South Sudan on Edge as Its Neighbour’s War Disrupts Oil Exports

[John Ashworth]

South Sudan on Edge as Its Neighbour’s War Disrupts Oil Exports

Income from oil exports is critical to keeping South Sudan’s factious
elites together. The war in neighbouring Sudan has led earnings to
fall precipitously, threatening instability in Juba and highlighting
anew the need to bring the Sudanese conflict to a close.

International Crisis Group
15 MAY 2024

South Sudan is facing an economic meltdown that could bring not only
hardship but also political turmoil to a country already wracked with
both. The civil war in Sudan has severely disrupted oil exports,
depriving South Sudanese coffers of petrodollars, the government’s
main source of revenue. South Sudan seceded from Sudan in 2011, but
the young country remains entirely dependent on its northern neighbour
to get oil to international markets, using two pipelines to transport
crude to Port Sudan on the Red Sea. Yet one of these pipelines,
responsible for about two thirds of South Sudan’s oil exports, broke
down in February and will require months of complex repairs that must
be made amid active combat. Absent stopgap measures, the consequences
for South Sudan will be dire: the government will run out of money and
the national currency’s value will plunge. Chronic food shortages will
worsen, presaging renewed instability and fighting. Regional and
global partners should prepare to send emergency relief to South Sudan
as they redouble efforts to end the war to the north.

When the Sudanese civil war erupted in April 2023, few doubted that it
would cause enormous difficulties for South Sudan. Hundreds of
thousands of people have fled southward to a country that cannot feed
those who already live there. A staggering 7.1 million of South
Sudan’s 12 million-strong population are acutely hungry, while
cross-border trade with Sudan has ground to a halt. The country’s
security is at risk as it becomes embroiled in the conflict. Destitute
South Sudanese are now fighting on opposite sides of Sudan’s war; some
may carry their arms back home one day. South Sudan is also grappling
with the difficult task of staying on good terms with both of Sudan’s
main belligerents – the paramilitary Rapid Support Forces (RSF) led by
Mohamed Hamdan Dagalo “Hemedti” and the army headed by Abdel Fattah
al-Burhan – so that neither turns against it.

A host of critical challenges confronted the government even before
the outbreak of war in its neighbourhood. Preparations are lagging for
elections scheduled for December, the first since independence. Other
issues bedevilling the country’s leaders range from the weak economy
and rampant corruption to catastrophic floods and deadly clashes in
much of the countryside. But it is the damaged pipeline and its
financial effects that pose the most immediate threat to South Sudan’s
peace.

Oil is the glue that holds South Sudan’s rivalrous political elites
together even as it also finances much of the country’s chronic
violence. As Crisis Group reported in 2021, most of the wealth accrued
from oil exports does not benefit the public. Rather, the proceeds
underwrite a violent patronage network that President Salva Kiir uses
to maintain an uneasy overall peace in a country that descended into
its own civil war only two years after independence. Before the
pipeline fell into disrepair, oil accounted for at least 85 per cent
of national revenue. If the government is unable to sell the affected
crude, Kiir will struggle to keep the currency afloat, hold together
his security forces and stave off deadly unrest.

The Dramatic Drop in Oil Exports

The fighting in Sudan has its origins in the downfall of Omar
al-Bashir’s 30-year dictatorship in 2019. Anger about high bread
prices swelled into massive protests demanding that he resign. Top
generals and security officials arrested Bashir in April of that year,
seizing the reins of government and eventually signing a power-sharing
agreement with civilian leaders that was to culminate in elections and
restoration of constitutional rule. In 2021, the transition abruptly
ended when the army dissolved the civilian cabinet and took power into
its own hands. But tensions between Burhan and Hemedti mounted, with
the RSF resisting coming under army command. Their respective camps
came to blows in April 2023, turning Sudan’s capital Khartoum into a
war zone and displacing millions. Although the pendulum has swung
between the belligerents, both the army and the RSF now control vast
areas encompassing crucial oil infrastructure.

War in Sudan put South Sudan’s financial lifeline at risk. Sudan has
long sold South Sudanese oil from an export terminal in Port Sudan as
a means of collecting fees from Juba for the use of its pipelines.
Before the war, Sudan’s earnings from such fees were estimated at tens
of millions of dollars a month. Separately, Juba agreed to pay
Khartoum $3 billion in compensation for the oil infrastructure it
inherited when it seceded in 2011, reportedly settling the last
tranche in March 2022.

For some time, Sudan’s two warring parties had incentives to keep
South Sudan’s oil flowing to the Red Sea terminal. When the army lost
control of Khartoum, Burhan established his headquarters in Port
Sudan, where his government continued selling Sudan’s allotment of
South Sudan’s crude on international markets. For its part, the RSF
has sought to portray itself as a protector of oil infrastructure
while also quietly siphoning off crude and seeking under-the-counter
payoffs from Juba as well. The RSF diverts oil from the al-Jaili
refinery north of Khartoum, the country’s sole such facility, which
the paramilitary force captured in the war’s early days. The army has
responded by repeatedly striking the refinery, destroying its fuel
depots and likely diminishing its value to the RSF.

