The construction of an alternative export oil pipeline route for South Sudan could ensure an economically and politically diverse environment where trade and exports can take place at reduced costs, says strategy and communications consultancy africapractice.

While Sudanese oil has been on the international market since the late 1990s, the secession of South Sudan from Sudan in July 2011 created a complex political game between the two countries, notes africapractice senior consultant Tom Savory.

In 2005, an historic peace agreement brought an end to Africa’s longest-running civil war – the 22-year conflict between citizens in the north and in the south of Sudan. International nongovernmental organisation Global Witness reports that tensions over the distribution of the country’s vast oil wealth had exacerbated the conflict, but oil was also a key component of its resolution.

The 2005 Comprehensive Peace Agree- ment was underpinned by evenly dividing the revenues from southern oil between the north and the south. Rather than driving conflict, oil became a basis for peaceful cooperation.

With up to 75% of oil reserves from the old Sudan now falling in South Sudan, the newly established South Sudan’s capital, Juba, should have the economic upper hand between the two “heavily underdeveloped” countries.

However, Savory adds that the only economically viable route to market – through one of two pipelines to the Red Sea from Sudan – are controlled by Khartoum, the capital city of Sudan. This means that, while South Sudan owns the resource, Sudan owns the means to export the resource.

“Unsurprisingly, as the two countries are the worst of neighbours and have strong incentives to increase revenue, relations over oil transit rapidly broke down between Sudan and South Sudan,” says Savory, adding that, while Sudan wanted to charge up to $36 a barrel, South Sudan wanted to pay $1 a barrel.

“In late 2011, when Khartoum started to siphon off a portion of oil to, in its view, cover unpaid bills, South Sudan promptly shut down oil production and the pipes and revenues promptly ran dry. “As a result, the brinkmanship between the two nations swiftly devastated both economies,” Savory highlights.

With neither Sudan nor South Sudan featuring high on any development or gross domestic product index, africapractice states that the countries’ economic rents from oil production are vital to keeping their governments and economies afloat.

South Sudan relies on oil revenue to generate 98% of its foreign exchange earnings and it accounts for more than 98% of the country’s budget, whereas Sudan has a slightly more diversified economy, which is still heavily reliant on oil.

“The effect of the hiatus in oil flow was devastating to Sudan and South Sudan. Inflation was the most direct effect, particularly with food prices skyrocketing – government spending was also reduced sharply. “For countries that are struggling to meet the basic needs of their citizens, this has had significant consequences on South Sudan’s socioeconomic development,” says Savory.

He mentions that South Sudan has suggested two routes for South Sudanese oil. The first heads east from the south of the country towards a potential new Indian Ocean port in Lamu, in northern Kenya, while the second heads east from the north of the country through Ethiopia and Djibouti, to the Gulf of Aden.

The Kenya route will ensure that the pipeline traverses a relatively flat and logis- tically accessible path, says Savory.

“Regionally, Kenya has a strong and diversified economy and would be grateful for transit revenue, but will not rely on it. Also, the opportunity to develop Lamu and to rebalance the country’s maritime options, away from the clogged Mombasa port, would be highly desirable,” he men- tions. A pipeline that traverses this route is likely to be connected to the Ugandan oil fields.

Ethiopia is a significantly more trouble- some logistical prospect, notes Savory. Not only is the route longer but it also passes mountains and wetlands, neither of which are favourable for pipeline construction, though neither render the route impossible.

Savory explains that, by crossing Ethiopia and Djibouti, the route will also increase costs as revenue will need to be shared between more countries. Getting Djibouti on board, therefore, presents a “less interesting proposition for Ethiopia than what it does for Kenya” and less income for South Sudan.

However, the route does offer an enhanced economic and political partnership with a regional power that not only consists of sub-Saharan Africa’s most potent armed forces but also borders Sudan. “For South Sudanese strategists, a tight economic partnership with Ethiopia will help tip the balance of force in its favour, compared with Sudan, which wields a strong military force but few regional allies,” he explains.

On the other hand, Savory highlights that South Sudan has regularly voiced an interest in joining the East African Com- munity (EAC), and strengthening its economic ties with Kenya will help this process and build Nairobi’s interest in the country.

He further states that, if South Sudan manages to join the EAC, it will represent a significant economic and diplomatic boon for the nation – regional integration will eventually encourage East African and global trade with the nation, improving access to consumer goods, reducing prices and creating economic opportunities. EAC membership will cement South Sudan’s legitimacy and prominence in the international community.
Moreover, Savory points out that, though the possibility of two routes out of South Sudan is technologically feasible, the project is unlikely to be as successful from an economic point of view. “Economies of scale are vital to the oil sector and any company that develops a pipeline out of South Sudan will aim to transport as much oil as possible. Splitting the oil transport along two routes does not favour anyone, with significantly less revenue to share, which may result in neither of the projects being viable,” he points out.

Meanwhile, as much as the desire for a new oil outlet is real and immediate, South Sudan’s capital, Juba, appears to be focusing more on short-term goals. The 15-month hiatus in oil revenue – the result of the oilfield shutdown – took its toll on the country, but South Sudan President Salva Kiir Mayardit is monitoring the ongoing negotiations about the disputed Abyei region and facing several political challenges.

Africapractice notes that Kiir undertook a major Cabinet reshuffle in July, an appa- rent response to an in-house leadership challenge. A 2015 election is an important milestone in the country’s independence and Kiir’s party is “ill-prepared” to run a credible poll, which is essential to sustaining positive international relations, particularly with donor bodies.

Talks on the route out of South Sudan through Kenya to Lamu are ongoing. The announcement on this route is likely to be made by the end of 2014.