A year after the birth of South Sudan, the country is facing a new challenge as it turned off its oil taps. While this decision endangers the country’s near future, it sheds light on possible strategic partnerships in the long run.
Hardly a year since its ensanguined laborious birth and South Sudan is already bracing itself for another protracted trial by fire – albeit self-imposed this time. The world’s newest nation, and also one of its poorest, recently performed an economic hara-kiri, one that could potentially put the infant state back on the course to ruin and conflict.
It turned off its oil taps, the source of 98% of its national revenue, following an intractable stalemate over transit fees with its estranged parent Sudan. For Juba, inheriting an enviable oil wealth alongside a hard-fought independence from Khartoum following two decades of civil war was a fortuitous severance package. Vast swathes of oil reserves, with a production potential of 350,000 barrels per day, can go a long way for a country the same size as France with 8 million mouths to feed but which has only 70 miles of paved road and hardly anything in the way of infrastructure.
However, the bounty came with an inevitable problem. While the South broke away with 75% of the unified Sudan’s oil reserves last July, the crucial pipeline network, refinery and the Red Sea terminal at Port Sudan – currently the only export route available to the landlocked South – remained with Khartoum giving it a prodigious leverage over the new republic’s economic artery.
In terms of lost oil revenue the South’s independence has left a gaping hole in the North’s national budget, 40 percent to be precise. Miffed by the massive dent in its pocket, Khartoum asked for $32 per barrel of oil in transit fee – a price Juba deems extortionate and rightly so. Even by industry standards, Sudan’s asking price is a whopping 22 times more than what Russia’s Druzhba, the world’s largest pipeline network and Europe’s fuel artery, commands for overland transit. The row deepened further earlier this year when the South accused the North of stealing its oil, and Khartoum hit back claiming Juba was stoking tensions within its territory by arming former rebels.
As negotiations between the two stalled in Addis Ababa amid incessant accusations, South Sudan went all-in with its chips on the table in outrage. Announcing a complete halt to its oil production Juba declared it was going to build its own pipeline network to scupper what it called Khartoum’s blackmail. Within weeks it inked deals with Kenya, Ethiopia and Djibouti for an alternative pipeline network to circumvent the North altogether.
Whether or not it’s a snap decision soaked in jingoism of a battle-weary people still drunk on their newfound and hard-fought freedom depends on which side of the border you are standing. Immensely popular inside the country, Juba’s plan B is nevertheless a risky preposition, and one that will inevitably determine its survival quotient. Here’s a quick back-of-the-envelope calculation to gauge how the odds are stacked in South Sudan’s big gamble.
Let’s first look at what can go wrong. To begin with, South Sudan’s plan B is still what it is – a plan. And an exceptionally ambitious one at that. The entire network is price-tagged at approximately $16 billion. According to industry analysts, just the Kenyan leg of the proposed pipeline running 1715 km to connect with Lamu Port is estimated at $4 billion and will take at least three years to build. For a country that just nipped its only source of income funding such a mega project is an exercise in inevitable bankruptcy. Despite assurances by Juba’s partners to commit funds from their national budgets, the network will still need substantial foreign investment to complete. Exasperatingly for Juba, securing loans will be a long bureaucratic trudge until it formally becomes a member of the International Monetary Fund and World Bank.
To make matters worse, its decision to halt oil production is spawning anxiety among international investors. Private sector companies with exposure to multi-million infrastructural contracts are in a flux over South Sudan’s spending ability, even as oil firms have started recalling their staff after the shutdown. Its Vice President Riek Machar, who was recently on his second trip to the US in eight months, returned home without any promising deals with oil majors or big bond investors.
Assuming that pipeline does attract ample investment, the project’s success may yet be threatened by the region’s political instability. The proposed pipeline is supposed to traverse difficult terrain, which is also home to hardline Somali and Sakuye militias, a major headache for the stakeholders.
