Sanctions and South Sudan: The Oil Factor
Supporters of US oil sanctions on Khartoum, and who are in many cases supporters of the SPLM, are strangely silent with respect to its impact on South Sudan. Yet nowhere is the case of the “unintended consequences” of sanctions more clearly apparent than on this vital sector of South Sudan’s fragile economy.
US policy-makers failed miserably at attempts to ameliorate the effects of US sanctions on South Sudan when passing the Darfur Peace and Accountability Act (DPAA) of October 2006. Here legislators attempted to carve out exclusion zones, known as the “Specified Areas of Sudan,” which would be exempt from US sanctions. These exempted areas include South Sudan, South Kordofan/Nuba Mountains State, Blue Nile State, Abyei, Darfur and IDP camps in and around Khartoum, which are free to engage in commerce and trade by US entities “provided that the activities or transactions do not involve any property or interests in property of the Government of Sudan.”
The major problem of the DPAA is that it did not exempt the oil industry from sanctions, the sales of which comprise over 95 percent of the Government of South Sudan’s (GOSS’s) entire revenue base.
Congressional legislators who had been working on the wording of various Sudanese related sanctions bills in Congress over the past few years may have not fully appreciated the extent to which the country’s oil reserves and concession blocks extended into South Sudan. [See map below.] Despite the DPAA, South Sudan’s oil sector remains effectively off-limits to US and other oil companies registered on the NYSE and/or which may have US shareholding in the form of US state pension funds and other equity portfolios.
Neither, it seems, has there been a fundamental understanding of the fact that nearly 80 percent of Sudan’s oil production and nearly 75 percent of its oil revenue is derived from South Sudan. A key facet of the CPA was that South Sudan was willing to accept much lower revenue flows from its oil production to ensure a political accommodation with Khartoum to sign the Comprehensive Peace Agreement (CPA). Not only did Juba accept a 50 percent reduction in potential oil revenues due to it as per the terms of the CPA – but faces the additional penalization of sanctions. [Note: The CPA pressed compromise on both the North and the South; the South, for its part, agreed to share 50% of its oil revenues with the North under the agreement that the Government of National Unity seated in Khartoum would act in its powers to promote the “economic development of all Sudanese.” ]
The impact of US sanctions on South Sudan’s oil revenues is most directly felt in the sale of “Dar” blend oil – a heavy acidic sulphur content oil – almost exclusively produced in South Sudan (Blocks 3 and 7 operated by Petrodar). High acidic crudes, also called high Total Acid Number (TAN) crudes, have a high volume of naphthenic acids. Crudes with a TAN higher than 1 are usually considered highly acidic and can corrode refineries equipment and are often out of the reach of ordinary refineries. Sudanese Dar oil registers TAN figures of between 2,1 and 2,4. With a large slice of the global refining capacity in the US and Europe off- limits to Sudanese Dar blend crude, the prices obtained for this oil is significantly lower than average.
Highly acidic crudes generally trade at a discount of around to 10 to 20 percent per barrel on worlds markets against the current spot price of Brent crude. According to Petroleum Ministry sources in Khartoum in mid-February earlier this year, with the price of Brent Crude hovering just under US$40 per barrel at the time, it was disclosed that South Sudan’s Dar oil was, however, being traded at less than US$13 a barrel with most of the oil going to China. This is far cheaper than prices paid for Chad’s Doba sales of oil, for example, with TAN levels exceeding 4,0 which is of an even lower quality. Speaking at a Sanctions conference in Washington DC on 28 April, Sudan’s State Minister of Finance Lual Deng, said the figure for January sales of Dar oil was even lower at US$9 per barrel.
That means 200 000 bpd of South Sudanese Dar oil is being sold for less than US$13 per barrel, half of the revenues of which are routed back to South Sudan as per the CPA agreement. Even working on a generous trading discount of 20 percent (US$32 per barrel), South Sudanese Dar oil at the time was being traded at just under a 60 percent discount off current spot prices offered for similarly heavy acidic oil – representing an annualized estimated loss of revenues to GOSS of some US$690 million, or roughly 40 percent of its current budget expenditure estimate for 2009).
This potential loss in oil revenues has significant implications for the stability of the South where GOSS is attempting to fast track the development of a region shattered by the civil war. There are growing expectations by the people of South Sudan of reaping the benefits of an “economic peace dividend”. Yet the oil sanction against Sudan is postponing the accomplishment of such an “economic dividend” and poses a threat to the stability of the government. For example, GOSS has not been able to pay salaries to most of its military personnel in the SPLA since January 2009.
Replying to a question on the issue of secession in 2011, Ezekiel Lol Gatkuoth, the head of the GOSS mission in Washington, warned recently that it was up to policy-makers to make Sudan unity “appealing” to the people of South Sudan. Continued oil sanctions make such an option less desirable with all the attendant repercussions this may hold not just for Sudan but for the region as a whole.
Warwick Davies-Webb is Research Director, Executive Research Associates.