The Republic of South Sudan was officially recognised as an independent country on 9 July 2011, becoming the world’s 193rd, and youngest nation. It became a member of the United Nations (UN) on 14 July and joined the African Union on 27 July.⁽²⁾ In an ideal world, both Sudan and South Sudan would be enjoying the fruits of their shared natural resource, with revenue generated being used to build schools and hospitals and other infrastructure. Initially greeted with jubilation and relief and considered a step towards eventual peace, South Sudan’s secession has quickly created two extremely volatile nations, threatening not only the political, economical and social situation of the two countries today, but also placing them at risk of lasting, possibly irreparable, damage.

South Sudan finds itself in a uniquely precarious, and highly volatile situation due to its over-reliance on oil exports for foreign exchange. Oil accounts for approximately 10% to 20% of Sudan’s gross domestic product (GDP) but 98% of South Sudan’s Government revenue.⁽³⁾ From independence, South Sudan gained control of approximately 75% of the previously united country’s 500,000 barrels a day output ⁽⁴⁾ but problems regarding the production of this lucrative natural resource soon emerged. The oil dispute is borne of the fact that South Sudan contains the oil fields but the only way to transport oil is through the Greater Nile pipeline which runs through the north, in Sudan.Sudan believes that South Sudan should pay between US$ 32 and US$ 36 per barrel - which is over ten times the international average ⁽⁵⁾ - to transport the oil through the pipes. South Sudan believes these prices to be extortionate and that costs should be closer to US$ 1 per barrel.⁽⁶⁾

In January of 2012, South Sudan halted oil production after Sudan seized approximately US$ 815 million worth of South Sudanese oil and redirected it to its own refineries,⁽⁷⁾ an act Sudan felt was completely defendable due to its belief that South Sudan has failed to pay several months’ worth of oil transit fees.⁽⁸⁾ South Sudan refuses to pay the prices demanded by Sudan and has retaliated by stopping production. However, by cutting off its oil production, South Sudan has effectively eliminated its revenue stream, having an almost immediate negative effect on its GDP. South Sudan could, and is likely to, in turn, incur a devastating effect on its future economy and its citizens’ wellbeing. This discussion paper outlines the dispute over oil between Sudan and South Sudan. The economic and social implications, for citizens of both nations, of the ongoing dispute, particularly the negative effects on South Sudan’s oil industry are examined.

South Sudan’s pipe dream

It is thought that Sudan would generate approximately US$ 2.6 billion if South Sudan were to accept the pipeline fees suggested by officials in Sudan’s capital, Khartoum – exactly the amount of money Sudan would have earned had South Sudan not gained independence, and the two regions continued their often uneasy 50/50 revenue sharing deal.⁽⁹⁾ It would be somewhat naive to believe that now the country is split such a deal could ever be forged again – despite how much Sudanese President, Omar al-Bashir, desires or intends to enforce it.

The president of the newest country in the world, Salva Kiir Mayardiit, is looking east in the hope that he will soon no longer need to consider forging a cooperative relationship with Sudan. There is a hope that a new pipeline from the ocean ports of Kenya to South Sudan via Uganda can be constructed, allowing oil from Juba, the capital city of South Sudan, to travel straight to the south east, along a shorter route to the sea than through the current pipeline through Sudan.⁽¹⁰⁾ The thought of building such a pipeline would certainly suit South Sudan as it will be able to resume oil production without any involvement by the North, as well as being beneficial to both Uganda and Kenya as what is Khartoum’s loss would undeniably become their gain. However, given the situation at hand and the reality that large-scale infrastructure development in this part of the world tends inevitably to be hit by several stumbling blocks, it is likely that construction of the proposed new pipeline is, at the moment, only a dream. Especially considering that the Port of Lamu in Kenya, where the planned sea connection for the pipe would be situated, has itself not even been built yet,⁽¹¹⁾ it is unlikely that any alternative pipe will be built in the foreseeable future. Some optimists in South Sudan believe that the pipe could be built within seven months. However, Pagan Amum, Secretary General of South Sudan’s ruling party and chief negotiator in talks to settle the oil dispute with Sudan, admits that it would likely take 30 months to 4 years to construct and that the biggest stumbling block at the moment is finding investors to fund the proposed project.⁽¹²⁾

China’s involvement and subsequent predicament

In Africa in particular, oil is seen as both a gift and a curse, having the potential to provide previously unthought-of riches to a country, but also increasing the disparity between the rich and the poor, especially when the wealth created falls into the hands of the influential few. Some may argue that China holds the key to finding a viable solution where the citizens of both Sudan and South Sudan can enjoy the fruits of both countries’ revenue-accruing natural resource. Last year, just after the split, China contributed approximately 50% of annual foreign direct investment in Sudan with the majority of this in the oil sector.⁽¹⁴⁾ In 2009, Chinese companies invested US$ 8 billion in Sudan with 90% of the funds going into the oil industry.⁽¹⁵⁾ With China investing so heavily in Sudan and South Sudan, it is in all parties’ interests to forge some sort of resolution.

