By the European Coalition on Oil in Sudan (ECOS)

South Sudan’s proposal on oil is commercially sound and, with $8 billion in budget support, may be the best that Sudan can ever get.

Since their separation in July 2011, Sudan and South Sudan have been negotiating bitterly about the way forward. Time is running short now. South Sudan closed down its entire petroleum industry last January after Sudan had started confiscating and even stealing its oil, and now both countries are facing bankruptcy. Moreover, if they don’t sign an agreement by 2 August, the UN Security Council may sanction them.

To break the deadlock, South Sudan made a detailed proposal on 22 July, called “Agreement on Friendly Relations & Cooperation”, which deals with all outstanding issues, including border demarcation, a solution for Abyei, and managing internal conflicts. Its key component, however - a $ 7.5 per barrel transportation fee plus $ 8 billion in budget support - is about the restart of oil production and the prevention of mutually assured bankruptcy.

On 25 July, Sudan rejected the proposal, arguing that it contained “nothing new”, meanwhile lowering its demand for a transportation fee of South Sudan’s oil from $ 36 to $ 32 per barrel. Assuming an estimated production of 230.000 barrels per day at a price of $ 90/100, this comes down to $ 2.7 billion a year, or 52% of South Sudan’s expected future net revenue. The two proposals may be too far apart to meet the UN Security Council’s deadline and both sides are under heavy diplomatic pressure to give in. The challenge will be to strike a deal that does not only relieve today’s immediate troubles, but also satisfies the longer term interests of both governments and will be supported by their constituencies. Such a deal will have to be reasonable and equitable. Are they?

The key issues are the fee that South Sudan should pay Sudan for transportation and handling of its crude, what to do with Sudan’s assumed debt of $ 5 billion to South Sudan, and whether Sudan should receive budget support from South Sudan.

The transportation fee must take into account the costs for the use of pipelines, central processing facilities and marine terminals, as well as a fee for transiting the territory of Sudan. South Sudan’s offer is based on the current tariffs for Sudan’s internally produced own crude, to which it adds a profit component and transit fee of $ 0.63 to $ 0.69 per barrel. This amounts to an average of $ 7.5 per barrel in transportation fees or $ 1.7 million per day. Most of it would be paid to the operators or owners of the petroleum infrastructure. Sudan’s Government would annually receive $ 129 million in cash plus the profit derived from the state oil company’s partial ownership of key petroleum infrastructure. Commercially, this is a reasonable offer and if two friendly countries were to sign such a deal this would go unnoticed.

In addition, South Sudan is offering Sudan $ 8 billion, notably $ 3.03 billion budget support in cash to be paid over 3.5 years and $ 4.97 billion in immediate forgiveness for all claimed arrears. The cash transfer part roughly equals 15% of the Government of South Sudan’s expected annual revenue and would trim the State’s expected budget for the coming 3.5 years down from $ 5,1 billion to $ $ 4.3 billion.

Sudan has rejected the offer, arguing quite rightly that there is no such a thing as a right to be charged the same price as others are getting, and that it is perfectly legal to demand whatever one finds right. Sudan’s counter-proposal does not involve any direct budget support by South Sudan. The core, a transportation fee of $ 32 per barrel, is inspired by its acute budgetary needs rather than by economical commonsense and amounts to $ 7.3 million per day, or $ 2.7 billion per year, 52% of South Sudan’s total Government revenue, to be fully paid to Sudan’s Government. No details are given as to how the companies are to be paid their share. It would be just about a continuation of the arrangement for the 6 years before separation, when Southern oil revenues were split 50-50.

Sudan has badly mismanaged its economy. Since 1999, and largely thanks to South Sudan’s oil, it has spent extraordinary amounts of money on its security apparatus and political patronage, borrowed a lot of extra money, while neglecting economically sustainable investments. Its failure to prepare its economy for a future without South Sudan’s oil is causing acute financial stress and, according to some observers, may even be threatening the National Congress Party’s hold on power. South Sudan has also mismanaged its economy. The majority of its budget goes to the security apparatus, the civil service, and bank accounts of high ranking officials, rather than investment in future economic growth. But all this doesn’t make it any more equitable if South Sudan were to pay for Sudan’s budget deficit.

From an outsider’s perspective, South Sudan’s proposal seems to be reasonable. Whether it appears to be equitable will depend on one’s perspective, but the enormous mutual benefit of any agreement may to some extend compensate for the odd spectacle of a very poor country subsidizing a slightly less poor country with which it is has been at war for many years. South Sudan offers commercial conditions for commercial activities, and government-to-government payments for the non-commercial side of things. It has also thought about a management system that is likely to prevent unnecessary disagreements along the way. This seems to be a sensible approach for an agreement that only makes sense if it holds for several years.

South Sudan offers to transfer 15% of its own revenues for a period of 3.5 years is unheard of in human history. It reflects the fact that a refusal to allow the transit of southern crude would financially strangle South Sudan. The Government of South Sudan hasn’t consulted Parliament yet and will have a hard time defending its proposal against a constituency that has no sympathy for Sudan’s leadership. Clearly, the proposal will only partially solve Sudan’s acute budgetary problems and may therefore not be enough of an incentive, but it is likely to be close to the maximum that Sudan can obtain at the negotiating table. Once people in South Sudan will start realizing that their President Salva Kiir is offering a multi-billion dollar lifeline to President Omar al-Bashir, his approval ratings are likely to plummet.

Some observers are speculating that both governments are tacitly hoping for the other to collapse first. This would be a nightmare scenario. For now, South Sudan’s proposal seems to be the most reasonable solution. And if it prevents the implosion of both states, it may in some way even be the most equitable.

The European Coalition on Oil in Sudan (ECOS), established in 2001 and lead by IKV Pax Christi, represents a large group of European organizations working for peace and justice in South Sudan and Sudan. ECOS calls upon the Governments and the business sector to ensure that oil wealth contributes to peace and equitable development.