South Sudan’s quagmire

South Sudan is being financially squeezed like any other oil producing nation right now. But spot prices for South Sudan’s Dar Blend were assessed by Argus at just $33.28/bl last week, from highs of nearly $117.50/bl in March 2012. And with pipeline transit fees of around $10/bl payable to Sudan, the margins for South Sudan’s main source of revenue begin to look worryingly thin.

Relationships between South Sudan and Sudan in 2012 — when the parties were negotiating the transit fee deal — were dangerously delicate, overlaid by the legacies of war, contested borders, and Khartoum’s loss of two-thirds of the pre-secession reserves and production to the new state.

South Sudan was, so to speak, over a barrel. It had, and indeed still has, no economically viable means of getting oil out of its borders, except through the Sudanese pipeline and terminal. In 2012, the governments of Khartoum and Juba played an exacting game of chicken, with the Sudanese regime demanding exorbitant pipeline fees to compensate for loss of production. Its South Sudanese counterpart responded by shutting in its oil.

South Sudan president Salva Kiir Mayardit said Khartoum was demanding a transit fee of $32.20/bl. So when Juba’s rulers managed to secure a near $10/bl average transit fee with Sudan, and exports resumed, they probably thought it wasn’t too bad, given the lack of options.

Then came the 2014 oil price collapse.

Both countries rely on oil, but South Sudan to a larger extent, with its oil exports — around 171,000 b/d of Dar Blend set for next month — making up 98pc of its government revenue after the country became independent. Sudan has more land, and exports gold and cotton, and retains up to 120,000 b/d of crude capacity. But the pipeline revenues are an important addition.

The costs of the continuing instability and violence — financial and human — are enormous. Given its population size and its oil reserves and a dose of good governance, South Sudan could be prosperous but is in impoverished tatters. Some recent reports calculate that continued regional conflict could cost Juba $28bn over the next five years.

Sudan has been under comprehensive US sanctions since 1997 and will remain so indefinitely on the grounds that the “policies and actions of the Government of Sudan, including continued support for international terrorism, ongoing efforts to destabilise neighbouring governments, and the prevalence of human rights violations, including slavery and the denial of religious freedom, constitute an unusual and extraordinary threat to the national security and foreign policy of the US”.

Kenya and South Sudan have been discussing plans to build a pipeline to the Kenyan port of Lamu, so South Sudan can reduce or eliminate its reliance on Sudan. It’s a long shot, not least because of the civil conflict in Upper Nile state — where the pipeline would have to pass through — the cost of a pipeline that size, and low oil investor confidence in South Sudan. But perhaps the most frustrating part of all this for South Sudan is that it is dependent on its oil revenues to pay for the pipeline, and the more prices fall, the longer it is tied to existing infrastructure.

One possible ray of sunshine is China’s continued involvement in the region. China has been instrumental in bringing leaders from both countries to the negotiating table, and was responsible for facilitating a resumption of crude exports in 2013 after a 15-month halt to production.

And, last week, the UN announced that China will deploy 700 troops to Juba, its first official military involvement in Africa. People will question China’s motives of course — it buys most of South Sudan’s crude, has invested in infrastructure and has loaned the country hundreds of millions of dollars. And let’s not forget there aren’t many other buyers of South Sudanese crude out there at the moment, so China is taking advantage of that.

Even so, Chinese state-owned oil companies were key to the development of Sudan’s oil industry and have been vital players on both sides of the border since South Sudan won independence from Sudan.

And whether China’s recent deployment is as a result of the burden of duty or for more selfish interests, South Sudan will be glad to have an ally in China at this time.