China is facing an energy and foreign policy crisis in Sudan

International Link - Hong Kong

China is facing an energy and foreign policy crisis in Sudan. The recently independent Republic of South Sudan halted oil production and exports in late January over a transit pricing dispute with the North, disrupting some 5 percent of China's oil imports. While Beijing has been acting as a mediator behind the scenes, South Sudan has accused Chinese companies of stealing oil, and the recent kidnapping of 29 Chinese workers has shown the limits of China's leverage. Paul Cochrane in Beirut reports.

China had been onto a "good thing" in Sudan until this past year. While a challenging environment to operate in, Chinese oil companies had the Sudanese market in the bag, exporting 70 percent of all oil exports and facing minimal international competition due to the international sanctions on the Khartoum government.

China's position as the dominant foreign player in Sudan started to be chipped away at last July when the South broke with the North, forming the Republic of South Sudan. Seeing the potential to access Sudan's primary oil production area, with the south accounting for 75 percent of the unified country's 500,000 barrels of oil a day, Washington DC lifted sanctions on the new country in December.

"There is an eagerness (by the South) to attract Western oil companies for a host of reasons; not just because of the close relations between Beijing an Khartoum, but also more concretely to improve recovery rates which are by and large below international standards," said Jean-Baptiste Gallopin, a South Sudan Analyst at risk consultancy Control Risks in London. "South Sudanese officials continue to harbour mistrust towards Asian national oil companies because they suspect them of having tried to maximize production before independence at the expense of long-term yields. They also accuse existing investors of having neglected investment in recent years."

While such factors pose a potential threat to Chinese oil companies continued presence in the medium to long term, a more immediate crisis was brewing that threatened 5 percent of China's oil imports.

Following the 2005 peace accord that ended Africa's longest running civil war, Sudan's oil revenues were to be divided fifty-fifty between north and south. Independence ended this agreement, but with the South landlocked and the pipeline, refineries and export capabilities all in the North, Khartoum had the upper hand in its demands for transit fees and some $15 billion in compensation for the loss of oil revenues.

The north turned the screws on Juba, the capital of the South, confiscating oil worth more than $815 million over a two month period from December, 2011, and in January charged $22.8 a barrel in transit fees then raised it to $36, while Juba wanted to pay the international norm of a $1 or less a barrel. The excessively high fees forced Juba's hand, making a radical decision to halt oil production and exports on January 25.

"It was both surprising and unsurprising that South Sudan has gone so far to dig its heels in. They are really damaging themselves more than anything else, as 98% of foreign revenues come from oil production. At most they have three months of hard currency left and are in desperate need of revenues," said Marc Mercer, an East Africa specialist at risk consultancy Eurasia Group in London. "It all says to me they are doing this on principle as they're sick of the north (being involved in its affairs), and took this drastic action no matter what the consequences, which has annoyed Chinese oil companies and others."

Beijing the mediator

China has been a long time ally of the Sudanese President Omar al-Bashir, who is wanted by the International Criminal Court of Justice for war crimes and genocide in Darfur in Western Sudan. During the civil war, Beijing sided with Khartoum and Chinese companies have invested billions of dollars in Sudan while being instrumental in rolling out infrastructure in the country, some of which have been politically controversial, notably in the Nuba mountains.

The North-South stand off has put Beijing in a tight corner, wanting to placate Bashir on the one hand while needing Juba to re-start oil production and exports on the other. As Stephen Dhieu Dau, South Sudan's petroleum minister, remarked to the press: "They want to be close to us and close to Khartoum. But Jesus said you cannot serve two masters. They have to make a choice. They have to be honest and say who is right."

Indeed, Beijing is not overly trusted by the South, with Juba sending mixed signals, initially that they were willing to leave the past behind them and work with China, then in mid-February accused Chinese firms of playing a role in aiding Khartoum seize its oil. Juba was careful however not to name any of the firms, but given the Chinese National Petroleum Company's 41 percent stake in the Chinese- Malaysian oil consortium Petrodar, the move can be read as a veiled attack on the Chinese government.

"Our relations with China are beginning but they are of course having difficulties now because of the role of some Chinese companies or individuals covering up some of this stealing," said South Sudanese negotiator Pagan Amum to the press in Juba. He added that oil firms operating in the oil rich Unity state that straddles the border had helped to block exports of the entire output in December and in January. "They are stealing and robbing our oil," Amum said. "We will make them pay the cost or else they are out of the country."

A week after Amum's statement, the south expelled the president of Petrodar, Liu Yingcai. The company has asked for the decision to be overturned – to no avail – and while Beijing did not respond to the accusations directly, China reiterated its commitment to dialogue, sending in early March Zhong Jianhua, Special Representative of the Chinese Government on African Affairs to the two Sudans. Asked by a CCTV reporter whether China was "playing a kind of embarrassing role between South Sudan and Sudan," Jianhua replied "That's not true. China is always helping to reduce the tension. I think we are full of confidence to do something together with the international world and other countries here."

