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Oil Politics, Asian Suitors, and Alternative Pipelines in South Sudan

According to South Sudanese officials, the Japanese Toyota Company has agreed to build a new oil pipeline that bypasses Sudan.
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President Salva Kiir of South Sudan at a political rally in Juba. Photograph by Mark Lotwis/Save Darfur Coalition.

Following a meeting earlier this month between President Salva Kiir of South Sudan and the chairperson of the Toyota Company, Junzo Shimizu, South Sudanese officials announced that the Japanese firm had agreed to build an oil pipeline from South Sudan to Lamu Port in Kenya.

Several big questions remain around the details of any agreement – and it is notable that South Sudan has developed somewhat of a reputation for announcing deals that later turn out to be far less concrete than implied – but if the project were to go ahead, the ramifications would likely be deep and far-reaching.

Oil lies at the centre of Sudan/South Sudan relations and at the centre of both Sudans’ relations with China. The extraction and transition of oil ties the fates of the Sudans together – which since South Sudan gained independence in July 2011 have been more lose-lose than win-win – and is the main driving force behind China’s interest in the region.

At the moment, these dynamics are delicately, or rather precariously, balanced. If the proposed pipeline were to be built, it would not only radically alter the logistics of oil exploitation, but could precipitate a significant reconfiguration of these allegiances and of the politics in the region and beyond.

The best of enemies

When South Sudan assumed independence nearly two years ago, it took with it around 75% of Sudan’s oil reserves. Oil accounted for approximately 98% of South Sudan’s revenue.

However, South Sudan’s oil industry – as well as economy and politics – has remained dependent on Sudan. South Sudan has most of the oil, but Sudan has the pipeline infrastructure, refineries, and export terminal at Port Sudan necessary to trade it.

This forced marriage, whereby Sudan would get a cut of the oil profits in return for the use of its infrastructure, could have been the thing that kept relations between the two historical nemeses amicable. But in the period leading up to South Sudan’s independence and well after secession, an agreement on what the transit fees should be was never reached. Matters came to a head a few months after independence when Khartoum seized several million barrels of oil citing the non-payment of transfer fees, and in January 2012 Juba responded by shutting down all of its 350,000 barrels-per-day oil exports.

The consequences of cutting off the source of 98% of government revenues were dramatic and disastrous. The shutdown sparked a military confrontation and led to widespread economic consequences including rising inflation, currency devaluation and severe austerity measures.

Eventually, after months of negotiation, an agreement was reached and South Sudan continued oil exports in April 2013. Only a few weeks later, however, Sudan’s President Omar al-Bashir threatened to block South Sudanese oil exports unless Juba stopped its alleged support of rebel groups operating in Sudan’s border regions.

China’s oil dilemma

Since South Sudanese independence then, oil has continually been held hostage to ongoing disputes around the many unresolved aspects of the 2005 peace agreement, which ended almost 40 years of civil war. Indeed, of the 23 months that South Sudan has been independent, oil has not flowed for 15 of them, and the Sudans’ symbiotic oil relationship has mostly been one of mutual destruction rather than mutual gain.

However, the Sudans are not the only interested party in all this. China, Sudan’s biggest investor, has long been active in the region, and its diplomatic and economic ties with Sudan have been underwritten by oil investments. The China National Petroleum Corporation (CNPC) owns a 40% stake in the Greater Nile Petroleum Operating Company (GNPOC), and was behind the construction of 1,500 km of pipelines, numerous refineries and the development of Port Sudan. Furthermore, China purchases around two-thirds of the oil exported from Sudan/South Sudan. Malaysia meanwhile buys around 9% and Japan 8%.

South Sudanese secession in 2011, however, threw a spanner in the works for China. Not only did the Asian power now have to deal with a new set of actors in Juba, but Beijing’s historical support for Khartoum meant it had a very poor image to overcome.