China is well known for its stance on international politics: it doesn’t have one. China tends to keep itself focused on business and does not meddle in other people’s affairs. However, it finds itself in a peculiar situation in which staying behind the front line may not be enough. It is the biggest investor in oil in both Sudan and South Sudan ⁽¹⁶⁾ and with the situation worsening rather than improving, it may need to alter its game plan. In January 2012, when the dispute first started to reach boiling point, the Chinese Foreign Ministry Spokesman, Liv Weimin, stated that “the Chinese side hopes that the two governments will fulfil their commitments to protecting the legal rights of Chinese enterprises and those of other partners.”⁽¹⁷⁾ So far China has refused to offer support in construction of the proposed new pipeline, with Chinese president, Hu Jintao, instead offering bank loans and emergency aid to South Sudan.⁽¹⁸⁾ The Chinese’s refusal to aid in the construction, the lack of a potential start date, and the likely abundance of political, economic and financial stumbling blocks surrounding this project, indicate that it is not a viable short term solution.

Sudan and South Sudan made up 5% of China’s crude oil imports in 2011, ranking them 7th in China’s oil supply.⁽¹⁹⁾ According to Dow Jones, “Crude shipments from Sudan ground to a standstill in April after falling 59.2% and 52% in February and March respectively...with China boosting imports from Saudi Arabia, Angola, Russia and the United Arab Emirates to make up for the loss.⁽²⁰⁾ Given that Sudan and South Sudan account for a fairly small amount of oil supply to China, it could be argued that China will not alter its stance and involve itself in the murky political waters of Sudan and South Sudan. However, by staying on the sidelines, China may have jeopardised its interests and image as a friend of the developing world ⁽²¹⁾ and this may prompt it into acting – this, and the billions of dollars of Chinese investments that risk harm if the two countries were to go to war or even were to continue in this manner. In April, China agreed a US$ 12 billion deal with South Sudan to build roads, bridges, telecoms networks and to develop agriculture and hydro-electric power.⁽²²⁾ In doing this, it would appear that China is attempting to ensure that its investment interests are protected, without becoming embroiled in the political battle between the two nations.

The economic and social impact of no oil: South Sudan’s attempts to quell the ensuing storm

South Sudanese officials are under the impression that, although 98% of Juba’s revenue has essentially been cut off with the halting of oil production, the South Sudanese people will be able to survive the inevitable days of austerity and economic hardship until the pipe is built, as they survived the civil war.⁽²³⁾ However, a World Bank study conducted by the World Bank’s Director of Economic Policy and Poverty Reduction Programme for Africa, Marcelo Giugale, found the situation to be far more dire. Giugale has pointed out that South Sudan finds itself in an unusual and unprecedented situation as countries in crisis usually face a collapse of growth, rather than of GDP.⁽²⁴⁾ The current recession is testament to this – in Britain, the country finds itself in a double-dip recession, which has seen growth in GDP decline in two successive quarters of the year.⁽²⁵⁾ This situation alone is causing Britain and the world, as many other countries, in particular in the West, feel the impact of little, no or negative growth, serious problems including significant cutbacks and increases in unemployment. The idea of a country running out, so to say, of their stock of reserves is unfathomable, but it is the situation that South Sudan finds itself in today. The consequences of this situation are even worse, with increases in poverty and violence at the forefront. Giugale dismissed the notion put forward by some South Sudanese officials that a large percentage of the population would be immune to the impact of a depletion in money in the economy due to the fact that many are not part of the cash economy, by reiterating that even the poorest households interact with the cash economy, usually through trade of items such as livestock.⁽²⁶⁾ It is highly likely that the South Sudanese will face an astronomical increase in inflation – inflation jumped to 50.9% from 21.3% from February to March of this year according to the country’s statics office ⁽²⁷⁾ – and a large devaluation of their currency, sure to negatively affect the majority of its population.

