South Sudan: Rethinking the Energy Curse

Under the terms of the 2005 Comprehensive Peace Agreement between the government of Sudan and the Sudan Peoples’ Liberation Movement, a referendum on the question of independence was conducted after 56 years of grinding war between the North and South that left some 2 million southerners dead and millions displaced. The January 2011 referendum was approved by more than 99 percent of voters, now waiting for the benefits of peace.

The U.S.–hosted meetings, billed as an ‘International Engagement Conference for South Sudan,’ emphasized private sector development, good governance and accountability.

A key purpose of the Conference – which included officials from private companies, diplomats and international aid officials from Sudan, the United Kingdom, Norway, Turkey, the European Union, the United Nations, the African Union, the World Bank and the International Finance Corporation – was dedicated to understand South Sudan’s strategic development priorities and broker investment opportunities.

But, just as U.S. Secretary of State Hillary Clinton and President Salva Kiir (picture) spoke of South Sudan’s exhaustive challenges, reports of bombardments in the oil rich border regions by the Republic of Sudan underscored the severity of the challenges for a war–torn nation without roads, electricity or markets, and social indicators amongst the world’s worst.

South Sudan Defied the Odds

The Secretary of State found grounds for optimism in petroleum development as she both congratulated South Sudan’s 150 representatives of a nation that she said, “defied the odds” by simply being born. Clinton also warned of the downside of petroleum development that can be a “resource curse.” She cautioned against policies that can create a government dependent solely upon petroleum taxes and overvalued currencies while enriching a small elite.

Emphasis on Trade

In his remarks, President Kiir, wearing a cowboy hat presented by Senator John Kerry of the U.S. Senate Foreign Relations Committee, described his development vision, and said that South Sudan intends, in part, to bridge the development gap by using petroleum as the centerpiece for sustainable and equitable long–term development.
The 400 participants at the conference broadly identified a range of tools, investment supports and humanitarian aid to help drive South Sudan’s development.

Acknowledging the practical constraints of its economy, U.S. policy–makers placed considerable emphasis on opening barriers to trade, with some much needed humanitarian and development aid to help put South Sudan in a stronger position as its development potential unfolds.

U.S. Trade Representative, Ron Kirk, announced that the U.S. has launched a review for South Sudan’s eligibility for two major trade preference programs: the Generalized System of Preferences (GSP) and the African Growth and Opportunity Act (AGOA) which offers duty-free treatment for a broad variety of products.

The U.S. also announced the newly–lifted sanctions would allow for greater investments in the petroleum industry, formerly prohibited.

Strategic Re–balance: North and South

Directly following the Washington meetings, South Sudan’s Minister of Petroleum and Mining, Stephen Dhieu Dau, left for another round of north-south negotiations in Addis, hosted for the past 18 months by the African Union High–Level Implementation Panel (AUHIP), only to emerge once again deadlocked, although scheduled to meet again in January 2012 with the petroleum industry present to resolve core issues between the two new countries.

The oil–dependent parties remain far apart from resolving key underlying issues: pipeline transit fee tariffs per barrel of oil, use of oil infrastructure port fees, cash transfers for a combination of arrearages, outstanding debts and transitional financial arrangements – between $5.8 billion USD and $7.77 billion. South Sudan’s position links the tariff and fee issues with status of the oil and grazing–rich lands of Abyei, and demarcation of the South Kordofan, Blue Nile and other disputed borders.

China’s Behind–the–Scenes Role

China’s absence from the meetings loomed large. China, which imports nearly one–third of its crude oil from Africa, is crucial to South Sudan’s petroleum development. South Sudan is 98 percent dependent on revenues from petroleum pumped by Chinese, Malaysian and Indian producers.

Even as South Sudan is financially benefiting, The Republic of Sudan, to the north, was hard hit by the loss of its petroleum concessions along with South Sudan’s independence. Khartoum’s lost an estimated 75 percent of its pre–independence oil revenues – with most of the oil production located in the landlocked south – and also, according to the International Monetary Fund, 90 percent of its exports.

Although it is generally unknown exactly how much money China has invested in Sudan, the U.S. Foreign Military Studies Office reported some $20 billion USD, “apart from soft loans, grants and other forms of aid.” This formerly cross–border and now two–nation oil play straddles the unstable and yet not fully marked north–south border – a virtual powder keg. With billions at stake, and a substantial appetite for energy resources, China – a typically risk–averse global leader that is reputed to stay out of internal affairs – has opted for a behind–the–scenes role in the deadlocked AUHIP negotiations – that followed Khartoum’s blockade of about 200,000 barrels a day – in order to protect its investments.

Co-existence is crucial. All of the refineries and the port are located in the north’s Port Sudan fed by the Chinese–built pipelines that delivers the petroleum from south to north. A proposed pipeline that would move south through Kenya is unlikely to happen any time soon. In any event, peace is better than war.

Refining South Sudan’s Road Map

In a series of developments following the D.C. meetings, South Sudan appears to be refining its road map by better leveraging its natural resources. Following the collapse of the Addis Ababa talks, the Washington Post reported that South Sudan’s Petroleum Ministry “summoned” the China National Petroleum Corp. (CNPC) along with the other state–controlled Malaysian and Indian partners to South Sudan’s capital city, Juba, to discuss an issue – one that is directly linked to prevent the “resource curse” – the renegotiation of the contracts inherited from Khartoum.

Renegotiating the contracts appears to be a shot-across-the-bow that would kick–start a national strategy to tackle social, environmental, equitability, corruption and other challenges, allowing petroleum revenues to meaningfully fuel development.

Generally, facts about the petroleum industry in South Sudan are obscure. The agreements between the Government and the companies on production rights, contracts, refineries, and pipe-lines are generally secret; the country’s oil production is not independently verified; the companies generally do not issue reports; but are assumed to generate substantial profits.

Suggestions

Several suggestions mentioned at the D.C. Conference both reinforced South Sudan’s new Petroleum Law and suggested others, including crucial elements of regulatory rigor to development reliable geologic information, produce taxation policies that reward the state without scaring away investors.

The petroleum strategies are being developed to take into account both benefits – revenues, taxes, export earnings, jobs – and costs – environment, social, tariffs and border challenges. For example, President Kiir noted that South Sudan would implement the Extractive Industries’ Transparency Initiative (EITI) in its “publish what you pay” requirement for transparency at both the industry and government levels would help to incentivize Juba’s commitment to good governance.

Further, several Juba representatives indicated an interest in attracting Western companies, some of whom in 2001 sold their stakes to the Chinese, Malaysian and Indian companies following shareholder actions – well before the CPA – that alleged complicity with accusations of state sanctioned rights abuses. The potential for return, to some extent, depends upon both stability and the longevity of the resources.

Corporate Social Responsibility

Challenging the “resource curse” is complex, but not insurmountable. The Petroleum Ministry’s strategic regulatory direction along with its development mandate fits quite easily into the corporate social responsibility ‘best practices’ model – no longer a soft issue for the petroleum industry.

It would be, perhaps, useful for South Sudan to develop a rigorous framework within which it can define its CSR strategy that can serve as a tool both for the AUHIC negotiations and as a complement Juba’s regulatory and development strategies. The Washington conference created a measure of enthusiasm. The South Sudanese must now lead the way.

A.L. Parlow from A.L. Parlow & Associates, has advised CEOs, top managers, government and non–governmental organizations on corporate social responsibility strategies, both in the United States on BP–related projects and worldwide. Parlow wrote reports on Sudan for Human Rights Watch during Sudan’s civil war. See:   www.sustain-the-globe.com