Meanwhile, just how South Sudan is going to sustain itself until the pipeline is ready is a question few in Juba have answered satisfactorily. Nearly a third of its population urgently needs food aid even as it grapples with thousands of refugees and internally displaced people in the aftermath of its secession. Resources will stretch even thinner when 700,000 South Sudanese return home from the North in April. Acutely lacking in basic infrastructure and with no manufacturing industry, the country almost wholly relies on goods imported via Uganda, Kenya and Sudan at a hefty premium. Adding to its woes, inflation rate is hovering at 50%. Before independence malaria pills cost £15 but now they cost £35. A high number of South Sudanese youths don’t have jobs and are unsurprisingly unemployable. Having spent years fighting Khartoum to liberate the country, a whole generation lost the opportunity to be educated and gain vocational skills.
Interestingly, South Sudan insists it has sufficient foreign reserves to last it another 18 months. As an additional back-up plan, President Salva Kirr’s government has declared to halve non-salary expenditures along with better tax enforcement to triple receipts. However, the numbers still only make up for 25% of the deficit. Skeptics believe the situation is critical and Juba is inevitably heading for a collapse.
As if this wasn’t bad enough, a humanitarian crisis is unfolding in Kordofan region which straddles the border, following a surge in violence with hundreds of people killed and thousands forced to flee in recent months. The thorny issues of boundary demarcation, grazing lands and water rights still remain unresolved between the two Sudans and are now fuelling a bloody campaign along the border. Over 30,000 weapons are still on the loose in the region posing an incessant threat to the fragile peace between Juba and Khartoum. A resumption of full-scale hostilities will be deeply debilitating both politically and economically, especially for Juba.
However, South Sudan’s pipeline aspirations aren’t all doom and gloom. Despite the high odds likely to eclipse the project, Juba was dealt a few trump cards that may yet completely turn its fortune around. To begin with, Sudanese reserves yield good quality and readily traded crude grades known as Nile Blend and Dar Blend for which the demand has steadily soared, particularly in China and Japan. The region has also attracted large-scale oil investments from Chinese, Malaysian and India oil corporations since the mid 1990s. For the consortium, the venture is too capital-heavy not to consider supporting a project that promises to protect its interests.
Especially for China, which depends on Sudanese supplies for 5% of its energy needs and is also its biggest consumer, the stakes are even higher. Demand for the Sudanese variety of low-sulphur waxy crude is growing in Asian economies, and China, predicted to be the largest oil importer by 2035, will be pushed to compete harder to secure its supplies.
To Beijing’s advantage, it is still viewed as a strategic partner both by Khartoum and Juba due to its long-term presence in the region. Economic wisdom dictates China is likely to use its leverage to rein in the North without political entanglements even as it provides financial and infrastructural assistance to the South in building the pipeline.
Interestingly, Juba’s shutdown came at the heels of Iranian threats to close the Hormuz Strait following an escalation in tensions over its nuclear program. Although Sudanese oil accounts for roughly 0.5% of total global production Juba’s announcement threw oil markets into a tizz. The stalemate over Iran continues to fuel anxiety over crippling disruptions in future, a fear that’s likely to boost Juba’s prospects to attract investment. Moreover, the possibility of using its network as a Central African Grid to extract new finds in Uganda and Tanzania may be a compelling incentive for prospective investors to devise alternative plans to scupper terrorist threats.
South Sudan’s status as a new country is starting to pay dividends too. Although, the US sanctions against Khartoum on account of terror sponsorship have been in place since 1997, technically they are not applicable to Juba anymore. The US lawmakers are revising policies to reflect this change, which will also allow the American oil industry to exploit South Sudan’s massive oil potential. And thanks to actor George Clooney’s activism, the two Sudans are back under the global spotlight again. Bureaucratic wheels may now turn faster than Juba expected.
Irrespective of which way the game turns, South Sudan cannot escape the impact its oil will have on its future. Whether it will be a curse or bring prosperity, Juba’s fate is inextricably intertwined with it.