Khartoum to Levy Oil Transport Fees on South Sudan

27 July 2011 FDI Team

Background

The Sudanese Finance Minister, Ali Mahmud, has announced parliamentary approval for a fee to be charged to South Sudan for use of the north’s oil infrastructure, which includes pipelines, refineries and seaports. With the South’s secession causing Khartoum the loss of three quarters of its oil production, accounting for around a third of its gross domestic product, the north is doing whatever it can to maintain revenue in the face of inflation, debt and currency devaluation.

Comment

Both North and South are heavily reliant on oil as a source of income. Before the South’s independence, the majority of oil revenues went to the central government in Khartoum, despite the fact that the majority of reserves lie in the South (around 85 per cent). Now, however, South Sudan has no obligation to share the reserves on its side of the border. While Sudan is not as dependant on oil revenue (around half of government revenue) as South Sudan, the loss of income is still significant and comes at an economically difficult time. Sudan has US$38 billion in foreign debt and consistently produces government deficits. Inflation stands at around 18 per cent and devaluation of the Sudanese pound had become so severe that the government replaced it with a New Sudanese Pound on 24 July 2011. With an estimated 40 per cent of the population living under the poverty line, Khartoum has only limited ability to raise revenue through tax receipts, leaving little choice but to introduce austerity measures and cut government spending.

South Sudan does not fare any better economically, with the poverty rate standing at around ninety per cent. The country is even more reliant on oil (98 per cent of government revenue) than the north, which leaves little room for compromise in negotiations with Khartoum over oil transportation fees. Based on the proposed figure of US$22.80 per barrel, it is estimated that northern Sudan will receive around US$2.6 billion per year in transportation fees. South Sudan currently has no alternative but to use the north’s infrastructure, pumping oil north to the Red Sea. To remedy this, a pipeline to the Kenyan port of Lamu has been proposed, with a price tag of around US$16 billion, potentially giving South Sudan some leverage in price negotiations with the north.

Questions remain over who would build such a pipeline. The United States has had investment sanctions in place against Sudan since 1997, due to alleged state-sponsorship of terrorism and genocide. The US Government has now lifted these sanctions for South Sudan, but still prohibits any support of the petroleum industry from which Khartoum would make a profit (the 2005 peace agreement calls for a 50-50 split). This still leaves a question as to whether the US could invest in South Sudanese petroleum. Major bidders for the construction of the Lamu pipeline include the Chinese Government and Toyota, but no formal agreements have yet been reached.

Chris Doyle

Future Directions International Research Intern              

Indian Ocean Research Programme

 

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