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South Sudan’s oil sector needs to become more transparent
South Sudan’s oil sector needs to become more transparent
Report 186 / Africa

China’s New Courtship in South Sudan

Following its oil interests and other opportunities to Juba, China is building a new relationship with South Sudan but finds itself drawn into a dangerous dispute that risks bringing the Sudans back to conflict.

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Executive Summary

In the wake of Sudan’s partition, Beijing has accelerated a re-orientation of its engagement in the resulting two states, most significantly through a new courtship in Juba. China’s historical support for Khartoum left a sour legacy in the South, but the potential for mutual economic benefit means a new chapter in bilateral relations is now being written. Balancing new friends in Juba with old friends in Khartoum, however, has proven a delicate dance. China has been drawn into a high-stakes oil crisis between the two, the consequences of which may temper an otherwise rapidly expanding relationship with Juba. A sustainable solution to the crisis cannot be achieved in isolation; North-South stability, mutual economic viability and the security of Chinese interests will also depend on answers to other unresolved political and security issues, including in Sudan’s marginalised peripheries. The future of Beijing’s dual engagement, and the kind of relationship that emerges in the South, will depend in part on how the oil standoff – and this broader reform agenda – are confronted.

As South Sudan prepared for its 2011 self-determination referendum, China recognised the increasing inevitability of independence. Eager to maintain stable relationships and the continuity of its oil investments – now situated primarily in the South – its stance evolved to reflect changing political realities. Beijing is keen to preserve and expand its footprint in South Sudan’s oil sector, but Chinese companies are also flocking to other sectors, above all to build infrastructure in a country that has almost none.

China’s cultivation of new political and economic relations has been most visible in the surge of bilateral exchanges with Juba over the last year, which is expected to be capped in the coming weeks by President Salva Kiir’s first visit to Beijing as head of state. As they seek to build bridges with the South, the Chinese are keen to draw comparisons with their own experience of economic transformation and rapid rural development, as well as to emphasise a sense of shared historical experience at the hands of imperial powers.

South Sudan is very much “open for business”, actively seeking foreign direct investment from West, East, and everywhere in between. Historical ties may be strongest with the West, but Juba has made clear that if the Chinese are first to come and partner in developing the new nation, they will not hesitate to welcome them. Furthermore, China’s “no strings attached” political approach and economic cooperation model is as attractive in Juba as it has proven elsewhere on the continent, not least in resource-rich states eager to develop fast.

As Juba opens up to new investment, it should take two critical factors into consideration. First are potential correlations between the economic partnerships it forges, the character of the state that emerges and its foreign policy. While it hopes to remain politically aligned with the West, time will tell whether expanding economic partnerships with China or others will have a gravitational effect. For now, it wants to welcome, and leverage, the interest of all actors.

Secondly, in the midst of a mounting budget crisis, Juba must consider how to secure and direct investment so as to best serve its development agenda, calm its own domestic insecurity and prevent even greater state fragility. It must actively shape new economic relationships rather than become a passive recipient of foreign-authored investment. Given limited government capacity and an untested legislative framework, its economic planners must take care to harness such investment for its own benefit, lest Africa’s newest state be overrun in a resource scramble.

The number of Chinese nationals and commercial actors in Juba has spiked dramatically in the nine months since independence. Beyond oil, Chinese companies are most interested in infrastructure, and South Sudan needs everything: roads, bridges, telecommunications, power plants, electricity grids, schools, hospitals, municipal buildings, water treatment facilities, dams and irrigation systems and new oil infrastructure. Companies are registering, conducting feasibility studies, and drafting proposals, but major deals are yet to be landed. Though China’s central government often plays a role in helping secure market access, Chinese engagement in South Sudan is not monolithic. Private businesses and small-scale entrepreneurs are driving new investment as much as the state.

