Damaged equipment at the Heglig oil field

On August 4, African Union officials announced that Sudan and South Sudan had reached an agreement on oil pipeline fees. The proposed deal, coming two days after a United Nations deadline for the resolution of all outstanding issues between the two countries, could potentially pave the way to the resumption of oil production. Pressure from U.S. Secretary of State Hillary Clinton during a visit to South Sudan’s capital on Friday is believed to have been a large factor in reaching an agreement.

However, what exactly was agreed to in the oil agreement remains unclear. South Sudanese officials reported that the South will pay approximately $9.48 per barrel in transit fees in addition to $3.028 billion in compensation to Sudan for loss of its oil reserves. The agreement would last 3.5 years at which point fees could be renegotiated.  Sudan has not commented on the exact transit fee figure, but officials have said it will be equivalent to $24 per barrel when the compensation payment is factored in.

There are already signs that this deal may be in trouble. In addition to the conflicting accounts of the deal’s terms, Sudan has said that it will not sign the agreement until a final deal is reached on security issues. This means that issues around border demarcation, accusations of both countries supporting cross-border rebel groups, and determination of the status of the disputed Abyei region could all potentially derail the oil agreement. Given the interconnected nature of these challenges, there is real concern that if they are not resolved in conjunction with the oil agreement that they will not be resolved. Security talks are not set to resume until the end of Ramadan at the end of August, and face an African Union imposed September 22 deadline.

At independence South Sudan came under control of 75% of what previously belonged to a unified Sudan. However, the landlocked South still has to export its oil through Sudan, and negotiations over fees for usage of the North’s pipelines grew increasingly contentious last fall.  In January, South Sudan suspended production — cutting off its 350,000 barrels per day output — after accusing Sudan of stealing oil. The shutdown, which was strongly criticized by international actors, has caused severe economic problems for both countries. It also contributed to the outbreak of fighting around the Heglig oil field located on contentious the border between the two countries in April, threatening to reignite war between Sudan and South Sudan.

The need for an oil agreement and the resumption of production is reaching a critical point. Sudan is experiencing protests in response to fuel subsidy cuts enacted as part of austerity measures, which the government of Sudan is implementing to deal with the budget crisis caused by loss of oil revenue. Meanwhile, South Sudan is believed to have almost totally depleted its foreign-exchange reserves during the shutdown. At this point, even if an agreement is reached, it could take more than a year to resume pre-shutdown levels of production.


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