But Beijing's behind the scenes negotiating power has not born fruit, despite a reported development aid and low- interest credit package to the South worth up to $10 billion. Instead Beijing has, by and large, left the more publicized negotiations to the African Union.

"Everyone recognizes China has a unique position given leverage with Khartoum and has a keen interest to see oil production resume in South Sudan, where it has completely shut down. But the Chinese have not been very successful," said Eric Reeves, a Sudan researcher and analyst at Smith College in the US.

Indeed, China is also in a relatively unique position as the only major global power actively engaged in the Sudan crisis. For despite South Sudan locking in its oil, the stand- off has not received attention from the international media or by multi-national bodies it arguably should have. This can be attributed to Sudan having less significance for the West due to no commercial interests or reliance on oil exports from the East African country, to the focus by the West on the instability in Syria and the Middle East.

Kidnapping

An earlier incident highlighted the kind of problems Beijing faces when Chinese companies operate in unstable countries and get dragged into political disputes. Just four days after Juba cut off oil exports, 29 Chinese road workers in the South Kordofan state were kidnapped by the Sudan People's Liberation Movement (SPLA).

"I don't think the kidnapping will deter further Chinese investments in Sudan. Chinese state-owned companies are closely aligned with the interests of the Chinese state and Chinese investments in Sudan remain largely driven by strategic imperatives rather than by short- term commercial benefits. But from a foreign policy angle, the kidnapping and controversy over oil revenues has forced China to take a proactive approach in its managing its presence in Sudan," said Gallopin. "The Chinese government has been involved in mediating the dispute behind the scenes for a while, but it has recently been forced to take a more public role. So far, the lack of an agreement between the two Sudans shows it has had little affect, which highlights the limits of China's leverage."

Indeed, while the workers were later released, it was to the International Red Cross rather than to the Beijing's ally, the North Sudanese. "If a message was to be sent it was that the SPLA can strike very powerfully and seize Chinese workers so everyone can see Khartoum cannot release them," said Reeves.

Notably, the road the Chinese workers were building was part of a larger network to encircle the SPLA's stronghold in the Nuba mountains. "The SPLA North is a potent force there, so Khartoum started this encirclement of creating a road around the mountains with only one exit route, to the South, which is blocked by an artillery battalion, meaning there is no entry or exit. The idea is to starve the people of Nuba to death and that such massive collateral damage should grab some international attention, and Chinese attention," said Reeves. "All humanitarian aid has been shut off since June 5, 2011, and there are as many as 400,000 people still trapped."

A slippery slope?

The North-South dispute, analysts believe, will not be resolved anytime soon, meaning Beijing will have little choice but to be remain involved, even if just to get the oil flowing again. But the situation within Sudan could pose further foreign policy problems.

The UN's Food and Agricultural Organization (FAO) have warned that with harvests failing in Sudan's contested border area a famine is likely, while the security issue is getting worse, whether in Darfur or along the Southern border. Meanwhile in the North there is rampant inflation, economic problems and signs of popular unrest, suggesting that the "Arab Spring" that has swept much of North Africa and the Middle East could happen in Sudan.

"Sudan has the same demographics as "Arab Spring" countries, a lot of young people, high unemployment and few opportunities," said Reeves. "What we are seeing in Sudan is just as bad as what we see happening in Syria right now; in many ways it is worse. It may not be a military defeat that brings the regime in Khartoum down but economic collapse."

And while analysts believe that the SPLA will not make a habit of kidnapping Chinese workers it cannot be ruled out, having been the third case in Sudan since 2004, and reflecting a similar trend that has happened elsewhere, such as in Pakistan where several Chinese workers were killed by Islamic militants in 2006 and 2007.

"The Pakistan and Sudan situations change the framework for Chinese foreign policy in a way, in how they deal with these countries, such as investments," said Mercer. "China can't continue operating as they have and not weigh in. Sudan is a prime example to change their framework and step up to the plate as they stand to lose quite a lot."

Indeed, China will not want a repeat of its experience in Libya last year. Like in Sudan, China was the biggest foreign contractor in Libya, with $18.8 billion worth of contracts, and had close ties with the Gaddafi regime.

Following the outbreak of civil war, 35,000 Chinese workers had to be evacuated and despite Beijing sending overtures to the Libyan rebels, the rebels threatened a commercial boycott after releasing documents they claim showed Chinese defence companies had discussed supplying Gaddafi with weapons. Those multi-billion dollar contracts in Libya are now in jeopardy. However the situation plays out in the two Sudans, Beijing will have to play its cards carefully, with an estimated 15,000 Chinese in Sudan and the oil concessions of significant economic as well as energy importance.

Photograph by Jihad Samhat