The secession of South Sudan in July 2011 and the consequent loss of three quarters of Sudan’s oil production have been disastrous for an economy that since its first oil exports in 1999 has become increasingly dependent on hydrocarbons revenue.

Khartoum’s average oil exports have fallen from 415,000 barrels a day (b/d) in 2010 to 240,000 b/d in 2011 and further to just 49,000 b/d in 2012, according to the latest report on Sudan by the Washington-headquartered IMF, published in November 2012. Revenues from crude sales likewise dropped from 11.3 per cent of gross domestic product (GDP) in 2010 to an estimated 3.5 per cent in 2012.

What little production that was left to Sudan following South Sudan’s independence was further eroded in 2012 due to the ongoing conflict between the two nations. In April 2012, South Sudanese forces captured and briefly held Heglig, just north of the de facto border between the two states. During the dispute, about a third of the field’s 115,000 b/d output was halted.

Licensing round

As its dollar reserves dwindle and with scant other means of replenishing them, the government in Khartoum is trying to develop those oil resources still at its disposal. China’s Petro Energy began producing 10,000 b/d from the Hadida field in the west of the country in late 2012. Oil Minister Awad al-Jaz said that by December, Sudan’s production had increased to 140,000 b/d, from 120,000 b/d in October.

In January 2012, the Oil Ministry launched a licensing round for six exploration blocks located south of Khartoum, on the border with Egypt, in the western Darfur region, onshore and offshore of the Red Sea coast, and in the east of Sudan.

The round has had some success. In July, Khartoum signed an exploration and production sharing contract with Canada’s Statesman Resources on Block 14 in the Murzuk basin. The field has potential reserves of 1.5 billion barrels, according to a statement by the company in November.

The government also signed production-sharing deals with companies from China, Nigeria, Australia, Brazil and France. Canadian-Pakistani businessman Lutfur Khan is, meanwhile, seeking to develop three oil fields in the north of Block 7, which straddles the border with South Sudan.

In the medium term, the government also hopes to increase production by using enhanced oil recovery techniques (EOR) on existing fields, according to Azhari Abdalla, director-general of the state-run Oil Exploration and Production Administration. The government aims to increase recovery rates to 47 per cent from 23 per cent.

According to Abdalla, incremental production from existing blocks will enable output to rise to 180,000 b/d by the end of the year. In February 2013, Sudan News Agency, the state press service, quoted a member of parliament saying that the government plans to boost production to 200,000 b/d in the current calendar year.

Increments to production are expected to come from Block 6, where the government expects to add 40,000 b/d; Blocks 2 and 4, where an estimated 15,000 b/d will be added; and Block 17, where an additional 10,000 b/d is expected.

Impossible oil production targets

Such a significant increase in production is unlikely. The government’s lack of foreign exchange reserves will hamper its ability to finance EOR.

There is also suspicion the government’s bullish predictions may be little more than an attempt to arrest the declining value of the Sudanese pound against the dollar.

The IMF estimates oil exports averaged at 49,000 b/d in 2012 and forecasts a rise to 85,000 b/d in 2013 and 124,000 b/d by 2017. A 2012 report published by the Paris-based International Energy Agency estimated production at 70,000 b/d, predicting an increase to 90,000 b/d in 2014, followed by a drop to 60,000 b/d in 2017. Late last year, even the oil minister said that incremental production in 2013 would amount to just 10,000 b/d.

The government has also embarked on a programme to increase the capacity of its downstream facilities. In 2006, the capacity of the country’s main refinery, 70 kilometres north of Khartoum, was doubled to 100,000 b/d. The work also enabled it to process the heavy, acidic crude that makes up a growing proportion of production.

Sudan has two smaller refineries at Port Sudan and El-Obeid. In mid-February, Al-Jaz announced that the ministry had launched a programme to rehabilitate the Port Sudan facility. The minister is encouraging the use of local companies to make parts for the project as a way of developing the domestic oil industry. Sudan is currently running a deficit in refined products, forcing it to pay elevated prices on the international market. In late February, the state-owned Sudanese Petroleum Corporation reportedly bought 520,000 tonnes of gasoil for delivery between March and July.

Cutting fuel subsidies

High fuel costs and widespread poverty mean that domestic energy consumption relies on substantial subsidies from the government. Treasury spending on subsidies increased from 0.9 per cent of GDP in 2010 to 2.9 per cent in 2011 and 2012, according to IMF estimates. With the loss of oil income, the ruling National Congress Party proposed that the fuel subsidy be reduced by some £SD6bn ($1.4bn) in 2012, but the idea was dropped on the grounds that it might provoke unrest.

The subsidy was eventually reduced in May 2012, but the decision was widely criticised. The Sudanese Businessmen Union described it as “catastrophic”, while the Sudanese Farmers Union said that it would increase the cost of agricultural inputs, according to a report published by International Crisis Group, a Brussels-based non-governmental organisation (NGO) in November 2012. According to the IMF, the government has expressed its determination to phase out the fuel subsidy by the end of 2014. But the implementation of such a plan remains susceptible to political considerations.

In the short term, the most effective way for Sudan to increase its oil earnings is to allow South Sudan to resume crude exports through its pipelines.

In December 2011, just five months after South Sudan became independent, Khartoum blocked exports of its neighbour’s crude from the Port Sudan terminal, and began confiscating oil through a tie-in pipeline in lieu of what it claimed were unpaid transit fees. South Sudan responded in early 2012 by halting oil exports entirely.

In September 2012, the two countries eventually reached an agreement on the resumption of oil exports, and South Sudan began work to restart production. The Juba government estimated that start-up would take six months from oil fields in Unity state and 12 months from those in Upper Nile state.

But since the agreement was made, Sudan has repeatedly obstructed its implementation, adding new conditions to the original deal, such as the withdrawal of South Sudanese support for the northern branch of the Sudan People’s Liberation Army (SPLM-N) in Blue Nile and South Kordofan.

Summits were held on 5 January and on 27-28 January to try to resolve the impasse, without success. The consensus among analysts is that Khartoum is deliberately imposing conditions that Juba cannot meet in order to delay or derail the resumption of exports.

“After each agreement, somebody in Khartoum says nothing will be implemented before the SPLM-N is disarmed, and that’s impossible for South Sudan to achieve,” says Douglas Johnson, a UK-based historian and analyst specialising in Sudan.

Unresolved conflict

Sudan is still smarting from the loss of South Sudan and the humiliation of its military defeat in Heglig. There is a school of thought in Khartoum that preventing the resumption of oil exports will cripple South Sudan, or force it to make further concessions.

International conflict also has the added benefit for the Al-Bashir regime of providing a distraction from its own failings, even while it continues to exacerbate the country’s economic plight.

Negotiations between the two parties on oil transit and other unresolved issues are due to resume after three months. If they fail, the African Union, which has sponsored the talks, is likely to refer the matter to the UN Security Council.

Some analysts believe that a last minute deal will allow oil exports to resume, but others are not so optimistic. “I can’t see there being a resumption,” says Johnson. “I don’t see a resolution of the political issues unless there is a change of mind or personnel in Khartoum.”

Juba’s fundamental lack of trust of the Khartoum government means that even if a deal is made there will always be a suspicion that the north might start taking its oil once again.

“South Sudan has learnt from history not to trust the north,” says an energy specialist at a Juba-based NGO. “It would be like giving your life on a string to somebody holding a knife, knowing that they could cut the string at any time.”

Key fact

Revenues from crude sales dropped from 11.3 per cent of GDP in 2010 to an estimated 3.5 per cent in 2012

GDP=Gross domestic product. Source: MEED