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.


Cynan said...

So... The South are paying 3bn in 'transitional' fees, staying locked in to their grim codependency with Sudan, when 3bn is the estimated cost of building a second competing pipeline south thru Lamu. http://www.theglobeandmail.com/report-on-business/international-business/african-and-mideast-business/south-sudan-plans-3-billion-oil-pipeline-to-kenya/article4474138/

I'm sure someone above my pay grade can tell me why this deal is actually the best (or at least, only possible) way to go.

Anthea Pitt said...

I think one crucial factor behing the agreement is that South Sudan halted oil production in a bid to force a more equitable deal. The longer it (and the north) did without oil revenues, the more unstable their domestic situations became. This deal was necessary for both to try to get their houses back in some sort of order. It's arguable that South Sudan used its big guns too early.This agreement is, to my mind, a place-keeper. A breather until round three, if you count the CPA deal as the first version.

Another thing I thought when I read the full agreement is that the tough issues - those the 2005 CPA deferred, including oil transit and Abyei - remain essentially unresolved. That's worrying. I hope I am not being unduly pessimistic. (I have reservations about the Lamu link as well)

rovingbandit said...

Building a new pipeline would also take a couple of years, and lock South Sudan into a dependency on Kenya....

Gyre said...

Besides the serious time delay there's also the issue of geography. Sudan is nicely set with flat plains for pipes to go across and the pipes are in places that the Sudanese army can protect. In contrast the proposed alternative pipeline to Kenya would be across mountains, hills and jungle all of which would mean increased costs and delays as well as the inability of Kenya or South Sudan to properly protect the pipes if militants attacked.

Gyre said...

The same thing that forced Sudan to the negotiating table in the first place. A desperate need for money. Sudan's Bashir is not quite as firmly in control of the military as he would like to be and there are quite a few high ranking officers who were very angry at South Sudan's successful move for independence, Without the oil money the Sudanese government will find it very hard to handle any major protests that spring up (and few things spur military coups like serious separatist movements) and Sudan will find it hard to keep the various militants throughout Sudan under control.

Also China is Sudan's best patron and China is not going to tolerate anything that threatens its access to oil. Reportedly it was Chinese pressure that helped get Sudan to negotiate in the first place.

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