In February it was reported that the Southern Sudanese Government halved spending on everything – except government salaries – in an attempt to compensate for the loss of oil revenue. The Vice President, Riek Machar, admitted that the loss of oil revenues meant that development would certainly be put on hold for several years, but argued that basic services would not suffer.⁽²⁸⁾ Giugale also pointed out that even if South Sudan were to take the drastic, but somewhat necessary action of cutting monthly spending by 77%, its stock of reserves are likely to last only until December 2013.⁽²⁹⁾ Besides the potential astronomical economic impact of South Sudan not resuming oil production, the potential social impact is no less daunting. According to Human Rights Watch, millions of South Sudanese lack access to basic education, healthcare, food and water, the Government estimates that 47% are undernourished and the maternal mortality of 2,054 per 100,000 live births is the highest in the world.⁽³⁰⁾ There have been at least 70,000 people, targeted due to their ethnic heritage, displaced by conflict in Sudan / South Sudan, many of whom are victims of extreme violence.⁽³¹⁾ If oil production was not to resume, it has been predicted that the percentage of the population living in poverty would jump from 51% in 2012, to 83% in 2013, causing 3.6 million more people to fall below the poverty line.⁽³²⁾

Concluding remarks

From the devastation that has been seen in the first half of 2012, the economic and social impacts are already being felt. It seems apparent that programmes designed to help improve the long term economic and social situation of Sudan and South Sudan are likely to see their funds depleted and redirected toward humanitarian purposes. In 2010, a study conducted by the Institute For Security Studies and the Society for International Development, analysed potential outcomes to different scenarios that the then-Sudan could find itself in if the referendum concerning separation and results of the referendum were not handled correctly.⁽³³⁾. It highlighted the fact that there were, and subsequently are, a number of sensitive issues such as border demarcation, citizenship and oil sharing, that needed to be resolved before the split took place in order to avoid increased violence and poverty and thus increasing uncertainty in an already extremely uncertain land. The Frontier analysts suggested that a return to war would cost in excess of US$ 100 billion over 10 years including:

1. US$ 50 billion to Sudan itself in lost GDP
2. US$ 25 billion to neighbouring countries (due to instability of the area)
3. US$ 30 billion in peacekeeping and humanitarian costs to the international community

Although this study was simply extrapolating these numbers from, at that time, a potential hypothetical situation, it can be argued that if something is not done soon to alleviate the situation, it could well become a reality and the costs of such a war, not only economically but socially due to the number of people that will inevitably be killed, injured and displaced, is unquantifiable, and is hopefully enough for the international community to begin thinking of a more forceful approach to resolution.

At the beginning of the shutdown of oil production, multi-storey buildings were still being constructed in Juba.⁽³⁴⁾ This highlights the fact that South Sudanese officials seem truly to believe that an all out crisis can be averted, but also potentially highlights the fact that initially they did not realise the severity of the shutdown. Approximately 8.3 million South Sudanese are expected to need food aid this year,⁽³⁵⁾ and with the escalating violence and uncertainty, this number will almost certainly rise. In early May 2012, the South Sudanese Government secured a loan to the tune of US$ 100 million from the Qatar National Bank and a further US$ 500 million from an undisclosed source with the Deputy Finance minister, Marial Amon Yol, stating that “we have oil in the ground, we can mortgage this oil for money.”⁽³⁶⁾ He insists that in the short term, the Government will offset oil revenue losses by borrowing, in the medium term by building two oil refineries to meet domestic demand, whilst exporting excess oil to neighbouring countries, and in the long term by building a new pipeline. In reality however, the volatility of the situation and the lack of an impending start date to construction of a new pipe or reconciliation with the North, it seems unlikely that such sources of income will be long-lived. With regards to the medium term solution, Rob Borthwick, an analyst at the London based risk analyst company Maplecroft, deduced succinctly that although transporting oil long distances over rough terrain and unstable regions poses a significant risk “...given Sudan’s dire macroeconomic situation, diminished returns remain better than none.”⁽³⁷⁾

Without sustainable and continued cooperation, neither country will be able to achieve its full potential, risking a further deterioration of the current situation with foreign investment threatened due to ensuing violence and severe insecurity. If things were to continue in the manner in which they are today, all Sudanese, from both the North and the South, will be in a worse position than before the split. This is true economically and socially due to the increasing number of people living in poverty, and politically as democracy slowly edges away as militia power continues to grow. It is common knowledge that poverty breeds violence (and vice versa) and if someone, whether it be China or the wider political and economical elite, does not prevent the two countries from breaking into an all-out-war, we could find a situation far more dire than today. The fact that, at the moment, neither country is able to fully benefit from oil, this lucrative natural resource, due to the volatile situation is a problem that clearly needs to be resolved. Furthermore, after more than 20 years of civil war it is a resolution that all Sudanese, whether from the North or South, deserve.