To do this, China has gone on a charm offensive, negotiating large loans and infrastructural development projects. This is all no doubt welcome in South Sudan, but the one thing Beijing has not offered so far is the one thing Juba wants most: an alternative oil pipeline that would bypass Sudan.

Despite arguments that an alternative pipeline would diversify export options and spread the risk of supply disruptions, it is clear that China – along with Malaysia and India, whose state-owned oil companies have 30% and 25% stakes in GNPOC respectively – would prefer to stick with the current arrangement of South Sudan using the Sudanese pipeline infrastructure and upstream refineries in which China has already invested significantly.

China’s stance is that the Sudans should learn to get along with each other, and this position is likely being leveraged through diplomatic pressure as well as promises of aid, with reports of Chinese development pledges and Malaysian loans against future oil sales being the most widely reported.

Enter Japan

In many ways, Japan is just one more of South Sudan’s Asian suitors. Since the Fukushima nuclear disaster of March 2011, Japan’s demand for oil has more than quadrupled. And South Sudanese low-sulphur fuel oil (LSFO) is especially valuable to Japan as it can be used in the country’s particular type of oil-fired generators. South Sudan is the second largest supplier of LSFO in Japan, and during the suspension of production, Japan’s power utilities were paying a premium to access LSFO from other sources.

More generally, Japan’s presence in South Sudan is also growing steadily, and includes the provision of technical assistance, infrastructure development, the deployment of an engineering contingent of the United Nations Mission in South Sudan (UNMISS), and the construction of a new $100 million bridge over the Nile river in Juba.

However, amongst South Sudan’s oil buyers, there is one important way in which Japan is unique. Unlike China, Malaysia and India, Japan has no stake in the GNPOC and is not invested in the success of Sudan’s refineries and infrastructure. This perhaps explains why the Toyota Company reportedly dared to go where Chinese firms have not. While China’s loyalties and interests are more precariously balanced, Japan has relatively little to lose but lots to gain from the building of an alternative pipeline.

Shaking the chessboard

It is too early to assume the Toyota deal will actually go ahead, but if it did, there could be a whole range of complex implications. To begin with, the building of an alternative route that would bypass Sudan would likely lead to the deterioration of relations between the Sudans even further. There are still many difficult disagreements to be resolved over issues such as the demarcation of the border regions, and both sides regularly accuse the other of supporting armed rebels. The current system whereby the two countries need to cooperate in order for oil to flow – and government coffers to be filled – at least forces the Sudans to try to negotiate.

The building of an alternative pipeline would change this. Juba might come to believe that cooperation with Sudan would soon be no longer necessary, and start acting accordingly. Meanwhile Khartoum – seeing that one of its main sources of revenue was being cut off and that its economic leverage over its southern neighbour was being lost – could be tempted to retaliate. One possibility is that it could step up support for insurgent groups operating in South Sudan to deter investment and disrupt construction, while perhaps also offering new concessions for Chinese investment in return for Chinese diplomatic pressure on Juba to not pursue the pipeline.

China’s own attitude towards a new pipeline is somewhat harder to read. As the main purchaser of South Sudanese oil, China is well aware of – and suffers from – the current instability and uncertainties over the flow of oil. China’s position could rest on its calculations of how realistic it is that the existing pipeline in Sudan will deliver enough crude oil, and with enough reliability, to remain economically viable. However, also thrown into that mix, is the possible that China may be holding out for possible new oil discoveries in Sudan, and that a new pipeline would have significance for Beijing not just regarding South Sudanese oil, but could prove useful in its oil exploration efforts in the likes of Uganda and Kenya. Beijing’s balancing of interests and allegiances would involve a vast and intricately interconnected range of factors and actors.

As South Sudan approaches its second birthday, it remains uncertain whether it will get the multi-billion-dollar present at the top of its wish list. But if its does, and the Toyota deal goes ahead, it will be sure to have significant repercussions for the regional foreign policy chessboard.

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