Courcy's Future Threats - June 2013

China’s investment in Africa has been significant, and Beijing is intent on being the main trading partner for as many of the mineral- and oil-rich nations on the continent as possible. However, indecision over the Sudanese question and maintenance of the wrong loyalties could see China losing out to its East Asian rival Japan in a key area of interest.

The issue at stake is favourable access to the vital oil reserves in South Sudan. Before the secession of South Sudan, China was playing a dominant role in the extraction and transportation of oil, in return for access on privileged terms to the product. Developments since the secession, including ongoing border disputes between Sudan and South Sudan and arguments over export fees, have limited the benefits for China. What is more, China’s poor judgement may cost it dearly in the future.

In 2009 China overtook the US as Africa’s biggest trading partner, and according to a Standard Bank Group Ltd. report bilateral trade between China and Africa is forecast to reach $300 billion by 2015, double the 2010 level.

Japan’s investment in Africa is much lower; Tokyo is determined to make up ground on China but it has a long way to go. According to official Chinese trade data and information from the Japan External Trade Organisation, in 2011 Japanese investment in Africa was just $460 million compared to China’s $3.17 billion.

China’s interests in Africa range over the whole continent, but it has a particular interest in Sudan. Beijing made strong connections with Sudan in the 1990s when the West imposed sanctions on Khartoum for atrocities committed in Darfur during the Sudanese civil war. Thus, exploitation of Sudanese oil reserves was led by the Chinese company CNPC (China National Petroleum Corporation).

According to the US Energy Information Agency (EIA), in 2011 Sudan was China’s seventh largest source of crude oil imports at 260,000 barrels per day (bpd) after Saudi Arabia, Angola, Iran, Russia, Oman and Iraq. This may only comprise 3-4% of China’s total oil imports, but it is nonetheless a large amount to have to source from elsewhere, and it would be a blow if the price it had to pay for it were to rise.

The lie of the land

On 9 July 2011, following a referendum in which 98.83% of the southern population voted for independence, South Sudan seceded from the Republic of Sudan.

The impoverished population of the region is hoping that its independent future will be far more prosperous than the past under the rule of Khartoum. Key to this prosperity is the ability to exploit oil reserves. An important factor (although by no means the only one) that led the southern population to bid for independence was that before secession, although the region was sitting on 80% of Sudan’s oil, it only saw a fraction of the wealth it created.

Sudan was rightly concerned that it would lose out heavily due to the lost revenues from oil sales. However, Sudan has an ace up its sleeve. The only route South Sudan currently has to export its oil is via pipelines which run through its northern neighbour to Port Sudan on the Red Sea. Sudan is able to control the flow of oil, and is happy to use this as a bargaining chip. Disputes over the fee South Sudan has to pay to transport its oil have led to the pipelines being shut down, and there remains the threat of Sudan using this tactic as leverage in ongoing disputes over border issues.

The pipelines, which had been moving 300,000bpd, were first shut down in early 2012 and remained out of action for over a year. Stalling talks in March 2013 eventually led to an agreement to reopen the pipeline and oil finally left South Sudan on 21 June – a shipment of 1.2 million barrels sold by CNPC, which co-owns the oil fields in South Sudan along with India’s ONCG Videsh and Malaysia’s Petronas. Future shipments are still under threat, as Khartoum announced on 12 June that it was shutting down the pipeline again for a period of 60 days, and will not relent unless Juba gives up its support of rebels operating across the shared border. The oil already in the pipeline, reported as approximately 7 billion barrels, will be allowed to pass through to Port Sudan, but at the moment no more may be introduced into the system. CNPC is believed to have moved a further 1 million barrels over the weekend of 29 June, but unless more oil can be put into the pipeline its revenue stream will soon dry up again. Diplomatic efforts are still underway to allow future transfers, and South Sudanese Vice President Riek Machar arrived in Khartoum on 30 June to attempt to resolve the latest spat.

