05 October 2012

The oil deal

I haven't read any coverage yet, so I've just had a quick skim of the actual agreement (available here, HT: Nicki Kindersley). 

As a reminder, pre-agreement North Sudan wanted to charge half of the value of the oil, or around $36 a barrel. South Sudan wanted to pay $1 a barrel. 

It looks like there is a 

- processing fee - $1.60 per barrel
- transportation fee - $8.40 per barrel for one oilfield and $6.50 for the other
- transit fee - $1 per barrel

so a total of $11 or $9.10

plus a Transitional Financial Arrangement (payoff) of an additional $15 per barrel until a total of $3.028 billion has been paid (at production of 180,000 barrels per day this would take just over 3 years).

So - whilst this seems like a good deal for North Sudan in the short run and a good deal for South Sudan in the long run, my main concern is the hold-up problem. What is stopping North Sudan ripping up the agreement in 3 years, demanding a higher cut, and just confiscating oil (again). Here is Tony Venables from Oxford in a paper on these issues;
Even if the purchaser and investor entered an agreement before the investment is undertaken, ex post the purchaser may act opportunistically, breaking the agreement and only offering a lower price ... 
The hold-up problem between states is radically more severe than that within countries because the whole domain of international law is fragile: essentially, the concept of national sovereignty constitutes a barrier to the enforcement of any contract entered into by states.


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