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Sudan seeks natural resource sharing

12 July 2019 William Farmer

A document signed on 7 May by General Mohamed Hamdan Dagalo (alias Hemedti) on behalf of Sudan's ruling Transitional Military Council (TMC) was publicly released by the United States government on 17 June. The document highlights the TMC's intention to integrate Sudan with South Sudan as part of a "Sudanese Union" and merge the "marketing" of both countries' natural resources into "a consolidated entity".

Hemedti's administration probably wants to obtain a greater revenue share of South Sudan's oil by increasing the fee for transferring oil through Sudan. The reduction of subsidies on bread due to low state revenues caused mass protests in Sudan in late 2018 and these have continued in 2019, which, in turn, brought about the overthrow of Sudan's president, Omar al-Bashir, on 11 April. As such, under its new political leadership, the Sudanese government must increase state revenues. Transporting South Sudan's oil is a key source of state revenue, as oil exports earned Sudan half of its total fiscal revenues before the secession of South Sudan in 2011. IHS Markit assesses that, following a reduction in fees in 2018 owing to reduced production and relatively low oil prices, Sudan currently charges roughly USD14 per barrel for the transit and processing of South Sudan's oil. This includes compensation paid to the Sudanese government for its loss of oil fields and infrastructure upon South Sudan's independence.

On 5 July, the TMC and the civilian opposition coalition the Declaration for Freedom and Change (DFC) agreed to form a joint government following talks brokered by the African Union and Ethiopia, thereby granting Hemedti influence over Sudan's foreign policy. The agreement stipulates that the DFC take a 67% share of seats in parliament, and the TMC and DFC rotate the presidency of the sovereignty council and share over the next three years and three months. The TMC will control the sovereignty council for the first 18 months of the transitional period, so they would be likely to attempt their most contentious policy revisions then. Hemedti commands tens of thousands of fighters, and the TMC received USD3 billion from Saudi Arabia and the United Arab Emirates, which is likely to consolidate his influence over Sudanese policymaking.

Under Hemedti's leadership, Sudan will probably try to justify any renegotiation of the transit fee by citing South Sudan's more favorable oil production conditions. South Sudanese oil production was around 135,000 barrels per day (bpd) in August 2018 according to IHS Markit, which has since increased to 175,000 bpd in early May, according to the Ministry of Petroleum. At the same time, the nominal global price of Brent crude increased from USD54 per barrel in 2017 to USD71 per barrel in 2018. The transit fee is currently at a fixed rate per barrel transported, which favored Sudan when oil prices were beneath USD50 per barrel; however, IHS Markit's nominal price outlook for Brent crude is set to increase from USD67 per barrel during 2021 onwards and reach above USD100 per barrel in 2035. As a result, Sudan is now likely to demand a transit fee pegged to global oil prices.

If Sudan's demands are not met, then the low likelihood scenario of Sudan taking military action against South Sudan, either directly or by using proxy forces, will become more plausible - although there are significant constraints on military escalation. South Sudanese oil assets, which are currently guarded by a joint protection force of mainly Sudanese and some South Sudanese soldiers, would be the most likely military targets. In the event of an assault, pumps and pipelines would more likely be overrun and occupied by Sudanese troops already stationed there, rather than destroyed. In this instance, Sudan would likely support South Sudanese anti-government militias such as the Sudan People's Liberation Movement-in-Opposition, which are strongest in South Sudan's oil-producing Unity and Greater Upper Nile regions, and they would also be likely to occupy oil assets. Despite Hemedti's proven readiness to resort to military force, as shown by attacks carried out by his Rapid Support Forces paramilitary troops against protesters in Khartoum, the capital, any such assault would be unlikely. Notwithstanding the high likelihood of disruption to oil production, any effort to seize South Sudanese oil assets would face strong domestic opposition from the DFC coalition and likely international opposition from one of its key creditors and investors, China. The likelihood of any attack would be further mitigated by roughly 14,000 United Nations peacekeepers currently stationed in South Sudan.

Indicators of changing risk environment

Increasing risk

  • South Sudan further increases its oil production, increasing the likelihood that Sudan would attempt to increase the transit fee.
  • Sudan further reduces state subsidies on basic goods (particularly on bread), indicating Sudan's increasing need for state revenues which it would likely seek through increasing the transit fee.
  • Sudan Armed Forces (SAF) officials such as Lieutenant-General Abdel Fattah al-Burhan announce their support for the integration of South Sudanese and Sudan natural resource marketing, increasing the likelihood of SAF forces overrunning and occupying South Sudan's oil assets.

Decreasing risk

  • The global price of oil falls beneath USD50 per barrel during the next year and a half, reducing the likelihood or commercial viability of Sudan attempting to obtain a greater transit fee from South Sudan.
  • Hemedti demobilizes sections of his Rapid Support Forces militias, indicating his diminishing military power and decreasing capability to carry out attacks against South Sudanese oil assets.

Posted 12 July 2019 by William Farmer, Analyst, Sub-Saharan Africa, Country Risk, IHS Markit

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