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Workers for the Chinese company Zhongyuan Petroleum Exploration Bureau at an oilrig in Upper Nile state of South Sudan. Trevor Snapp / Bloomberg News
Workers for the Chinese company Zhongyuan Petroleum Exploration Bureau at an oilrig in Upper Nile state of South Sudan. Trevor Snapp / Bloomberg News
The discovery of oil in Sudan by Chevron in 1978 helped to trigger the country's second, and bloodiest, civil war. Camille Lepage / AFP
The discovery of oil in Sudan by Chevron in 1978 helped to trigger the country's second, and bloodiest, civil war. Camille Lepage / AFP

Oil dependence is South Sudan's boon – and bane

South Sudan may have enough oil reserves to fuel an economic boom but the problems the new country faces seem almost insoluble.

With a long track record of broken promises and dishonoured agreements, many South Sudanese are very sceptical about the durability of the recent oil agreement between South Sudan and Sudan.

Yet, because of the indispensability of oil to the economies of the two countries, particularly South Sudan, most people in the country welcomed the announcement to reverse the threatened closure by Khartoum of a pipeline South Sundan relies on to export its oil via Port Sudan.

South Sudan now plans to increase crude output by 20 per cent to 200,000 barrels a day after reaching the agreement, the foreign affairs spokesman Mawien Makol Arik said last week.

"It's good news for South Sudan," Mr Arik said in the South Sudan capital, Juba. "The production of oil is going to go up to 200,000 barrels a day" from a current estimated output of 167,000 barrels, Bloomberg News reported.

The news came after a summit last week in Khartoum between South Sudan's president Salva Kiir Mayardit and Sudan's president Omar Al Bashir. Mr Al Bashir had accused South Sudan of backing rebels in his country fighting to overthrow him and had threatened to shut down the vital oil link by last Friday.

For South Sudan, where oil revenues amount to 98 per cent of the national budget and practically all its foreign hard currency, production disruptions have hammered the economy already.

GDP has shrunk from US$19.17 billion in 2011 to $9.33bn last year, according to the World Bank, and the summit was a last chance to avert complete economic disaster.

"It was the last opportunity for us to strike a workable deal with the government of the Sudan," says Dual Chuol, a researcher at the central bank of South Sudan.

"We were prepared for the worst, though we know the accusation that we support the rebellion in the Sudan is nonsense."

Barely two years old, the country's economy is characterised by two sectors. The first is the informal sector, which comprises the majority of the approximately 10.8 million South Sudanese people, most of whom live in rural areas. It is dominated by traditional subsistence agriculture and livestock farming.

The formal sector, which comprises the government and international aid organisations, is dominated and financed by oil revenues plus donations from the aid groups.

The main economic challenge facing South Sudan is to use oil money to jump-start socioeconomic development and achieve political stability. But with more than half of the population living below the poverty line and more than 80 per cent still illiterate, it suffers from acute shortages of human and technological capacity with which it can fuel such development. It is a dire situation.

"It is hard to imagine South Sudan surviving economically for the next one year or so without oil revenue," admits David Lohure, an official working at South Sudan national bureau of statistics in Juba.

As a former war-torn nation, South Sudan needs to build economic infrastructure from scratch. The introduction of an austerity budget following Juba's 14-month shutdown of the oil sector from January last year amid claims of Sudan stealing oil transiting the country to Port Sudan has hurt prospects of that.

Since the industry restarted in April, Juba has sold about 9.1 million barrels of oil for US$969 million until the start of September, the oil ministry said last week. It had to pay $91m in fees for using pipelines crossing Sudan and for the use of Port Sudan port.

An extra $147m was paid as part of a package to compensate Sudan for the loss of most its oil reserves with secession. Juba needs to make this monthly payments to Sudan for more than two years yet.

To try to insulate itself from future potential economic peril, South Sudan wants to draw up an in-depth development plan for the creaking oil sector.

John Muor, from the newly restructured ministry of finance, concurs that, "there is a need to launch an oil reserves evaluation study to give us a very detailed understanding of the oil sector. We must know our oil potentials and what barriers there are to its exploitation and how we deal with them."

But undertaking such a detailed analysis of the oil sector's potential would require a huge investment in exploration and development of oilfields and South Sudan has neither the money nor the technological knowhow to do it. Thus, it has been wooing overseas oil investors to help finance a study.

However, the foreign oil companies that today dominate the country's oil sector - the China National Petroleum Company (CNPC), Malaysia's state oil firm Petronas and India's national oil company ONGC Videsh - have not invested heavily.

"This is because South Sudan is facing dwindling oil reserves," says Arnold Juma, a South Sudanese who works for Petronas.

"And with the uncertainty over the export pipeline [to Port Sudan] persisting and insecurity mounting in most parts of the country, there is no guarantee that these foreign oil investors would get good return."

The history of oil and the conflict that it has fuelled, however, has always been connected to international oil companies. It was the US giant Chevron's 1978 discovery of oil in the Sudan, and the controversy that generated, which triggered Sudan's second civil war, its longest and deadliest, between Khartoum and southern nationalists.

"Foreign oil companies have been variously accused of committing atrocities - clearing oilfields areas of the local populations and facilitating the passage of Khartoum's army through their feeder roads and vehicles - against the people of South Sudan," claims Akuch Chol, an official at Nilepet, the only South Sudan state oil firm operating alongside foreign players.

Since independence, however, there has been a marriage of convenience between the foreign oil companies that had previously aligned themselves with Khartoum against the SPLM/A that now runs South Sudan and the rebel leaders of the SPLM/A bent on fighting foreign oil companies for aiding Khartoum. Overseas firms now produce and market South Sudan's oil and take profits from the crude sold.

Despite last week's accord, Khartoum could still issue threats to block the passage of South Sudan's oil to Port Sudan.

As a consequence, many South Sudanese are pressing for the construction of an alternative oil pipeline to either Kenya or Djibouti.

The government of South Sudan has opened bids for the building of oil pipelines to transport the country's crude oil exports, according to a report last month on the website of radiomariya.org, based in Juba.

The undersecretary in the ministry of finance, Wani Buyu, was quoted as saying priority would be given to companies bidding to construct pipelines to Djibouti, although lines to Lamu Port in Kenya would also be considered.

"The economy of South Sudan depends entirely on oil. We have been exporting the oil through Sudan's pipelines, but as a landlocked country we want to have several alternatives," he said.

"So we were thinking of having some other pipelines through our neighbouring countries, we planned to have one to Kenya through Lamu, and then we were also thinking of having another pipeline through Djibouti."

Of course, such a plan requires raising a huge amount of money. Until that happens, if it ever does, Juba and Khartoum's relationship remains crucial.

"Like co-joined twins, the two nations will either flourish together or wither away together," says Bullen Chol, an official in the ministry of petroleum and mining in Juba.

"They might have separated politically but it is still a confederacy in term of their economies."

PaanLuel Wl is the managing editor of PaanLuel Wl: South Sudanese Bloggers


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