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Global Risk Insights

Global Risk Insights

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Violence In South Sudan Threatens Chinese Oil Investment

South Sudan

On December 15, 2013, fierce fighting broke out in South Sudan’s capital, Juba. Rebel forces loyal to Machar targeted South Sudan’s oil fields, and what started as a clash, quickly escalated to a civil war. Violence swept the country, killing tens of thousands people and displacing over one million.

The UN estimates that almost a third of the population, 4 million people, is now in dire need of humanitarian assistance. The promise of nation-building seems to be a distant memory as South Sudanese leaders viciously struggle to claim power.

Months of ongoing political tensions between President Kiir and Machar has inexorably reopened deep fault lines among ethnic groups, begging the question: Can these two main tribal groups reach a common ground before they destroy the world’s youngest nation?

Related: Kenya to Develop Africa’s Largest Wind Project

When South Sudan became independent, it gained not only sovereignty but control of about three-fourths of Sudan’s oil production, a devastating blow to Sudan’s economy. The IMF estimates that Sudan lost roughly 55% of its fiscal revenues and about two-thirds of its foreign exchange earnings. Sudan’s crude oil export revenues were dramatically slashed from a near $11 billion in 2010 to less than $2 billion in 2012.

South Sudan’s landlocked geography forces it to remain dependent on Sudan to transport its oil through Sudan’s pipelines to the Bashayer port along the Red Sea, impelling both countries into a mutually dependent relationship.

Due to its dramatic loss of oil export revenue, Sudan relies heavily on the fees it charges South Sudan for using its pipelines and facilities. In January 2012, disagreement between the two countries over oil transportation fees led South Sudan to boldly shut down its entire oil production.

After nearly 15 months of fruitless negotiations, both countries finally agreed on a transit fee and South Sudan resumed oil production. In late December 2013, it was armed civil conflict that once again interrupted South Sudan’s oil output.

As the largest foreign investor in Sudan and South Sudan’s oil industry, China has been forced to play an unusually active role in the conflict.

Before South Sudan gained independence, several Chinese companies built pipelines from South Sudan’s oil fields to Sudan’s Port Sudan. 98% of South Sudan’s government revenue emanates from its oil production. According to the U.S. Energy Information Administration, South Sudan accounts for 5% of China’s crude imports.

The Oil & Gas Journal (OGJ) predicts that Sudan had 1.5 billion barrels and South Sudan had 3.5 billion barrels of proved oil reserves, as of January 1, 2014. One of three companies that pump oil in South Sudan, China’s state-owned National Petroleum Corporation (CNPC) holds a 40% stake in a joint venture that operates in South Sudan’s enormous oil fields. The company boasts a 1,600 kilometer export pipeline that carries crude through abutting Sudan to Port Sudan.

Chinese and South Sudanese official statistics predict that about 120 Chinese enterprises currently operate in South Sudan. Over the past six years, these companies have concluded $10 billion worth of deals with the South Sudanese government.

The eleven-month-old rebellion in South Sudan is posing a serious threat to China’s desire of a flourishing economic liaison with South Sudan and restoration of stability has become a priority for Beijing.

Five days before violence exploded in the area, the South Sudan-China Development Cooperation Forum co-hosted by the Export-Import Bank of China (Exim Bank) and the South Sudanese Ministry of Finance, was attended by numerous industrial and commercial representatives.

The Exim Bank had allegedly agreed to provide $2 billion in loans, to strengthen South Sudan’s fragile economic and social infrastructure. Moreover, on December 15, China’s Ambassador to South Sudan Ma Qiang was expected to sign the Juba airport renovation deal with the South Sudanese counterpart after the SPLM’s party conference.

National Petroleum has quickly become acquainted with conflict management and promptly evacuated 97 of its employees following December’s unrest. Maintaining a minimum level of staff present on the ground to keep oil production going is proving to be quite the challenge. After December’s outburst, production has been slashed by a third, to 160,000 barrels a day.

Related: Kenya Exploration Strong Despite Oil Price Slump

Chinese officials are working closely with Western diplomats to help regional African mediators enforce peace. Since the fighting began, South Sudan has spent at least $1 billion on weapons. Ironically, while pledging to provide peacekeeping troops that will protect thousands of civilians, China happens to be the government’s top weapons provider, calling its neutrality and true intentions into question.

Norinco, China’s biggest producer of arms, confirmed selling $38 million worth of ammunition, grenade launchers, machine guns and missiles to South Sudan’s government earlier this year.

A vivid supporter of the secession from Sudan in 2011, the United States is especially concerned with losing face. In a desperate attempt to curb the violence, it began imposing bilateral sanctions on South Sudanese individuals back in May. Last month, the Security Council unanimously extended the mandate for a 12,500-strong U.N. peacekeeping mission in South Sudan for six months to continue protecting civilians.

By Itziar Aguirre

Source – www.globalriskinsights.com 

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