Some of Juba’s elite remain hesitant about putting too many eggs in one basket, and even those most eager to secure a major economic partnership argue there will be no Chinese monopoly. Beijing affirmed in January 2012 its intent to offer an economic package, including development grants and a possible billion-dollar infrastructure loan, and details are being negotiated. But new uncertainty over the future of Juba’s oil sector and continued North-South instability have altered the equation and may reduce the total offered in the end. Given the greater variety of financing opportunities now available to Beijing’s government “policy” banks and thus an increased sensitivity to risk, the scale of a loan may not match those extended to other resource-rich African states. Chinese companies will actively pursue contracts in any case, though most would prefer the loan financing that normally ties contracts to Chinese firms.

The budding bilateral relationship has strained of late, as Beijing has been drawn uncomfortably into the oil dispute between North and South. An African Union (AU) team, backed by the UN and other partners, continues to facilitate talks between the parties. Tense negotiations on security, borders, citizenship, financial arrangement and the export of oil have yet to yield concrete agreements and are complicated by ongoing conflict in Sudan’s border states. The impasse led to a shutdown of the oil sector in early 2012 that has imperilled both economies and prompted renewed war rhetoric. Most remaining oil is now in the South, but the predominantly Chinese-built infrastructure to exploit it – pipelines, refinery and export terminal – is in the North. Given comparatively modest proven reserves, oil imports, whether from North or South, no longer occupy the significant position in China’s global energy strategy they once did. But given the considerable investment in developing and operating the oil sector, the Sudans remain important for China National Petroleum Company (CNPC), the state-owned oil giant, and thus a focus for the government.

As negotiations toward a North-South oil deal foundered dangerously in late 2011, the role of China came centre stage, and many in the international community (and in the two Sudans) thought Beijing would be forced to intervene. Juba wanted help in pressuring Khartoum to cut a reasonable deal, and when the North began to confiscate Southern oil instead, it interpreted China’s inaction as passive complicity and moved to leverage its increasingly uncomfortable position.

At the same time, Chinese-led oil consortia were engaged in their own set of negotiations with Juba over the transition of oil contracts previously held by Khartoum. The financial terms were retained, but significant changes were made to strengthen previously neglected social, environmental, and employment standards. In light of the heated row with Khartoum, Juba also bargained hard to include measures that would bring oil company interests in line with its own and secure considerable legal rights and compensatory protections in the event of an oil-sector shutdown. It also secured discretion over the post-shutdown extension of contracts based on, among other things, companies’ cooperation in helping resolve the impasse with Khartoum. The interplay between the parallel negotiations added another dimension to China’s increasingly complicated position.

Both sides, as well as many international actors, assumed China would weigh in more assertively, though perceptions of Beijing’s influence and readiness to employ it were unrealistic. The shutdown of the oil fields, abduction of Chinese construction workers in Southern Kordofan and expulsion of the head of a Chinese-led oil consortium added to Beijing’s vexing political problem and generated anxiety among Chinese nationals in North and South. Both Sudans continue to try to pull China into their respective corners, but Beijing has resisted taking sides, as its principal objective remains balanced relations with North and South.

That said, many – including in Beijing – argue China can and should do more to ensure peaceful resolution, without compromising its interests or traditional adherence to a principle of non-interference. A recent shift in the North-South negotiation presents a possible new entry point for the international community, including opportunities for China to help break the deadlock, ease its own position and bolster stability within and between the two states. Beijing has shown signs of new engagement in recent weeks, but the comparatively weak domestic status and limited resources afforded to the foreign ministry must also be considered. China’s diplomatic capacity does not always reflect the powerful position the country enjoys on the world stage.

The oil impasse may temper the pace of Chinese engagement in the South but is unlikely to stall it. Angered by its sense that China still “treats it as a province rather than an independent state”, Juba will continue to make demands, particularly with regard to management of its oil sector. But if managed pragmatically, the opportunities for mutual economic benefit should trump episodic tensions. China’s new expedition in the South and its attempt to balance relations with the two Sudans have proven tricky tasks, however, that will continue to challenge the boundaries of its foreign policy.

Juba/Beijing/Nairobi/Brussels, 4 April 2012

Op-Ed / Africa

South Sudan’s oil sector needs to become more transparent

Originally published in The African Report.

South Sudan’s fortunes have always been tied to its oil. The discovery of oil in the late 1970s deepened tensions between the South Sudanese and the regime in Khartoum and fueled violence after the outbreak of Africa’s longest-running civil war as both sides vied to control the region’s oil fields.

