sea to the Mediterranean, required three years and $3.9 billion for construction—after about a decade of political wrangling between neighboring states. More recently, a Chinese company spent 18 months constructing a 400km pipeline from Nairobi to Eldoret in Rift Valley, Kenya – at which pace the South Sudan-Lamu pipeline would take over seven years to complete.

South Sudan’s plans to have a northern pipeline alternative operational in the near-term are unrealistic and experts say it will take at least three years and cost $4 billion to construct the project. Furthermore, activists in Lamu, a UNESCO world-heritage location, have already filed for an injunction in Kenya’s courts to prevent construction until environmental safeguards are in place.

Over the long term, there are genuine benefits to building a pipeline that frees South Sudan from reliance on Khartoum’s infrastructure. Not only would such a pipeline generate a stable source of revenue for South Sudan but it would help to deepen the nation’s integration into the East African market.

In the near-term, however, Juba needs to focus on resolving its Gordian Knot with Khartoum by securing the borders of Abeyi and protecting its territory against attacks in Blue Nile and Southern Kordofan from the Republic of Sudan as well as address the impending citizenship problem. On April 8, a transition period will end and South Sudanese who live in Sudan will be classified as foreigners, and vice versa. With an estimated 500,000 to 700,000 South Sudanese living in Sudan, this issue could easily become a conflict flash point.

In addition to the other challenges raised by South Sudan’s recent independence, efforts made by the African Union to resolve the issue of oil fees between the north and south have remained unresolved. Several weeks ago, South Sudan withdrew its offer to pay Khartoum $2.6 billion over four years to resolve the Abeyi dispute and other issues. The African Union mediation team has proposed that South Sudan give the Republic of Sudan a direct cash transfer of $5.4 billion, plus transit fees worth up to $1.1 billion, to provide for the export of oil through 2014 and to compensate Khartoum for the loss of the South. Juba has rejected this.

After 22 years of war in which South Sudan emerged victorious, it is understandable that the leaders in the south believe they can overcome extraordinary odds, and that time is on their side. Incidents such as the February 29 aerial bombing of the El Nar oil field only increase South Sudan’s hostility to the north. The challenges of governance and economic development are very different, however, from those faced by a liberation movement waging war. The people of South Sudan inevitably will want the benefits of independence, such as improved education, health care and job creation, no matter how popular Juba’s hard line against Khartoum may currently be.

South Sudan needs to find a solution in its stand-off with Khartoum that will generate much needed revenue, not only to deliver an “independence dividend” of investment in an improved quality of life for its citizens, but also to leverage financing for the pipelines to Lamu and Djibouti. One strategy would be to restart production and place all revenues in an internationally managed escrow or trust account. Juba could then leverage these funds for development while Khartoum would receive payments when specified obligations are met, perhaps related to citizenship or other security issues. Whatever agreement is reached, a pact with Khartoum will nonetheless require statesmanship on Juba’s part. Such an action would be a clear signal that South Sudan’s number one priority is investing in the welfare of its own people.