Oil Ties North and South Sudan Despite Expected Separation

A man examines a leaking oil pipe line at a pumping station built next to his village on land that was once used for agriculture, Paloch, South Sudan, Jan. 20, 2010. (Courtesy of Sven Torfinn, www.sventorfinn.com)

With only the votes left to count to make south Sudan’s succession from the north official, the first big challenge for the two countries will be how to cooperate over managing Sudan’s lucrative oil resources. Despite the parting of ways, the two neighbors will remain—at least for the time being—mutually dependent when it comes to oil: the south has most of the oil fields, while the pipelines lie in the north.

Sudan is Africa’s third largest oil producer, with a turnout of 490,000 barrels per day, according to the BP Statistical Review of World Energy for 2010. At the beginning of 2010, Sudan’s oil reserves were 6.7 billion barrels, 80 percent of which are in the south.

In 2005, Sudan’s 22-year bloody civil war, which left an estimated 2 million dead, ended with the signing of the Comprehensive Peace Agreement (CPA). The CPA created the Government of National Unity comprised of ministers from both the north and south. The south was granted semi-autonomous status and the right to hold an independence referendum after an interim period. Voting in that referendum concluded on Saturday. While official results won’t be announced until Feb. 14, early results announced on Sunday, indicate that as many as 95 percent of Southern Sudanese voted for independence.

Oil was a major part of the CPA and will continue to play a critical role when the two Sudans meet to negotiate the future in Khartoum on July 6.

Revenue Sharing Under the CPA

Under the CPA, the North’s National Congress Party (NCP) lost exclusive military control over the oilfields, but retained control over the oil industry. In terms of revenue sharing, for oil extracted in the south, the individual oil-producing states were allowed to keep 2 percent of the profit, and the north and south split the rest 50-50. The NCP got to keep 100 percent of revenues from production in the north,

The above percentages refer to the state’s share of oil earnings, but in fact, the majority of drilling operations in Sudan are held in foreign hands.

According a report published last month by the European Coalition on Oil in Sudan (ECOS), the report, “Sudan’s Oil Industry on the Eve of the Referendum,” over 70 percent of Sudan’s petroleum producing blocks are owned by just two companies: China National Petroleum Corporation (CNPC), the national Malaysian oil company Petroliam Nasional Berhad (PETRONAS). Together with two other companies, Indian Oil and Natural Gas Corporation (ONGC Videsh) and the China Petroleum & Chemical Corporation, also known as Sinopec Corp., the top four companies control between 87 and 95 percent of Sudan’s oil. Only 5 to 7 percent is owned by the Sudanese national state oil company, Sudapet.

According to Egbert Wesselink, director of ECOS, 35 percent of the oil revenues go to the drilling companies, and 65 percent to Sudan, split as described earlier.

“These companies have made a lot of money thus far,” commented Wesselink.

So has Sudan. In 2010, the earnings split between the north and south were $4.5 billion, according to the Government of Southern Sudan (GoSS) Ministry of Finance and Economic Planning’s report for September 2010.

Both governments rely strongly on the oil revenues: 98 percent of the annual budget of the south comes from oil income; in the north, oil revenues accounted for 50 percent of domestic revenue and 93 percent of exports in 2009, reports Global Witness, a U.K.-based organization that monitors environmental exploitation and human rights abuses.

Post-Referendum Finances

When the South secedes, the previous even split between Khartoum and Juba will end, and each Sudan will keep the profits from the oil exploitation in their own territory.

This will naturally tip the financial scales in favor of Southern Sudan since it owns more than three -quarters of the oil.

Wesselink calculates that if there is no new agreement before July 9, when the independence of the south is expected to be declared, the north will end up with 32 percent of the oil revenues, and the South 68 percent.

“In the short term, the south will get a bigger share, but negotiations are far from being finalized.”

Wesselink says that with time, the difference between revenues in north and south will blur, mainly due to new oil explorations in the north.

“In the midterm, the differences in income between north and south will smooth out as production in the north is up and new fields along the Red Sea are about to be developed, while production in the South will be in steep decline after 2013.”

The expert explains this is because the oil fields of two of the major oil drilling companies in Sudan--the Greater Nile Petroleum Operation Company and Petrodar--will start losing potential after next year and then start declining relatively rapidly. What is more, there are no known new finds or other concessions that are currently under exploration.

Next: lack of transparency in Sudan’s petroleum industry

Transparency

One complicating factor in the oil revenue equation is the lack of transparency in Sudan’s petroleum industry.

According to a 2008 report by the Woodrow Wilson International Center for Scholars, wealth sharing under the CPA was slow or nonexistent.

“Disputes remain over which fields are subject to wealth sharing, how the new institutions are to function, and who determines the status of existing and new contracts. Teams that are tasked with auditing existing production and reviewing existing contracts have not been staffed,” states the report.

In a new report from Global Witness published Jan. 6, called “Crude Calculations,” the organization calls for an independent audit of the oil production in the country.

The report comes after CNPC announced oil production figures that were significantly larger than those published by the government in Khartoum. The discrepancy represents $500 million in 2010 alone. The Sudanese government suggested that CNPC’s figures consist of a mix of oil and water, whereas their production figures do not. Global Witness rejected the explanation after consulting experts. The case is still under investigation.

Economic Sanctions

Western oil companies do not operate in Sudan because of sanctions imposed by the United States in 1997 because of the regime’s state-sponsored terrorism. Current Sudanese President Omar al-Bashir was charged with genocide and crimes against humanity in 2008 by the International Criminal Court connected to the genocide in Darfur that claimed 300,000 to 400,000 lives. Last week, freedom watchdog organization Freedom House ranked Sudan as one of the least free countries in the world in terms of both political rights and civil liberties.

In November, President Obama announced that the economic sanctions against Sudan would be extended by another year.

Sudan’s actions and policies, Obama wrote, “are hostile to U.S. interests and pose a continuing unusual and extraordinary threat to the national security and foreign policy of the United States,” in a letter to the Speaker of Senate, on Nov. 1, 2010.

Recovery Rates and Transport Fees

Wesselink says that what will be most important for the two new states is to seek an agreement that allows for a stable investment climate, to help improve the “incredibly” low recovery rate of 23 percent, which indicates poor reservoir management by CNPC and Petronas.

Recovery rate represents the percentage of oil-in-place that is actually produced. The world average is 30 percent.

According to ECOS, Sudan’s recovery rate can be raised to 37 percent through using more advance recovery methods. This would reduce one of the biggest environmental challenges related to the oil industry in Sudan, mainly handling the industry’s water. What is more, a higher recovery rate could eventually offset part of the current production decline.

In order to achieve this, Wesselink suggests that the Southern Sudan government retains full control over its oil fields and does not share revenues with the North.

“My recommendation is that the South will not share its future revenues, but pay a relatively high fee for services, and possibly sell to the refinery in Khartoum with a discount, in order to ensure sufficient shared interest in stability and the further development of the industry.”

In any case, the south and the north will have to cooperate since the north possesses all the pipelines that transport the black gold to market.

Ayman Elias Ibrahim, a Northern Sudanese reporter for The Citizen, an English daily based in Khartoum, believes that a good cooperation is imperative between the two future neighbors as it will have an “important impact” on the future of both states.

“Even if the South contemplates exporting oil via Kenya, it will still need three to five years to install a new pipeline. Many international parties have advised the South that exporting oil via the north will be more feasible in the long run.”

The secession of the south will mark a new beginning for both Khartoum and Juba. While good cooperation on oil production will not guarantee lasting peace in the region, it could prove the master key for smoothing out past differences and paving the way to for a better future for both Sudans.