THE OIL REVENUES’ DEAL BETWEEN SOUTH SUDAN AND SUDAN – DOES IT MAKE SENSE?
By Dr Lako Jada Kwajok
Feb 01, 2016(Nyamilepedia) —- Today in Juba, the SSP plummeted to a new low with one US Dollar equal to 30 SSPs. It was down from one Dollar to 5.5 SSP nearly a year ago. Our national currency lost 545% of its value in a space of 10 months. It’s a rapid downturn of uncertain outcome. The US Dollar has an inverse relation to the crude oil price. As crude oil prices continue to fall, the situation can only get worse with a stronger US Dollar and a rapidly diminishing value for the SSP. It’s now very likely that crude oil prices could drop to the prices before the oil embargo that was imposed by the Organisation of Arab Petroleum Exporting Countries ( OAPEC ) in the aftermath of the Yom Kippur war between Arabs and Israel in October 1973. Then the price of crude oil was under 10 US Dollars per a barrel. When we reach that, which is entirely plausible, only God knows what would happen to the working class in South Sudan. The layperson is feeling the impact of the drop in crude oil prices differently depending on where he or she lives in the world.
In Juba, the price of a litre of petrol soared from 6 SSP a month ago to 22 SSP today. While motorists are reeling from the high prices of petrol and diesel at the pump in South Sudan, their counterparts in the West are making significant savings out of low fuel prices. Governments are creating more jobs; entrepreneurs are expanding their businesses and companies are hiring more workers. They are now smiling and laughing all the way to their banks as their fortunes are gradually getting bigger and bigger. Right now a motorist, say in France which does not produce crude oil is far better off in terms of fuel expenses than his counterpart in South Sudan. Jesus! We do produce oil and yet our motorists have to pay more!
A memo issued by the South Sudan’s Petroleum and Mining ministry on 17/01/2016 regarding oil production which is 165,000 barrels per day reads ” We are left with no option at the moment rather than shut it down because it’s not feasible. We cannot sell the oil at a loss.” But before the recent fall in oil prices, were we selling the oil at a profit? Let us examine the deal struck between the regime in Juba and the Sudan government in August 2015. South Sudan agreed to pay $ 9.50 per barrel for the oil produced in Upper Nile state and $ 11.00 per barrel for that produced in unity state as transportation fees. The total charge made to $ 25.00 per a barrel by including the repayment of a 3 billion USDs compensatory package over a three years period. Apparently South Sudan agreed to pay the Sudan a transitional financial assistance that is the average of the accepted oil transportation fees. It’s important to know for comparison that the greater Nile pipeline that transports our oil is 1,600 Km long. At the time of the above agreement; crude oil prices were hovering between $ 41.00 and $ 42.00 per barrel.That means South Sudan was getting between $ 16.00 and $ 17.00 per barrel while Sudan was scooping a fixed $ 25.00 per a barrel. Therefore, I don’t understand what the Ministry of Petroleum and Mining calls as ” selling the oil at a loss ” when it’s quite evident that it has been all along selling it at a significant loss.
Furthermore, Sudan’s Minister of Finance, Badr AL-Din Mahmoud told Sudan’s lawmakers that Juba failed to honour its commitments by not paying the transportation fees hence his government was forced to take its share in kind according to the cooperation agreement signed by the two countries. No permission sought, and prior notification not given to our government – the Jallabas just helped themselves to our oil as they did before. It shows without ambiguity which country has got the leverage in the oil revenues issue. The regime in Juba only has itself to blame for this unusual situation where the producer of a strategic commodity gets much less revenue than the ” middleman.”
The August 2015 deal is a big blunder with tremendous negative consequences for the South Sudanese economy. It’s obvious that it resulted in loss of an immense amount of revenue that could have helped our economy. Responsible governments do not negotiate and enter into such agreements without full knowledge of previous deals and experiences of other countries. Much of the relevant facts are in the public domain and accessible to everyone. For example Chad has been paying Cameroon 40.09 Cents per a barrel as transportation fees for its oil pumped from three oil fields in Doba, southern Chad to an export facility near the city of Kribi on the Atlantic shore.