These ever-present threats to South Sudan from Khartoum, which it has demonstrated are not empty, mean that Juba cannot rely on the northern route to export oil. It has therefore been forced to explore alternatives.

Foreseeing this eventuality, as soon as it achieved independence South Sudan began exploring the possibility of building a new pipeline to Kenya. This was always an expensive option which would involve creating a pipeline approximately 870 miles long, and pumping the oil uphill, over the highlands and across the Rift Valley, to Mombasa or Lamu in the southeast. Various permutations of this plan have been explored, and it looks as if there could be progress.

Beijing’s gamble

When it appeared likely that South Sudan would achieve independence China had some strategising to do. It had to decide whether or not to throw unlimited support behind the new administration in Juba. South Sudan has the bulk of the oil, but Sudan has the export infrastructure, which China ostensibly built. In the short term at least, export could only be through Sudan, and Sudan could make life difficult for China if it committed itself to helping Juba realise a new export route. Also, Beijing still had strong links with the Khartoum administration that it was not keen to sacrifice.

In the end, China determined to back Juba, but only with half measures. Beijing decided that it was prepared to offer South Sudan humanitarian aid and bank loans, but would not invest in alternative export infrastructure. China appears to have been caught out during a period of indecision, unsure how much it can offer either of the Sudans without completely alienating the other. The result may prove to be the worst of all worlds for Beijing.

In fact, finding an alternative partner to China is a preferred option for many in South Sudan. When the US brought in sanctions against Sudan, China allied itself with Khartoum and strongly backed President Omar Hassan al-Bashir. The southern region suffered heavily under Bashir’s rule, and the US was a strong supporter of the secession movement. Heavy investment from US-allied Japan is being welcomed by Juba.

Tokyo has agreed to step in where Beijing refused to, and has committed to build a pipeline for South Sudan. Further to this, Japan has pledged $32 billion in investment and aid to African nations across the continent and encouraged Japanese firms to invest there over the next five years.

The full investment package, unveiled by Prime Minister Shinzo Abe at the opening of the Tokyo International Conference on African Development on 1 June, includes $14 billion official development aid and $6.5 billion support to improve infrastructure.

Prior to announcing the investment package, on 28 May Tokyo confirmed that at the UN’s request it would expand the peacekeeping activities of its Self-Defence Forces in South Sudan. Japan already has troops in the country engaged in road reconstruction and other work in Juba and surrounding areas.

Japan’s plan involves more than just pouring money into infrastructure, and it is an approach that it is likely to win it a lot of friends in African governments who are beginning to recognise that the inflow of huge volumes of cash is not enough on its own for a country to develop.

In a plan that mirrors some of its domestic policies Japan is emphasising the need for human resource development to improve skills. Japan lacks large volumes of natural resources within its own borders, so has invested a lot in skilling its population. In an article for the Wall Street Journal recently Shinzo Abe wrote, “Growth is not simply fuelled by natural resources. It is spurred and sustained by people – through skills, education, training, innovation and social cohesion.”

Of course, Japan has larger, global, political goals in mind and boosting its presence Africa speaks to these. Japan has an eye on the reform of the UN Security Council where Tokyo is bidding for a permanent seat. Support from African countries would represent a major boost to its bid over Brazil, Germany and India, its chief rivals for the seat.

Japan is also bidding to host the 2020 Olympics in Tokyo and support from Africa would aid this as well.

Japan is also eyeing up the emerging consumer markets in Africa for its technology goods. Digital terrestrial television broadcasting based on Japanese hardware has already been adopted in several African countries such as Botswana.

The new route

The business case for building improved infrastructure is becoming better and better. So much so that it is rapidly becoming a no-brainer for East-African countries, and for nations and foreign companies that want to invest in the burgeoning continent. Oil reserves already being exploited in Uganda and new finds in Kenya mean that even without South Sudan’s reserves, it is becoming practical to invest in new refineries and transportation routes. With South Sudan looking for better export options as well, the benefits on offer to a company or nation with the means to invest there are significant.

