December 20, 2011

Chinese Diplomacy May Be The Lucky Charm To Resolve Sudan’s Oil Impasse. China Benefits Most From Sudanese Oil Exports!

Business Daily Africa
written by George Wachira
Wednesday December 21, 2011

After months of “push and shove “ between Sudan and South Sudan on the subject of oil exports logistics fees, it now appears that the Chinese authorities have belatedly decided to get involved in mediation between Juba and Khartoum. The Chinese have traditionally avoided getting involved in internal issues pertaining to countries they operate in.

Chinese state-owned firms have the largest stake in oil investments in the two countries, and they benefit most from Sudanese oil exports. The other investment partners are Malaysian and Indian state companies. [FYI: All U.S. oil companies are NOT state owned. (emphasis mine)]

In the past few weeks, China has appointed a special envoy to specifically address the ongoing oil exports dispute between Sudan and South Sudan with instructions to show results within weeks. The African Union has been involved in mediation, but there is not much to show for it. The ongoing oil exports disagreements plus intermittent cases of insecurity in the oil regions have impacted on production and exports of oil and revenue inflows.

The dispute is in respect of a high oil exports fee that Khartoum is demanding from Juba. At US$ 32 per barrel the transit fee through Port Sudan on the Red Sea is about a third of oil export netbacks to South Sudan, and has no semblance to commercial pipeline handling fees charged elsewhere in the world. The fee is a desperate attempt by Khartoum to make up for oil revenues lost to the South after the mid-year separation.

Before secession, the combined oil production in the former Sudan was about 500,000 barrels per day (bpd). After separation South Sudan’s share is about 75 per cent or 350,000 bpd.

Diplomatic involvement by China was indeed the missing link all this time, and may finally yield results that allow both Khartoum and Juba to co-operate. Juba needs the exports infrastructure in the north, as much as Khartoum deserves a fair income for the use of their exports facilities, while investors like China need a return on their investments.

The ongoing disputes will sooner than later prompt the Juba government to expedite plans for alternative routes not only for oil exports but also for external trade in general. This will at least give South Sudan the leverage necessary for economic independence and flexibility while increasing their political clout in dealing with their northern neighbour.

Last week, French oil giant Total at a World Petroleum Congress, gave hints on preferred way forward for future South Sudan oil exports routing. Total holds the largest, but yet to be explored, single oil exploration block (Block B) southeast of South Sudan. The location of this block is nearer Indian Ocean than the Red Sea and Total are envisaging a port in Kenya for eventual exports out of their Block B should it yield oil.

At the same time Total are just about to entrench their presence in upstream oil production development in Uganda by a one third share farm-in with the Tullow Oil. The other incoming farm-in partner is the Chinese company, Chinese National Offshore Oil Corporation (CNOOC). The Total statement at the conference was that it will make economic sense to joint venture South Sudan and Ugandan oil exports infrastructure to the Kenyan coast.

Development of an alternative crude oil exports infrastructure by South Sudan would take no less than five years. For this reason, South Sudan has no immediate option but to strike a deal with the Khartoum government to export oil production from the current wells through Red Sea. The existing oil production fields are geographically nearer the Red Sea than the Indian Ocean and it is the prospective new production from the southern parts of South Sudan that will mostly qualify for exports through Kenya.

Even if the two countries strike an amicable deal on oil export transit fees, there is still the urgent need to guarantee security to permit uninterrupted production, and additional upstream developmental investments .While the Chinese, Malaysians and Indians have in the past tolerated insecurity in the production areas, new investors from the West (especially the likes of Shell and ExxonMobil) will demand a higher level of security assurances before they can put their investments down.

Securing long term peace between the two nations will be the only way of opening up meaningful long term capital inflows into the two countries, and this is why peace efforts by international (including Chinese!) continental and regional players is utterly urgent.

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