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Wednesday, 15 August 2012

Kenya and South Sudan sign pipeline deal in the wake of oil transit deal between the Sudans

Last week the governments of Kenya and South Sudan signed an agreement to commence the construction of an oil pipeline from the oil fields of South Sudan through to the Kenyan port town of Lamu on the Indian Ocean. Construction is set to begin in early 2013 and end in 2015. This was after an initial memorandum of understanding was signed between the two counties in the wake of hostilities between the Republics of Sudan and South Sudan in January 2012.

The genesis of the hostilities that resulted in a short armed confrontation in January 2012 is that when South Sudan broke away from the North with independence on 9th July 2011 it took with it three quarters of the oil reserves of the former joint country. However, being land locked it had only one route of exporting its crude oil through pipelines that run through Sudan to export terminals in Port Sudan.

Due to disagreements on pricing of the transit fee, Juba suspended production of crude at the onset of the conflict. Khartoum demanded US$36 per barrel from Juba to export the oil while the latter offered a little over US$1 on the basis that the figure was close to international averages. Juba also accused Khartoum of seizing some oil assets and diverting oil through secret pipelines to make up the unpaid fees.

After many months of bitter negotiations the chief mediator Mr. Thabo Mbeki (former president of South Africa) announced that both sides had reached a compromise agreement on the oil. This was after undue pressure from regional neighbors such as Ethiopia, Kenya and Uganda in addition to western powers such as the United States and the EU and the biggest beneficiary of the oil, China.

The discontinuing of the oil production has led to undue economic hardships in both countries with the government in Juba loosing 95% of its budget revenues. Experts from the Bretton Woods institutions are saying that the country would have run out of foreign exchange between the end of August and October 2012.  On the other hand Khartoum has been reeling from the effects of a sharp drop in oil revenues which has manifested itself in various forms; such as a sharp rise in inflation, spiraling high fuel prices and fuel shortages in addition to higher food costs. This led the government to announce biting austerity measures that have resulted into sometimes violent demonstrations in Khartoum for that first time in over a decade from a public that had become accustomed to a comfortable life funded by petro dollars.

Details of the oil deal are sketchy with Sudanese officials stating that Juba will export oil at a fee of US$25 per barrel while the South Sudanese government stating that they will pay US$9.48 per barrel and an additional US$3 billion one off lump sum as an unprecedented budget assistance to the North. The fee to be paid (cumulative US$11) is the highest rate in the world and the government of South Sudan is understandably looking at alternatives.

As it signed the oil transit deal with Khartoum it also signed the new pipeline construction deal with Kenya. The agreement with the North is set to end in 2015 when the South is hoping to have constructed alternative pipelines through Kenya and probably another through Ethiopia and Djibouti.

The South Sudanese Kenyan pipeline project will be funded by South Sudan and jointly managed by the two countries and ensures that the pipeline passes through Kenya’s LAPSSET corridor. LAPSSET is an alternative transport corridor in Northern Kenya that connects the port town of Lamu to South Sudan and Ethiopia. The LAPSSET projects championed by the government of Kenya under its Vision 2030 mission are valued at US$23 billion and include a planned port, a refinery, the pipeline, roads, airports and resort cities in Kenya’s underdeveloped north.

The pipeline is also planned to export Kenya’s recently discovered oil from the northern oil fields of Turkana where this pipeline is set to pass through. There are also unconfirmed reports of negotiations to build a branch of the pipeline to the oil fields in the Lake Albert region of north western Uganda.

Along the pipeline will run a fiber optic communications cable that will connect South Sudan to the world.

The intrigues around this pipeline continue.