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Despite clashes, oil shutdown is bad for South Sudan

The South Sudanese government recently decided to stop oil production in retaliation against actions taken by the Sudanese government in Khartoum. While on the surface it seems a wise decision, upon closer examination it has resulted in serious and harmful effects on the government and the South Sudanese people.

Ahmed Kodouda
1 April 2012

Recent reports of clashes between the armies of Sudan and South Sudan have reignited simmering tensions between the two countries. These skirmishes are manifestations of the broader post-independence issues between Khartoum and Juba.

In January, South Sudan shut down its oil production after months of stalled negotiations on an oil-sharing arrangement between the two nations and in retaliation against reports that Khartoum had begun to siphon off a portion of Juba’s oil to compensate for what it labeled “transit fees.” South Sudan’s oil is transported through Sudan to the northeastern city of Port Sudan where it is exported to international buyers such as China and Japan.

On the surface, the decision seems to have achieved several objectives for Juba. Stopping the oil production reframed the political discourse away from the South Sudanese government’s own mismanagement of the country’s resources and the rampant corruption back towards Khartoum. Ostensibly, it has united the South Sudanese against their common, foreign enemy and has allowed politicians in Juba, who have called for severe austerity measures and major cuts in government spending, to capitalize on the “rally ‘round the flag” effect.  Furthermore, cutting the oil revenue hits Khartoum where it hurts most, intensifying the economic malaise that has plagued Sudan since losing over 75% of its revenue.

However, beyond the surface, the decision to shut down oil production has serious and very harmful effects on the government and the South Sudanese people. The shutdown is effectively bankrupting the country, as oil production makes up 98% of South Sudan’s annual revenue. With no money coming into its coffers, the government has been forced to dip into its hard currency reserves. Officials in Juba have claimed they have currency reserves to cover 18 months of expenses, but because of corruption, informed sources put the estimates at no more than six months. With reserves running out rapidly, inflation will severely impact the country’s economic wellbeing.

In early March, the governments of South Sudan, Ethiopia and Kenya jointly launched a project to build a port in Lamu on the Kenyan coast. The project was heralded as South Sudan’s final path in its divorce from Khartoum. 
Although a pipeline through Kenya is strategically more important to Juba’s goal of further integrating its economy into the East African Community, it is not a viable alternative to the pipelines going through Port Sudan on the Red Sea for the foreseeable future.

According to Vice President Riek Machar, Juba plans to keep its pipelines shut off for 30 months. However, there are several factors that could ultimately delay the construction of any pipeline by several more years. First, to construct such a massive pipeline roads with particular load specifications are needed to transport the pipes to their destination. These massive trucks carrying the pipes would otherwise sink into roads constructed to handle normal traffic. Secondly, geologically if the oil wells remain untapped for much longer the oil will begin to recede back into the earth and dry up the oil wells. The wells will then take up to an entire year to return to their original, full capacity. Finally, the construction of the pipeline itself could take much longer than anticipated if rampant corruption persists.

Ultimately, South Sudan remains tied to Khartoum because it cannot survive much longer without any oil revenues. This has become more apparent in the past weeks as the South Sudanese pound is begining to lose its value on the black market and dollars are growing scarce.

The best path forward for Juba is to continue negotiating and come to an agreement with Khartoum until the pipeline is completed. If Khartoum continues to steal its oil during that time, Juba should remain steadfast in its agreement and seek international arbitration after the Lamu pipelines are completed.

Politicians in Juba need to refuse the urge to make unilateral decisions because, as much as they would like to deny it, they need Khartoum as much as Khartoum needs Juba’s oil. The blame for this standoff lies primarily with Khartoum, however it is in Juba's interest to resume oil production until it has another alternative. Although a popular decision, shutting off its oil wells is not a strategic or viable long term option for South Sudan, especially at such a critical time in its infancy.

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