Exporting its crude via pipeline from Hegleig and Paloch to Khartoum and then to Port Sudan, South Sudan shares the same economic lifeblood as that of its northern neighbor: oil. While South Sudan maintains the bulk of the region’s 3.5 billion barrels of proven reserves, Sudan owns and operates the export pipelines, refineries and sea access that transports that oil to global markets. Following South Sudan’s secession in 2011, the two nations signed an agreement stipulating the use of oil facilities and pipelines, as well as the compensation owed by South Sudan to Sudan for the loss of oil production revenue and destruction of pipeline infrastructure caused by the civil war.
Under the Transitional Financial Arrangement (TFA), compensation was agreed to amount to just over three billion dollars, to be paid as a fee per barrel of oil produced, while the reconstruction of oil infrastructure was expected to cost up to $1.5 billion. Initially designed to last for three and a half years, TFA payments were extended in 2016 and again in 2019, and are currently set to end next month. Under the agreement, South Sudan pays $26 per barrel transported through the Greater Nile Pipeline (GNP) and $24.10 per barrel that passes through the Petrodar Pipeline. After March 2022, if the agreement is not extended, the cost of the barrel should come down to $9.10 and $11 for the GNP and Petrodar pipelines, respectively. In addition to the fee payments, Sudan is a direct consumer of South Sudanese crude, with about 30,000 barrels of oil per day (bopd) transported to the country for processing at its Khartoum refinery and to supply the Um-Dabakir thermal power plant.
Sudan, for its part, has been facing ongoing civil conflict and a state of emergency following a military coup last October, led by General Abdel Fattah al-Burhan. Following the dissolution of the country’s power-sharing government, hundreds of millions in international aid from the UN, EU and US aimed at supporting a transition to democracy were cut off. Now, Sudan must finance its 2022 budget without the intervention of foreign donors, and is seeking to expand the use of gold exports to cover the importation of essential goods. Coupled with the likely halt in, or at minimum, renegotiation of TFA payments from South Sudan, Sudan stands to lose a substantial source of revenue, thereby deepening its existing economic crisis. Moreover, the country’s rising energy subsidies continue to consume significant government resources, triggering high inflation in the process. Domestic fuel prices of gasoline, diesel, kerosene and Liquefied Petroleum Gas remain far below their cost of production and/or importation, yet demand for fuel imports continues to rise due to domestic shortages. Sudan has also been struggling to supply adequate crude oil to its refineries, having accepted payments from South Sudan in the form of crude oil in the past.
Consequently, maintaining strong, mutually beneficial relations between the two countries, as well as boosting the flow of South Sudanese oil through Sudanese pipelines, represent the key to preserving economic stability and regional unity for Sudan. As recently as January 2021, the two countries signed an agreement to increase oil production from South Sudan’s current 170,000 bopd to 300,000 bopd within the next three years. This is not the first time Sudan has established a commitment to its petroleum-producing neighbor: in September 2020, the country offered to help boost production at the Unity and Toma South fields, provide technical support for Blocks 3 and 7, as well as open a state coordination office in Juba to provide equipment and necessary facilities.
While South Sudan has sought to increase its crude output and repair damaged oil fields, the country has faced setbacks due to COVID-19, a lack of direct investment and volatile oil prices. Sudan offers the requisite capacity to help South Sudan increase its production and address ongoing technical and logistical challenges, seeing as Sudan represented the third-largest African oil exporter and achieved a peak production of 483,000 bpd when it operated its own fields, prior to South Sudan’s independence. With a bilateral commitment to increasing production and rehabilitating existing infrastructure in tow, the development of South Sudan’s hydrocarbon sector will serve as a gateway to wider economic growth and stability in the region.