Oil then laid the groundwork for South Sudan’s secession. A landmark 2005 peace deal granted Juba half of the South’s oil revenues, pumping billions into the new semi-autonomous government.

But the sudden wealth gravely compromised the country’s stability. By 2013, only two years after independence, the elite scramble for South Sudan’s oil riches helped trigger a fresh war that may have killed 400,000 people while displacing millions.

Nowadays, despite a 2018 peace agreement and a government of national unity, Juba’s monopoly on oil revenue obstructs a broader political settlement the country desperately needs.

South Sudan’s leaders siphon off the bulk of the petrodollars, leaving much of the population starved of basic services and, in some parts of the country, on the brink of famine.

Pervasive corruption has become a huge source of frustration for donors, including the US, which allocates a billion dollars a year primarily to sustain humanitarian relief. South Sudan produces roughly 150,000 to 170,000 barrels a day. But because of the share owed to oil companies and fees paid to Sudan, it earns income from 45,000 barrels at most, according to the best estimates available. Little of that income reaches the national budget due to off-budget expenditures, undisclosed debt payments, and allocations to its opaque state oil company Nile Petroleum.

Those who still support South Sudan cannot ignore its rotten finances. Since oil underwrites the entire South Sudanese state, addressing the country’s deep troubles is impossible without a focus on its vanishing petrodollars. A first step in this direction is making the oil economy more transparent, not only in South Sudan, but also in Europe, host to many of the country’s commercial financiers.

Oil fuels tensions

Despite staggering poverty and underdevelopment, South Sudan qualified as a middle-income country at its birth thanks to its oil wealth. But instead of serving as a foundation for state-building, oil poisoned South Sudan’s politics. Before independence, rebel commanders enriched themselves through a mix of taxation, aid diversion, artisanal gold mining, deforestation, and outright looting. This culture of illicit self-dealing quickly came to resemble a free-for-all when the 2005 peace agreement unlocked billions of petrodollars.

After independence, oil money papered over the South’s ethno-political divisions until President Salva Kiir moved to consolidate power, tightening his grip on oil funds in the process. Only two years after secession, a leadership struggle between Kiir and internal challengers, led by his main opponent Riek Machar, burst into a civil war that drained state coffers, with oil production decreasing because of the conflict.

To stay afloat, South Sudan turned to a handful of commodity traders to purchase future deliveries of oil, including Swiss-Singaporean Trafigura, which bought South Sudan’s oil through secretive pre-payment arrangements. These high-interest cash advances worked like the petrostate equivalent of a payday loan scheme, piling up debt while hiding South Sudan’s finances ever further from sight.

Back to the books

South Sudan’s future would appear less bleak if the countries that foot the bill to alleviate the country’s humanitarian disaster focused on making sure Juba accounts for its oil revenue.

Donors should make a concerted effort to push Juba to comply with existing laws and provisions in the 2018 peace agreement to ensure that oil proceeds are paid into a single public oil revenue account. One source of leverage is through the IMF, which has given South Sudan $550m in the past year but with few strings attached. The IMF should condition future disbursements on the exclusive use of the public oil account.

Outside pressure on Juba should be supplemented with pressure on South Sudan’s financiers. European governments should urge trading companies with a strong corporate presence in Europe to disclose their payments to South Sudan and demand the funds be deposited into the official oil account.

They should also consider drafting regulations requiring commodity firms under their jurisdiction to certify compliance with South Sudan’s law. This could work. Following engagement by the UN Panel of Experts on South Sudan, Glencore has disclosed purchasing $950m of South Sudanese oil since 2018. Additional leverage could come from widening the regulatory net to the commodity firms’ insurers and bankers, many of which are also in Europe.

Declining output and global decarbonisation mean that South Sudan will not be in the oil business forever, and given the trouble it has caused there, the transition may provide as much opportunity as risk. Still, bringing the oil money back onto the books of the national budget could at least give the South Sudanese a chance to reset their bloody politics now, not when the oil pumps stop.