Analysis: Sudan’s oil transforms from curse into blessing

By Opheera McDoom

KHARTOUM (BestGrowthStock) – Oil inflamed Sudan’s civil war for decades but could now help seal the peace as the south becomes independent and needs the north to refine its crude.

Rhetoric and tensions are rising between the former north- south foes as Sudan hurtles toward the January 9 southern referendum on secession — the culmination of a 2005 peace deal which shared wealth and power and promised democracy.

In Africa’s largest country almost 75 percent of the current 500,000 barrels per day of crude output comes from wells in the south, but is exploited, refined and transported by the north.

But that very equation, along with the fact that both governments in the north and south are heavily dependent on crude revenues, could draw a line which neither side is willing to cross and stop them short of resuming full hostilities.

“Oil has a bad image — corruption, fuelling war. But in the case of Sudan, it’s helped push for peace,” said al-Sir Sidahmed, an energy expert advising Sudan’s petroleum ministry. “They simply can’t afford to have oil to stop even for one day.”

The semi-autonomous southern government, formed in 2005, derives some 98 percent of its revenues from crude. Some 45 percent of Khartoum’s budget comes from oil, which makes up around 90 percent of its exports.

Neither economy has moved to diversify away from oil dependency since 2005 and it will take years for either economy to do so in any significant way.

This leaves no option but to continue — in a form still open to negotiations — the sharing of oil wealth even in a likely post-secession scenario.

The 2005 accord shared oil from the south roughly 50:50. The southern ruling party, the SPLM, may well use its oil leverage to gain political concessions from Khartoum’s government — likely in the disputed central Abyei region.

Continued sharing of the landlocked south’s oil with the north may well be difficult to sell to a southern population bent on full independence from the north they see as having oppressed them for so long.

So a likely solution would be to rename the oil sharing as “rent” or “fees” for the use of the pipelines, refineries and port in the north.

“As much as 40 percent of oil revenues could end up going back to the north,” deputy finance minister Marial Awour — and a southerner — told a news conference.

Southern officials have raised the possibility of building refineries in the south and a pipeline to neighboring Kenya’s ports to be independent from the north. But this would be a political solution, rather than the most economically viable one, analysts say.

“It’s technically possible but they will simply spend so much,” said the deputy foreign minister Espen Barth Eide of Norway, which is advising Sudan on its oil management. “The cost of a pipeline to Kenya would be too high to warrant it… and you’d have to build a very specialized refinery,” he added, because of the low quality crude in Sudan.

There is also a lack of technical oil expertise in the south which would leave them dependent on foreign experts for extraction, an added cost.

And time is a constraint given Sudan’s oilfields are running low with new discoveries over the years being less promising than hoped.

“If you look at the projection of oil revenues, the production is peaking now – they know that it’s decreasing,” said William Battaile, a senior economist from the World Bank.

Oil giants such as Total SA (TOTF.PA: ) with the expertise and a contract to drill in the south’s massive swamps have been reluctant to begin work because of the political uncertainty.

Others have been too prudent to enter Sudan at all despite the 2005 peace deal, worried that contracts signed with Khartoum might be voided after the south secedes and that conflict with the north or within the south could hinder work.

“If war starts and oil stops flowing – who’s going to benefit from that?” said Sidahmed.

(Reporting by Opheera McDoom)

Analysis: Sudan’s oil transforms from curse into blessing