The original route mooted, aimed primarily at shifting oil from Uganda with another pipe joining part way from South Sudan, would have run about 810 miles from the Lake Albert basin, via Kampala, Kisumu, and Nairobi to Port Mombasa. This was eventually discounted due the cost, which would have offset revenues to such a degree that Uganda’s and South Sudan’s crude oil would not have been competitive on the global market; it would therefore have had to have been refined in Uganda and exported by road or rail. The infrastructure for this would also have been too expensive.

A new alternative has been thought of, and with help from Japan’s Toyota, it looks as if it will become a reality for South Sudan.

Tullow, the company exploiting the reserves in Uganda, and also the company planning to move forward with the tapping of the new discoveries in Kenya, is pushing to build a new refinery and power plant in Hoima, and a new pipeline starting there and running via Lira, Moroto, the Turkana basin and on to Port Lamu.

South Sudan, Ethiopia and Kenya have already agreed to partner in the developments of the Lapsset Corridor project. This will see a new port be constructed in Lamu that is purpose built for the transportation of hydrocarbons, a new oil refinery, and also a new highway and railway line through Ethiopia.

The details of the new deal between Toyota and South Sudan are still vague but it is believed to be worth about $4 billion, and the expectation is that it will focus primarily on the construction of a new pipeline from the country’s oil fields to the Turkana basin, where it can link with the rest of the network being built to export oil via Kenya.

The only remaining sticking point is security – at present the various difficult security situations in that part of the African continent leave open the possibility of banditry. However, this is a problem that can be managed with a little planning. If a sufficient amount of the benefits from the construction of these export routes is seen by local populations, such as construction jobs, and revenues from the oil sales, then the improvements in the local economies will make it ever more important to the locals to keep the project going. It may require the deployment of extra peace-keeping forces in the short term, but in the long run the projects have the potential to be stabilising factors.

Winners and losers, and learning the hard way

If these projects go ahead, and it seems almost certain that they will in some form or other, there will be some distinct winners and losers. The most obvious winner is South Sudan, which will no-longer be reliant on an export route through an intransigent neighbour that is happy to use oil exports as a bargaining chip. It will have increased Foreign Direct Investment (FDI) in the country and can look forward to not only higher but also more assured revenues from its oil, and all the benefits that go along with that.

Ethiopia, Kenya and Uganda are also set to see significant benefits in the form of increased oil revenues, more jobs and improved infrastructure.

Japan can look forward to benefits as well, as its increased investment in Africa in general, and South Sudan specifically, will give it access to more of the resources it needs to keep growing its industry and economy (which it is trying to stimulate after two decades of flat-lining).

The biggest loser, in terms of its national wellbeing, is Sudan. Sudan relies heavily on the revenues from exporting oil (if no-longer from selling large quantities), and it will be ruing its lost opportunity to work with South Sudan. Without the oil revenues it is difficult to see from where it will generate wealth. Even China, its biggest investor, is likely to lose interest if there is no longer a tangible benefit to be gained by propping up Khartoum politically and financially.

Another loser is China, which is beginning to find that being a major player on the world stage requires more than just large coffers. Of course, the prospect of losing access on better than average terms to a large amount of oil is an annoyance to Beijing, but this is only a part of it.

In the past China has been able to play the benefactor of many developing countries by pouring in large amounts of cash in return for access to the nation’s natural resources, be they mineral or hydrocarbon. Its policy of non-interference and of ‘respecting national sovereignty’ has served it well to this end. However, Beijing is learning a lesson which has to be learnt by all mature global actors – sooner or later more difficult political balances have to be struck. Indecision over these political issues can have serious economic consequences, and lead to the loss of opportunities for further investment as other countries jump to fill the void as the government dithers.

Due to China’s global investments, particularly in volatile regions, it will find itself facing more and more of these difficult political decisions. Failure to learn the salient lessons from South Sudan’s secession could lead to a serious drop in its global political and investment status, and leave opportunities open for other major economies to seize in its place. Whether it has in fact learnt these lessons has yet to be seen, but it is likely to become obvious soon.