Governments and companies all too often find themselves situations which threaten vital interests but from which they cannot easily extract themselves without substantial economic, political or diplomatic cost. China and its national oil company, CNPC, may now be facing that possibility in Sudan and South Sudan.
CNPC in Sudan
For several years Sudan has been the jewel in CNPC’s overseas crown and a major diplomatic ally of China in Africa. It provided CNPC with its first major overseas oil asset in 1997, just 4 years after China became a net importer of oil. International sanctions obliged Chevron to abandon its discoveries and CNPC took them over under the same generous financial terms. These fields formed the basis of CNPC’s commitment to the country. Subsequently it has set up a number of joint ventures, mainly with other national oil companies such as ONGC of India and Petronas of Malaysia.
The company has built a pipeline network to bring the oil north to Khartoum and a refinery which yields oil products for use within Sudan. The pipeline continues north to the Red Sea coast which allows Sudan to earn revenues from exports and CNPC to send some of the oil back to China. Sudan accounts for about 70% of CNPC’s overseas oil production. In 2010 Sudan exported 19 million tonnes (80% of national production), of which 12.5 million tonnes (65%) went to China, accounting for 5% of that country’s crude oil imports. China’s involvement in Sudan has not been limited to oil. Its companies have also played a major role in urban development and infrastructure construction, especially in and around Khartoum.
Sudan has been a major commercial success for CNPC, but this success has not come without security risks and political costs. Sudan has been riven by internal strife since 1987. The civil war between the Christian south and the governing Muslim north lasted for 22 Years and ended only in 2005 with a peace settlement which provided for a referendum on independence of South Sudan. The referendum was held in January 2011 and South Sudan became independent in July of that year. In addition, the western region of Darfur was the site of violent conflict between 2003 and 2010. These conflicts may have subsided, but lawlessness prevails across much of the country. The border between Sudan and South Sudan is the site of periodic fighting especially in the disputed oil-rich territory of Abeyi. This endemic instability continues to present CNPC and other Chinese companies with security challenges including the intermittent kidnapping and killing of their staff.
China’s close engagement with Sudan, led by CPNC is 1996, has presented the Chinese government with a series of diplomatic challenges which have not only complicated its relationship with the government of Sudan but have threatened the country’s international reputation. Right from the start, CNPC’s investment attracted international disapproval for it ran counter to United Nations sanctions on Sudan. The international listing of CNPC’s commercialised subsidiary, PetroChina, in 2001 had to be adjusted in response to public pressure and the Sudanese assets were retained in the holding company rather than being included in PetroChina.
Six years later, China’s government faced pressure as a consequence of the rising level of violence in the Darfur region of western Sudan. The lead-up to the 2008 Olympic Games in Beijing provided an opportunity for human rights activists to draw attention to China’s involvement in Sudan. This persuaded the government to lean heavily of Sudan’s leadership to permit UN peacekeepers to enter Darfur and to address the region’s problems in a peaceful manner.
CNPC and China’s government may have thought that the worst was behind them after South Sudan became independent, but this is far from being the case. Only the nature of the challenge has changed. China now has to deal with two states instead of one, and relations between these two states are extremely tense. This tension arises from oil and China is the key player in this arena.
When South Sudan became an independent state in July 2011, it took some 75% of Sudan’s daily oil production, but the only export pipeline from South Sudan runs north through Sudan. South Sudan is totally reliant on Sudan for its oil revenues, and Sudan is reliant on South Sudan for crude oil supplies. The critical unresolved issue concerns the level of fees to be paid by South Sudan to Sudan for transporting the north to the Red Sea coast. South Sudan proposes US$1 per barrel. Sudan is demanding US$36 per barrel. The government of South Sudan has nationalised the assets of Sudan’s national oil company, has stopped paying pipeline fees, and has turned off the oil flowing north to Sudan, even though this oil provides 98% of South Sudan’s revenues. In retaliation, the government of Sudan seized at least three ship loads of South Sudan’s oil at the Red Sea port in January 2012. One month later, South Sudan’s government expelled the general manager of PetroDar, the main Chinese oil operator in the country, accusing the company of assisting Sudan in taking this oil.
In its search for an alternative export route, South Sudan has reached an agreement with Kenya and Ethiopia to construct an oil pipeline from South Sudan to Kenya’s coast, as well as a refinery in Kenya. How much time will be needed to complete this work is uncertain, but the agreement has triggered diplomatic tension between Kenya and Uganda, for Uganda itself had hoped to construct a pipeline with South Sudan. Meanwhile, in the absence of alternative export routes, South Sudan plans to use trucks to take oil to coastal ports in Kenya and Djibouti. At best this would only amount to 10% of previous production levels.
Water, food and land
Oil is not the only resource creating tensions. South Sudan lies mid-stream along the Nile River and the appearance of this new country is exacerbating long-standing tensions between the riparian states along the river. This occurs at a time when climate change is increase the stress on water and food supplies across north-east Africa, a region already blighted by poverty, malnutrition and ill-health. South Sudan needs electrical power as well as oil. The nearest potential source lies in Ethiopia which has grand plans for the construction of hydro-electric dams. In turn, Ethiopia requires oil, which could be supplied by South Sudan. But the construction of dams in Ethiopia would reduce the flow of water along the Nile and would enrage Egypt which depends on this flow for its existence.
A major economic objective of the government of South Sudan is to develop a large agricultural sector, taking advantage of its plentiful water resources and fertile land. This requires investment, and the government is likely to seek large-scale corporate investment from the Middle East and Asia. At the same time it has to manage the legitimate expectations of its own people for access to land, a problem exacerbated by the absence of an established system of land tenure, by the return of large numbers of displaced people, and by past and ongoing pollution of land and water by oilfield operations.
This agricultural ambition may have regional consequences for it will affect the flow of water to downstream states. Further, South Sudan is unlikely to press ahead quickly with restarting the construction of the Jonglei canal, a project which would increase flow of water to Sudan and Egypt but yield little benefit to South Sudan. South Sudan has not yet joined the Nile Basin Initiative or the Nile River Basin Cooperative Framework, two institutions designed to assist inter-state cooperation along the Nile.
CNPC and China find themselves deeply engaged in two countries (Sudan and South Sudan) which have very tense bilateral relations as well as domestic political instability, and which lie in a region where diplomatic tensions relating to natural resources are barely concealed. CNPC faces the risk of substantial commercial losses in South Sudan. The company now has many larger oil fields to develop in other countries, but it cannot cut its losses and leave the South Sudan because that would be unacceptable to China’s government on diplomatic grounds. The Chinese government will have to sustain its political commitment to both Sudan and South Sudan, but the diplomatic and security challenges are likely to get worse before they get better.