The length of the pipeline is 1,070 Km. It has been the case since the completion of the pipeline in 2003. It was only on 30th October 2013 that the two countries agreed to increase the transportation fees to $ 1.30 per a barrel. The Iraqi oil that is being pumped through pipelines from oil fields in Kirkuk to Baniyas ( 800 Km ) and Ceyhan ( 970 Km ) in Syria and Turkey respectively has comparable transportation fees to the Chadian oil. In the USA, the pipeline that transports crude oil from oil fields in Alberta, Canada to Cushing in Texas is 4,924 Km long. The transportation fees are $ 3.78 and $ 4.54 per barrel for light and heavy crude oils respectively.
I don’t think the government negotiators were totally unaware of the above facts. However, their extraordinary leniency is quite puzzling. One would have expected them to rise above personal and party interests and focus on the interests of the country in the long term. Three explanations could be relevant to why we ended up with such an unprecedented deal. Firstly, the regime negotiators were negotiating while bearing in mind the need to preserve extra special relations with Sudan. They were our fellow countrymen in the past and could well be the same in future when the country is reunited again. Therefore extreme leniency on the part of our negotiators is justified to alleviate the plight of our future fellow citizens who are suffering from a bankrupt economy like ours. We should not underestimate the fact that Dr John Garang and many in the SPLM top hierarchy were and still supporting the idea of a unified New Sudan.
The former Federal Minister of Petroleum in the Government of National Unity ( GoNU ), Dr Lual Deng was quite vocal against secession on the eve of the referendum and we know he was not alone among the SPLM cadres. It’s easy to understand why we were dragged into this unfair deal as the negotiators were likely to be his former colleagues who share similar views with him. When you add to that the insistence not to retire the names SPLM and SPLA to history museums and history books and the maintenance of strong ties with SPLM-N, things seem to fall into place. There could be a line of thinking within the SPLM party that SPLM-N could one day ascend to power in the north with the facilitation of reunification and the realisation of the dream of New Sudan. Secondly, we are just witnessing the result of unmerited appointment of people in high positions in the government based on tribalism and nepotism. It’s obvious that our negotiators were not up to the task. The portrayal of our politicians as amateurs and buffoons by the Jallaba’s media could have some truth in it. Thirdly, It must be understood that the regime negotiators were under enormous pressure to strike a deal at any cost because they needed money quite badly. It was a pretty weak position to begin with in such negotiations and the other party was well aware of that fact. They were no match to the Jallabas who managed to dictate the terms of the agreement.
Crude oil prices are known to be extremely volatile. It relates to its geopolitical qualities and history has shown the use of it as a weapon at least once. Therefore it’s quite risky to depend wholly on oil revenues and neglect the utilisation of other resources for an alternative source of income. We have seen how Russia, which is a superpower, was on the brink of economic collapse due to falling oil prices and heavy dependence on oil revenues. The Russian Rouble lost 40 % of its value against the US Dollar within weeks and few months and the Russian economy is not yet out of the wood. The problem is that you cannot know for sure how much revenue you will get the next day let alone next week, next month or next year. Hence you cannot have an accurate forecast of revenues in few years to come. Economic plans need accurate or near accurate revenue projections and this is why you hear about a 3-years, 5-years or 10-years plans. Obviously, these cannot be based solely on oil revenues due to their inherent volatility. Our negotiators gave the Sudan something it wouldn’t have dreamed of – actual revenues for the next 3 years. By getting a fixed amount of $ 25.00 per a barrel, it knows exactly how much revenue it will get in the next three years regardless of the volatility of the oil prices. The only caveat to that is a drop in oil production which seems quite unlikely.
The Sudan can start a 3-years economic plan using the said funds or allocate them to a major project like building a hydroelectric dam. While the Sudan seems to enjoy its new found fortune, we are running out of cash and rapidly heading towards total economic collapse. Our negotiators shouldn’t have agreed to a fixed transportation fees that high. Last week crude oil prices fell to $ 26.00 per a barrel and we do know that our oil sells at a lower price. It means whatever oil sales we get will not be enough to pay the Sudan and South Sudan goes away empty handed. Again they shouldn’t have relinquished our right to reduce the transportation fees unilaterally when there is such a drop in oil prices.
END OF PART ONE
The author of this article, Dr Lako Jada Kwajok, can be reached for comments at email@example.com