ANALYSIS-S.Sudan-Kenya pipeline unlikely to see light of day
Thu Oct 6, 2011 12:43pm GMT
* S.Sudan locked in row with Khartoum over pipeline use
* Considers Kenya pipeline, but experts are sceptical
* Juba needs discoveries, end violence to make project viable
By Hereward Holland
JUBA, Oct 6 (Reuters) - A proposal by South Sudan to build an oil pipeline
to Kenya and end dependence on North Sudan to export its crude has little
prospect of becoming viable in the foreseeable future, because it requires
fresh oil finds and an end to widespread violence.
Landlocked South Sudan took two-thirds of Sudan's 500,000 barrels a day of
oil production when it became independent in July, but it is now locked in a
row with Khartoum over the use of the northern pipeline to the Red Sea.
The South, which produces around 300,000 bpd but has no refinery or
pipeline, has accused its former civil war foe of waging an economic war by
demanding a fee of $32 per barrel to use the northern pipeline.
To end its dependence, South Sudan has held talks with Toyota Kenya over a
pipeline to Lamu, where Kenya wants to build a port and refinery. Southern
officials have also talked to other firms about connecting to an existing
Kenyan pipeline from Eldoret to the port of Mombasa.
But analysts and diplomats say a Kenya pipeline would not be viable based on
current reserve estimates, because output would be rapidly declining by the
time it is completed.
A solution is more likely to come if China exerts pressure on both sides to
reach agreement, removing the need for a new pipeline.
Oil industry sources say Khartoum overpumped some fields in recent years to
get maximum revenue before the South broke away.
Southern output will decline to 200,000 bpd by 2016 and to 160,000 by 2018
before falling even further, according to estimates by the European
Coalition on Oil in Sudan, comprising research groups, non-governmental
organisations and activists.
"The pipeline is not viable currently because of the lack of certainty over
the South Sudan's reserve base. Perhaps it would be viable if one day
significant oil discoveries are made in South Sudan's underexplored blocks,"
said independent analyst Adrian J. Browne.
South Sudan said the Lamu pipeline would cost around $1.5 billion, but
analysts say construction would be a challenge because it must cross the
Sudd swamp, one of the world's largest wetlands, and mountains to reach the
Indian Ocean.
"If, as many analysts have suggested, oil production is set to peak in the
next year, the construction of an additional pipeline doesn't make fiscal
sense for a country facing so many development needs," said Dana Wilkins
from Global Witness, which has done extensive research on South Sudan's oil
economy.
SECURITY, NEW DISCOVERIES?
A pipeline would also require a large security force, because it would cross
regions in South Sudan prone to tribal and rebel violence and the
bandit-ridden terrain of northern Kenya.
South Sudan, a poor country struggling to set up efficient state
institutions, has been unable to contain violence in its main oil state of
Unity and other regions, which has led to 3,000 deaths this year.
"From an investor's perspective, given the political climate and the threat
of possible insurgent attacks on a pipeline, which is an easy target, there
is going to be a very serious insurance premium to protect the pipeline,"
said Harry Verhoeven, a PhD candidate focussing on Sudan's economy at Oxford
University.
Analysts say only significant new discoveries in the underexplored Block B
area in Jonglei state -- where France's Total holds a license -- would build
a case for a pipeline.
"Perhaps it would be viable if one day significant oil discoveries are made
... in Block B, and if these could be tied in with future finds in Kenya's
northern Lake Turkana blocks," said analyst Browne.
"However, in the former Total has been unable to recommence exploration due
to insecurity, and in the latter Tullow Oil is only just about to begin
drilling," he said.
The government also hopes for big oil discoveries in the Central and Eastern
Equatoria states, but based on the little mapping that has been done in the
remote area, there is much uncertainty, said Wilkins from Global Witness.
"All bets are on Total," said Kathelijne Schenkel from the European
Coalition on Oil in Sudan. "Only with substantial new finds will (a new
pipeline) be worthwhile."
Analysts say repeated statements by southern officials about a new pipeline
may be a bargaining tactic as Juba wrangles with Khartoum over the fee to
use the northern pipeline to Port Sudan on the Red Sea.
The African Union has been trying to reach a deal, but talks stalled after
Khartoum demanded $32 a barrel, which officials in Juba considered launching
economic war. The fee is about a third of the South's export prices, around
$90 in August.
Southern officials also hope for road projects to Kenya to reduce its
dependency on the North for passage of its imports, which come mostly via
the Nile.
A closure of the joint border by the north for several months has led to a
scarcity of food and fuel, driving up inflation to 57 percent in August.
Diplomats say China, the main buyer of Sudanese oil and trading partner with
both sides, could help broker an agreement.
China sent its foreign minister in August to north and south to expand ties
as it tries to end tensions and remove the need for a Kenya pipeline after
having funded the Red Sea pipeline.
"China is the one who could settle the dispute between north and south. They
built much of the Sudanese oil industry to secure oil supplies," a diplomat
said.
"Most of the loans granted by China have not been paid back, so they are in
a very strong position," she said. (additional reporting by Ulf Laessing in
Khartoum, editing by Jane Baird)
FEATURE-North-south Sudan tensions hamper Nile trade
Wed Oct 5, 2011 2:09pm GMT
* South Sudan isolated by poor trade links
* Ancient Nile route still key for commerce
* Traders complain of currency obstacles
* Officials see big southern demand in long term
By Ulf Laessing
KOSTI, Sudan, Oct 5 (Reuters) - Standing by his truckful of onions at the
bustling Nile port of Kosti, Sudanese trader Omar Sheikh hopes shipping his
goods to newly independent South Sudan will justify the bureaucratic hassle.