Written by Belinda Baah ⁽¹⁾

NOTES:

(1) Contact Belinda Baah through CAI’s Industry and Business unit ( industry.business@consultancyafrica.com).
(2) ‘World Report 2012: South Sudan’, Human Rights Watch, http://www.hrw.org.
(3) Mpyisi, K., and Okello, D., ‘The Cost of Future Conflict in Sudan’, Frontier Economics, 2010, http://www.frontier-economics.com.
(4) Ferrie, J., ‘South Sudan hunts for Loans as Oil-Output Halt Dents Economy’, Bloomberg Business Week, 11 May 2012, http://www.businessweek.com.
(5) Woolf, N., ‘South Sudan Refuses to be Held Ransom by the North’, The Guardian, 17 May 2012, http://www.guardian.co.uk.
(6) ‘Sudan Asks China for Help in Resolving Oil Dispute with South Sudan’, Sudan Tribune, 28 February, 2012 http://www.sudantribune.com.
(7) Woolf, N., ‘South Sudan Refuses to be Held Ransom by the North’, The Guardian, 17 May 2012, http://www.guardian.co.uk.
(8) ‘Sudan Asks China for Help in Resolving Oil Dispute with South Sudan’, Sudan Tribune, 28 February, 2012 http://www.sudantribune.com.
(9) Woolf, N., ‘South Sudan Refuses to be Held Ransom by the North’, The Guardian, 17 May 2012, http://www.guardian.co.uk.
(10) Ibid.
(11) Ibid.
(12) ‘Chinese Money to ‘Settle’ Sudanese Oil Divorce?’, RT, 23 April 2012, http://www.rt.com.
(13) Quingfen, D. and Jiabao, L., ‘Investing in Sudan a ‘win-win’ Situation’, China Daily, 29 August 2011, http://www.chinadaily.com.cn.
(14) Ibid.
(15) Ibid.
(16) Woolf, N., ‘South Sudan Refuses to be Held Ransom by the North’, The Guardian, 17 May 2012, http://www.guardian.co.uk.
(17) Hornby, L., ‘China Urges ‘Restraint’ in Sudan Oil Transit Dispute’, Reuters Africa, 21 January 2012, http://af.reuters.com.
(18) Woolf, N., ‘South Sudan Refuses to be Held Ransom by the North’, The Guardian, 17 May 2012, http://www.guardian.co.uk.
(19) Hornby, L., ‘China Urges ‘Restraint’ in Sudan Oil Transit Dispute’, Reuters Africa, 21 January 2012, http://af.reuters.com.
(20) ‘Oil Data: China April Iran Crude Imports Rise Vs Feb, March’, Fox Business, 21 May 2012, http://www.foxbusiness.com.
(21) Ragharan, S. and Higgins, A., ‘China in a Tug of War between Two Sudans’, The Washington Post, 24 March 2012, http://www.washingtonpost.com.
(22) ‘South Sudan ‘Agrees US$ 8 billion with China’, BBC News Africa, 28 April 2012, http://www.bbc.co.uk.
(23) ‘Exclusive – South Sudan Economy on the Verge of Collapse, World Bank Warns’, Sudan Tribune, 6 May 2012, http://www.sudantribune.com.
(24) Ibid.
(25) ‘UK Economy in Double-Dip Recession’, BBC News, 25 April 2012, http://www.bbc.co.uk.
(26) ‘Exclusive – South Sudan Economy on the Verge of Collapse, World Bank Warns’, Sudan Tribune, 6 May 2012, http://www.sudantribune.com.
(27) Ferrie, J., ‘South Sudan hunts for Loans as Oil-Output Halt Dents Economy’, Bloomberg Business Week, 11 May 2012, http://www.businessweek.com.
(28) ‘South Sudan Expels Chinese Oil Firm Boss’, BBC News Africa, 22 February 2012, http://www.bbc.co.uk.
(29) ‘Exclusive – South Sudan Economy on the Verge of Collapse, World Bank Warns’, Sudan Tribune, 6 May 2012, http://www.sudantribune.com.
(30) ‘World Report 2012: South Sudan’, Human Rights Watch, http://www.hrw.org.
(31) Chakrabarty, S., ‘UN Chief Urges Sudan & South Sudan to Stop Violence’, Jurist, 18 April 2012, http://jurist.org.
(32) ‘Exclusive – South Sudan Economy on the Verge of Collapse, World Bank Warns’, Sudan Tribune, 6 May 2012, http://www.sudantribune.com.
(33) Mpyisi, K., aand Okello, D., ‘The Cost of Future Conflict in Sudan’, Frontier Economics, 2010, http://www.frontier-economics.com.
(34) Manson, K., ‘South Sudan Fears Impact of Oil Shutdown’, Financial Times, 21 February 2012, http://www.ft.com.
(35) Ibid.
(36) Ferrie, J., ‘South Sudan hunts for Loans as Oil-Output Halt Dents Economy’, Bloomberg Business Week, 11 May 2012, http://www.businessweek.com.
(37) Ibid.