Will China help out the West in Sudan?
By Peter Lee
China, which purchases much of the oil from East Africa and provides investment and armaments to the Sudanese government in return, has suffered abuse and derision for its engagement with Khartoum.
But perhaps only China has the deep pockets and appetite for risk to buy the world's way out of its Sudan problem: a problem created largely by Western fecklessness.
Sudan and newly independent South Sudan are sliding towards war because these are two countries that hate each other; because Sudan lost 75% of its oil fields when the South split off; and the regime of President Omar al-Bashir in Khartoum is fighting for its survival.
Kind or stern words from Beijing will have minimal effect on Bashir, whose decision to pursue a Muammar Gaddafi-style rapprochement with the United States (yes, before the Libyan war, Gaddafi's abandonment of his weapons of mass destruction programs and normalization of relations with the West was seen as a victory of George W Bush-era big-stick diplomacy and a model for other anxious strongmen) now looks more like assisted suicide.
Bashir is looking at drastic curtailment of government revenues, inflation, burgeoning popular discontent, and prospects of Arab-Spring type unrest. To add to his woes, he is under indictment by the International Criminal Court for his brutal anti-insurgency operations in Darfur.
In response, Bashir is desperately cleaving to the Islamic governments of north Africa and seizing oil fields on the border with South Sudan. He is also fiddling with the passage of South Sudan crude in the pipeline crossing Sudan to Port Sudan for export (to China and elsewhere).
He's also on a search for hard cash and leverage. The fact that South Sudan's only export pipeline traverses Sudan to Port Sudan on the Red Sea gives him both.
As was typical of the haste and "hope is not a plan" lack of forethought surrounding the push for independence, the fact that South Sudan was 100% reliant on the good offices of Sudan to get its crude to market (and relies on oil for 98% of its non-non-governmental government revenues) was seen to be something that could be comfortably addressed after partition.
The most recent crisis was triggered by Sudan's demand that South Sudan pay exorbitant transit fees to move its crude through Sudan for export; and the pre-emptive seizure of crude as assessment for unpaid (exorbitant) transit fees. In response, the Government of South Sudan (GoSS) is shutting down the output of its oil wells.
Maybe this intractable problem will be worked out when the presidents of Sudan and South Sudan meet this week. But perhaps not, especially if the Khartoum regime decides the best solution to its domestic problems lies in a satisfying war with the South. Eric Reeves, the dean of Sudan-watchers, wrote in a gloomy and indignant op-ed, Sudan's Obstructionism Threatens War:
But without a fundamental shift in the negotiating posture of Khartoum ... the talks in Addis will break down on Friday (January 27) when Presidents Salva Kiir and Omar al-Bashir are scheduled to meet. But we should keep in mind the clear possibility that a collapse of these talks is in fact deliberate on Khartoum's part: since an already highly distressed northern economy would implode with the precipitous loss of all oil revenues from the South, economic woes of all sorts could be collectively blamed on a hostile and "belligerent" South.
The regime would blame this implosion not on its own gross mismanagement of the economy, its vastly excessive military and security expenditures, or its accrual of an unsustainable external debt of more than $38 billion - but rather on the South. The generals in Khartoum who now make decisions about war and peace will have their pretext for war - a war that will be justified, in a grim irony, as punishing the South for its "economic warfare" against the north. [1]
Reeves recites a grim litany of Sudanese bad faith and malfeasance and concludes:
If war comes - and it almost daily appears more likely - it will be a war emerging from the indifference, foolishness, and cowardice of an international community that refuses to see the Khartoum regime for what it is, or even to speak honestly about what it has done and continues to ... We have reached the "brink of war" ... not because of what South Sudan has done, but because of what the international community has not done.
Dr Reeves has previously advocated a blockade of Port Sudan to improve Bashir's behavior.
However, an aggressive international response to pressure Bashir and avoid a humanitarian catastrophe in the region appears unlikely. The centripetal forces that the West set in motion with its support of South Sudanese self-determination are too powerful, politically and economically, to be undone.
A confrontation will probably be driven by economic and strategic objectives, at the expense of the humanitarian goals Reeves advocates.
The dream of shared economic interests has been pretty much undone by Khartoum's intransigence and abuse of its control over the pipeline to Port Sudan.
Pointedly responding to Khartoum's interference with the existing pipeline, the government of South Sudan concluded a much-anticipated deal with Kenya to build a new pipeline south from its capital of Juba to the planned Kenyan megaport of Lamu. When completed, it will remove much of the incentive for civil economic and diplomatic relations between Sudan and Southern Sudan.
The government of South Sudan is also less likely to respond to Sudanese petro-coercion and an economic crisis prompted by cessation of oil revenues by rolling over militarily.
Thanks to assistance from its allies Kenya and Uganda and a blind eye from the United States, South Sudan muscled up during the truce with Sudan (when import of military materiel was supposedly prohibited), and has acquired an estimated arsenal of 100 battle tanks, among other things. [2]
On January 6, United States President Barack Obama lifted restrictions on sales of defense articles and defense services to South Sudan because doing so "will strengthen the security of the United States and promote world peace." [3]
In response to the oil transshipment crisis, South Sudan has put its army on "maximum alert".
There is ample national unity and belligerence in South Sudan against Sudan, and a willingness to pay the price to get out from under Khartoum's thumb. But the price will be pretty steep if the confrontation escalates.