Nearly three months after the south split from the north after decades of
civil war, no comprehensive trade agreement exists between them, hampering
the flow of goods to the poor, isolated and underdeveloped south, which has
only a little more than 50 kilometres (31 miles) of paved roads.
"In the south there is big demand for all sorts of goods," Sheikh said as he
waited for his customs papers to be cleared. "But we need agreements between
the governments to facilitate trade. Without such agreements, there will be
no trade."
Commerce on South Sudan's southern flank is hindered by tribal violence and
the world's youngest country must rely on one of the oldest trade routes,
the Nile, as its main link to foreign markets.
That forces it to deal with the north, but relations have been frosty since
they split on July 9, and arguments over oil revenue and their common border
have pushed the vital question of trade down the agenda.
Both countries have launched new currencies without any coordination. The
south issued its pound in July, forcing the north to launch its own new
currency as it feared being swamped with old notes hoarded in the south.
The barges that travel up the White Nile are loaded in Kosti, a dusty,
low-rise town on the river's western bank 300 km south of the North Sudanese
capital Khartoum. The rusty boats sag in the Nile's pungent waters as they
fill with food, consumer goods, luggage and equipment for United Nations
staff working in the south.
"Trading just resumed. In the south they want many products, such as food,
juices, lentils and other items," said Babiker Alsayer, an export trader in
Kosti's port.
It is around 1,000 km straight overland from Kosti to the southern capital
Juba. The Nile bends and twists through the arid landscape as it wends its
way south, making for a river trip of up to two weeks.
Trade almost ground to a halt in the run-up to southern independence as
violence broke out along stretches of the poorly marked joint border,
cutting off food supplies to the south. Southern inflation soared to 57
percent in August as a result.
Northern port officials say bilateral trade has grown since the two states
signed a limited agreement last month to facilitate trade and travel. Since
then, about ten or more trucks have been arriving every day in Kosti, port
officials and traders say.
SOLD UP THE RIVER
The lack of roads makes the Nile as vital for the regions either side of its
banks as in ancient times. But the traders plying the Nile say they are
taking big risks because of the long list of hindrances to commerce, raising
the costs for buyers in the south.
"I will ship my goods by barge and then sell on local markets, for which I
will get paid in southern pounds," said a trader who gave his name as Malik.
Since it is almost impossible to change southern pounds in the north, Malik
must first change the southern money into dollars -- a difficult task. Both
countries have shortages of dollars, which traders say are only available at
a bad rate on the black market. Some dealers in the south are demanding 5
pounds or more for 1 dollar, well above the official rate of 3 pounds and
above the black market rate in the north, they say.
The northern central bank allows traders to change only small amounts of
northern pounds into dollars in Khartoum, making it harder to buy imported
goods to ship south.
"I must bring back the dollars I changed at the central bank within 45 days.
I had to leave a cheque as a deposit," said one merchant, showing a letter
from the Khartoum-based central bank.
The traders struggle to get their goods to Kosti and down the Nile, sell
them, swap the southern pounds for dollars and bring them back to Khartoum
to meet the central bank's deadline.
"We need government coordination on how to trade with the south. There is
big business there but we need agreements," the merchant said.
BENEFITS
Reliable data for the size of bilateral trade could not be obtained, but
some analysts said the potential size could be gauged from the fact that
before the split, Sudan's non-oil exports were about $1.7 billion annually
-- north-south merchandise trade could eventually grow to a significant
proportion of that figure. The total population of the north and south is
about 41 million, of which 80 percent are in the north.
The Nile trade is also important for Egypt, which exported $274 million of
goods to Sudan in the first half of 2011, a figure that may rise as demand
grows from the south in the face of food shortages after rain and tribal
violence, experts say.
South Sudan will have to rely on the north to export its oil for years, as
the only pipeline from the southern fields runs to Port Sudan on the north's
Red Sea coast. The south, which is producing around 300,000 barrels of crude
oil a day, made some $500 million in revenue from its first oil shipment
exported via Port Sudan, the deputy finance minister said last week.
Diplomats say both the north and the south seem willing to improve economic
ties.
"We see a big rise in trade with the south. There is huge demand from
merchants here to export to the south," said Mutasim Matawi, head of the
export department at the ministry of foreign trade in Khartoum.
"We know the situation is not perfect yet. We have set up a committee with
the south to regulate trade."
South Sudan will have to significantly increase its food imports in coming
months because its own production this year will come in 500,000 tonnes
below its needs, according to U.N. estimates. Some food supplies will come
on U.N. aid flights but much will be delivered through the Nile trade.
Samson Wassara, an analyst in the southern capital Juba, said South Sudan
also wanted to develop trade via Kenya to its southeast, using the Indian
Ocean port of Mombasa for trade with Asia. For now, goods from Asia destined
for South Sudan arrive at Port Sudan for transfer to the slow Nile barges.
"They are trying to open new trade routes from Juba to Mombasa. The port in
Mombasa is relatively near to Juba compared to Port Sudan," said Wassara.
However, Mombasa is difficult to reach for now because of tribal violence
and taxes imposed illegally along roads into Kenya. Officials in Kosti say
their port will remain the cheapest, and simplest, option.
"Some of the traders don't speak decent English so they prefer to deal with
us than going via Kenya," said a port official in Kosti.
C Thomson Reuters 2011 All rights reserved
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Received on Thu Oct 06 2011 - 13:36:27 EDT