Oil production estimates for Sudan and South Sudan are cut amid revenue-sharing dispute

Monthly IEA Oil Market Report says China most likely to experience the acute effects of the supply disruption.

15 February 2012

The failure of Sudan and South Sudan to resolve a dispute over sharing oil revenues forced the International Energy Agency to cut by more than a quarter its estimate of the two countries’ combined 2012 oil production.

The downward revisions, included the IEA’s monthly Oil Market Report published on 10 February, reflect the absence of a foreseeable resolution to the dispute between the two countries over revenue sharing, which was put in place following Southern Sudan’s declared independence on 9 July last year. Through this scheme Southern Sudan had paid Sudan in kind for the use of its transit pipeline and port. However, South Sudan has now reportedly shut down its output of oil completely after the two governments failed to reach an agreement.

Inflaming tensions

Sudan lost around 75% of its pre-independence revenues to the South. After the South’s secession, the sharing agreement gave South Sudan 60% of the revenues from the Unity Oil field’s output (located in South Sudan) and around 25% of the revenues from Block 2 oil field’s output (located in Sudan).

The ensuing negotiations that ended in late January resulted in various proposals, but the governments remain at loggerheads. The latest African Union proposal involves the South giving Sudan a direct cash transfer of USD5.4 billion, plus transit fees worth up to USD1.1 billion, covering the period until the end of 2014.

"In addition to the transit fee dispute, the sides have not agreed on the final border status of the Abyei region. Also, citizenship issues of displaced persons, ongoing ethnic conflict, and the potential for Sudan to use its military force are inflaming tensions between the two countries amidst a worsening economic situation," observes the OMR, a monthly IEA publication which provides a view of the state of the international oil market and projections for oil supply and demand 12-18 months ahead.

"While it is impossible to predict the outcome, the broader set of economic and political factors at play mean that the two countries’ oil output will remain at risk at least for the remainder of the year."

Impact on Asia

The OMR notes the bad timing of this oil production disruption in Sudan and South Sudan, which it estimated to be reduced by 100,000 barrels per day (kb/d) for 2012. Asian markets are expected to tighten as a result of disruption; China, for example, imported roughly 260 kb/d of Sudanese and South Sudanese crude oil in 2011. (That’s more than the reduction estimate of 200 kb/d for the first quarter of 2012 alone).

In addition, the loss of over 200 kb/d of heavy and acidic Dar Blend and light, sweet, and waxy Nile Blend crude oils from South Sudan coincides with strong demand in Asia for medium and heavy crude oil. At the same time, there is serious concern over the potential impact of international sanctions on Iranian crude supplies and any resulting disruptions.

Elsewhere in Asia, Japan is expected to burn 150 kb/d more crude oil than it did in the first quarter of 2011, in order to compensate for the reduced nuclear power that is offline in the wake of the Fukushima Dai-ichi accident. On top of this, cyclones have shut in around 60 kb/d of Australian oil production.

How many gallons of oil are there in a barrel?
42 US gallons (35 imperial gallons), which is 159 litres.

How many barrels of oil are produced and refined a day?
Around 87 million barrels. That works out at nearly 32 billion a year.

What is crude oil?
Crude oil is a mineral oil consisting of a mixture of hydrocarbons of natural origin and associated impurities, such as sulphur. It exists in liquid form under normal surface temperatures and pressure. Its physical characteristics (e.g. density) are highly variable.

Photo: ©GraphicObsession

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