When South Sudan's President Salvo Kiir briefed parliament on the oil crisis, he stated:
H E the President instructed the Ministry of Finance and Economic Planning to initiate contingency plans for revenue collection and allocation and accelerate the increase of non-oil revenues. He also said that safely, security and health of the citizens of South Sudan remain top priorities. [4]
Good luck with that.
Since the government relies almost entirely on oil revenues for 98% of its non-aid funding, if its exports cease the West will find itself with a significant and unwelcome financial responsibility to keep the government and economy humming in Southern Sudan ... unless China steps in.
Zhang Jun, China's economic counselor in South Sudan, reportedly stated last year that China could provide loans secured by resources to keep South Sudan afloat while the pipeline to Lamu is built. That might take a while.
Optimists in Juba declare the pipeline to Lamu, the perceived magic bullet for South Sudanese security and economic independence, can be built in 10 months in a crash program. Experts aren't so sure, per Reuters:
Analysts said a Kenya pipeline would be difficult to build across rough terrain hit by tribal violence and also passing through bandit-stricken regions in western Kenya.
South Sudan has said it would cost around US$1.5 billion, but analysts say a hefty insurance premium would have to be added because of the security concerns.
"It would be really difficult," said Dana Wilkins at Global Witness. "We're looking at least a year or two because of the length of the pipeline, the terrain it has to cover and security concerns in the region." [5]
If, in addition to advancing the direct cost of building the pipeline, tensions with Sudan shut off the export pipeline to Port Sudan and required that China front South Sudan's lost oil revenues for two years, China's total exposure would approach $10 billion. It would take over 100 million barrels of oil to pay that back - over two years' production ... during which time the GoSS would still be relying on outside support to finance its operations, so the bill would keep rising.
It would appear that the only way to get the pipeline built and get South Sudanese oil out would be for China to obtain the forbearance of the Sudanese regime, and keep South Sudanese oil and revenue flowing through Port Sudan until the Luma pipeline is completed.
Khartoum, which presumably has been looking at the same figures as everybody else and figured out what its control of the current pipeline is worth, has apparently put a price on its forbearance: $15 billion over seven years (plus, one would expect, a healthy amount of debt forgiveness from the West). [6]
No wonder China is considered the key to successful resolution of the crisis.
The West probably lacks the stomach to sit down with Bashir and offer him $15 billion to assure the survival of South Sudan. So let China do it.
However, there's apparently not some huge bonanza of South Sudanese crude waiting for China, as the Reuters article points out.
Oil experts have questioned the economic viability of a pipeline in the medium-term as output is expected to fall sharply in coming years because some fields were overpumped by Khartoum in the run-up to South Sudan's independence.
South Sudan output will decline to 200,000 barrels per day (bpd) by 2016, to 160,000 by 2018 and further thereafter, according to estimates by the European Coalition on Oil in Sudan, which is comprised of research groups, non-governmental organizations and activists.
Some analysts say a pipeline would be viable only if new finds were made, but exploration in the vast Jonglei state have been hampered by tribal violence. France's Total holds a concession in Jonglei which is largely unused due to violence.
"Production in Upper Nile peaked in 2010, Unity in 2005. Even if major new fields were discovered today, it could be years before they come online in a real way," Wilkins said.
Another wrinkle is that if/when the pipeline to Lamu is built, apparently at Kenya's insistence it will supply a 120,000 bpd refinery whose output will serve the East African market.
In this case Sudan/South Sudanese crude will dwindle from an already less-than-critical 5% to an insignificant share of China's import slate.
For China, it boils down to a multi-billion dollar, multi-decade bet on South Sudan, a failed state in ovo in the middle of a war zone - with dwindling crude export capabilities.
Therefore, a unilateral Chinese bailout of the West's recklessly exposed position in South Sudan is unlikely. All-out war between Sudan and South Sudan also appears unlikely, at least for now.
As Reeves points out, the West has adopted the rhetoric of "moral equivalence", wrongly implying that South Sudanese instransigence is as much to blame for the crisis as Sudan's excessive demands.
This is presumably a signal that the South is being encouraged to knuckle under and swallow the medicine Bashir's regime has prepared (perhaps sweetened by concurrent subsidies to Juba by the West and China), so that the peace process can continue to limp on.
The prognosis for South Sudan appears to be of a landlocked, weak state whose overmatched government will serve as an arena for Western fantasies of "capacity building" as a social and economic panacea; and, if it actually overcomes its daunting security and economic problems and builds its pipeline to Lamu, will primarily benefit Kenya, East Africa's leading power, as a buffer state and source of raw materials and markets.
China may decide to minimize its exposure to Sudan and Southern Sudan in its Africa portfolio accordingly.
Notes
1. Oil Revenues Controversy: Sudan's obstructionism threatens war, Sudan Tribune, January 25.
2. US, China brace for Sudan trainwreck Asia Times Online, September 21, 2010.
3. Obama lifts ban on U.S. defense exports to South Sudan al-Arabiya, January 6.
4. President's Speech On Oil Crisis Tabled in Parliament allAfrica.com, January 25.
5. S. Sudan halves oil output, signs pipeline deal Teuters, January 25.
6. Sudan Demands $15 Billion in Compensation for Lost Southern Oil Bloomberg, November 23, 2011. Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.
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