South Sudan runs out of time for oil transit alternatives
Ongoing border and oil disputes and the halting of oil production by South Sudan has led to renewed clashes between Khartoum and Juba, the specter of another war and the buckling of South Sudan’s underdeveloped economy.
On 26 March, clashes erupted between the Sudan People’s Liberation Army (SPLA) of South Sudan and the Sudan Armed Forces (SAF) in a number of border-area hotspots.
Fighting is ongoing in the states of Kordofan and Unity, the latter home to the main oil field in Heglig, inside South Sudan but claimed by both sides. The government of South Sudan on 27 March claimed to have retaken full control of the Heglig oil field; however, other reports cite SPLA officials as saying that only partial control had been established. The residents of Kordofan largely supported the South in its independence bid, but the territory now technically lies on the Sudan side of the border.
Other disputed territories in Jau, Pan Akuach and Teshwin – inside South Sudan – have also come under attack by Khartoum. South Sudan’s oil minister said Khartoum continued to send warplanes inside South Sudanese territory to bomb oil facilities. Among the targets, according to the oil minister, was a compound run by the Greater Nile Petroleum Operating Company (GNPC), part of a Chinese-led consortium. The oil minister also said an oil well in the town of Rubokana, near Bentiu in Unity state, had also been bombed by Sudanese forces.
The renewed clashes come as the leaders of Sudan and South Sudan were scheduled to meet to discuss resolutions to ongoing border and oil disputes in early April – a meeting Sudanese leader Omar al-Bashir has now cancelled.
An estimated 75% of former Sudan’s oil reserves now lie in South Sudan, but the trick is that the refineries and the key pipeline to the Red Sea are in Sudan. At present, South Sudan has no chance of development as long as Sudan holds oil transit hostage.
In January, South Sudan moved to shut down all oil fields on its territory over a dispute with Sudan over transit fees and accusations that Sudan was stealing its oil (to the tune of over $800 million). While Khartoum demands $36 per barrel from South Sudan, Juba is aiming to pay around $1-$6 per barrel and a compromise is nowhere in sight.
The move was a risky one on the part of South Sudan, whose state budget relies almost solely on oil revenues. In response, Sudan seized oil tankers carrying oil belonging to South Sudan.
South Sudan’s move to shut down its pipelines is only a minor factor affecting world oil prices, with a reduction in global crude oil supplies of about 350,000 barrels per day. But at home, the move could have more severe consequences, as it leaves South Sudan’s budget drained and could spark a socio-economic crisis that will provoke security situations in South Sudan’s more volatile areas. It is dangerous not to be able to pay soldiers and police.
If the newly independent South Sudan can hold out for another couple of years, it may find an alternative to its oil sector problems. Perhaps the most important development towards this end will be the completion of Kenya’s massive Lamu port project, which will provide South Sudan with an alternative pipeline and refinery options for its oil, bypassing Sudan. The entire Lamu port project is targeting a four-year completion period, while the pipeline portion of the project to South Sudan will take an estimated 11 months to finish. However, this estimate is highly optimistic, and regardless, South Sudan’s economy would likely buckle under halted oil production in less than 11 months.
South Sudan is also exploring alternative pipelines options through Ethiopia, Djibouti and the Democratic Republic of Congo (DRC). But Kenya’s Lamu project aside, the construction of an alternative pipeline to any one of these East African destinations would cost South Sudan at least $1.5 billion. And investors are not exactly lining up: security cannot be guaranteed under the current circumstances and so far the risks seem to outweigh the rewards. The most ideal situation would be the creation of a regional grid, but security and regional politics make such an ideal extremely challenging. Right now, Kenya is the best chance, but South Sudan cannot leave its oil shut off for the estimated for too much longer.
Alternatives aside, severing South Sudan from Sudan in terms of oil would not resolve the problems between the two nations, and could reversely lead to an intensification of the conflict. Indeed, South Sudan’s halting of oil production has led to the current renewed clashes with Khartoum. Bypassing Sudan entirely would remove the only currency for negotiating peace.
In the meantime, the US has given South Sudan a boost for its non-oil exports, adding it to a US trade program for developing countries, which will enable the newly independent nation to export to the US duty free.
The GSP (Generalized System of Preferences) will allow South Sudan to export some 4,900 products without paying import duties. The GSP is one step toward membership in the African Growth and Opportunity Act (AGOA), which includes a waiver on import duties for textiles and agricultural products that are not included in the GSP.
The US has also eased sanctions that will open up investment in South Sudan’s oil sector.
But geopolitical realities will determine the end game.
The US, China, Uganda and the LRA
While South Sudan has allied itself with the US and Uganda, Khartoum uses the Lord’s Resistance Army (LRA) as its proxy to fight battles to ensure that South Sudan’s oil – a large share of which makes its way to Chinese markets – is held hostage.
The violent LRA cult-militia – which hides out in South Sudan’s northern mountains and in the DRC - is where the battle between Juba and Khartoum could become much more regional and even global in nature.
While China is most interested in ensuring cooperation between Khartoum and Juba, and hence an uninterrupted flow of oil, Beijing will have a difficult time convincing Khartoum to halt its attacks on Juba and to stop using the LRA as its proxy.
China, while it would prefer a stable relationship between North and South, is not going to bail South Sudan out. Diplomatic relations are shaky at best, as South Sudan accuses Beijing of complicity in Khartoum’s oil theft. This diplomatic spat has gone as far as to see Juba expel the head of the largest oil company on its territory, the Chinese-Malaysian Petrodar consortium. Increasing anxiety for Beijing, if South Sudan succeeds in finding an alternative route for its oil, it could upset exports to China as favor would likely be given to Western companies.
But the presence of the LRA could change the playing field, bringing the US and a consortium of Sudan’s neighbors into the battle. Uganda and the US have recently stepped up the fight against the LRA.
In late 2011, Washington authorized the deployment of around 100 special forces combat troops to help in the fight against the LRA and its fanatical Christian leader, Joseph Kony, whose celebrity status as a kidnapper, enslaver and creator of child soldiers and brutal fighting methods has recently spiraled out of control with help from the ignorance of Hollywood.
Indications that South Sudan is becoming a preferred stage for pursuing the LRA are already surfacing. On 24 March, Uganda, South Sudan, the DRC and Central Africa Republic (CAR), with the backing of the United Nations and the African Union (AU), announced the launch of a join military operation against the LRA inside South Sudanese territory. Some 5,000 soldiers are being deployed. The four countries, significantly, have agreed on the free movement of troops across mutual borders in pursuit of the LRA.
This development, in the end, may be why South Sudan is holding fast against Khartoum, despite the economic and security risks. Getting rid of only one of Khartoum’s proxies in this war will not be enough to stop Sudan from holding the South hostage, but it could help generate international aid to keep it afloat under halted oil production.
For now, though, it would appear that Khartoum has the upper hand as it can survive for the time being without South Sudan’s oil, owing to its ability to produce enough oil of its own for domestic consumption.
By Jen Alic of Oilprice.com
Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.
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