Then, in February, part of the 1,400km pipeline that connects the
Melut Basin oilfields in South Sudan’s Upper Nile state to Port Sudan
and is located in RSF territory broke down. The pipeline normally
transports about 60 per cent of South Sudan’s oil production. The
malfunction occurred after the Sudanese company operating the pipeline
– Bashayer Pipeline Company, or BAPCO – was unable to deliver diesel
to a pumping station that keeps the waxy Dar blend of crude
sufficiently heated to prevent it from congealing into an asphalt-like
substance. This particular pumping station (one of many along the
pipeline) is under RSF control, while BAPCO operates under Burhan’s
energy ministry.

On 10 February, BAPCO discovered a clog in the pipeline north of the
station, prompting it to halt work and suspend a planned shipment of
600,000 barrels due 22-23 February. Technicians managed to flush the
pipeline only to discover a rupture south of the pumping station two
days later. They were able to reach the site after negotiating access
with the RSF, which on 24 February released a video showing them at
work patching the hole. But they then found that large sections of the
pipeline north of the rupture and the station were clogged. On 16
March, Burhan’s energy ministry declared force majeure on the
pipeline, saying the war made it impossible for Sudan to meet its
contractual obligations to South Sudan.

It is unclear why the company was unable to resupply the pumping
station with diesel, but experts told Crisis Group that it was only a
matter of time before pipeline maintenance became a problem. The two
belligerents restrict access across the front lines, and the army does
what it can to stop fuel from entering RSF-held areas. So far,
attempts to flush the pipeline remotely with chemicals and pressure
have only caused more ruptures and other damage. Some experts believe
that parts of the pipeline will need to be replaced entirely. Many of
those with direct knowledge of the situation say South Sudan’s oil
exports are unlikely to resume without a months-long ceasefire that
allows technicians to repair and rebuild the pipeline on site. Even
so, some Sudanese and South Sudanese officials express optimism that
repairs could take place even amid the war, assuming both the main
protagonists cooperate. In late April, a top Sudanese official
promised that the pipeline would be fixed within two months. Industry
sources nevertheless told Crisis Group that this timeline is
unrealistic.

The bottom line is that South Sudan may well fail to get the pipeline
fixed soon. There is no consensus among regional officials and
analysts as to whether the RSF intentionally disrupted maintenance of
the pipeline, but Hemedti has been playing hardball with South Sudan
when it comes to the country’s oil earnings and stance on the war.
Although South Sudan professes neutrality in Sudan’s war and has
maintained relations with both sides, Hemedti perceives Kiir as too
cosy with his enemy Burhan. Indeed, Kiir remains on good terms with
Burhan, while his relationship with Hemedti seems increasingly frosty.
RSF officials say they want South Sudan to cut off payments to
Burhan’s government by placing the transit-related fees in an escrow
account until the war ends, a proposal that the Sudanese army would
dismiss out of hand. Most observers, including informed ones, assume
that Hemedti is driving up the price for his own parallel payoff,
further squeezing South Sudan.

The one silver lining is that Sudan’s other pipeline, which transports
crude from South Sudan’s Unity and Sudan’s Heglig’s oilfields to Port
Sudan, continues operating – for now. The crude blend from these
fields requires no heating and therefore less maintenance on the
pumping station and related machinery. Still, many industry officials
worry that this pipeline, too, will eventually malfunction given the
difficulties of routine upkeep in wartime.

Fragile Finances

If South Sudan is unable to restore oil exports from the Upper Nile
field soon, the currency will decline ever faster against the dollar
while elite squabbling over the shrinking pot of oil money
intensifies. In 2020, a slump in global crude prices triggered an
economic crisis that prompted the government to secure a $550 million
loan from the International Monetary Fund (IMF) in return for
financial reforms. Against the IMF’s advice, Juba began channelling
the proceeds from the Unity fields to an off-budget slush fund known
as the Oil for Roads project, controlled directly by Kiir. Ostensibly
earmarked for infrastructure, this fund sucks up nearly a third of
South Sudan’s income. It is widely believed to supply much of the
money Kiir doles out to keep South Sudan’s rivalrous generals and
warlords on his side.

Civil servants and soldiers, meanwhile, routinely go months without
pay. At the time of publishing, most South Sudanese public employees
had not received a salary since October 2023, after the government
quadrupled public-sector wages to adjust for inflation. Even after the
adjustment, a regular soldier now earns only $15 a month if he
actually gets paid. Even South Sudan’s political class, once flush
with petrodollar largesse, admits adapting to a new era of austerity.
Governance outside Juba is largely absent.

A first major concern is that the slide of the South Sudanese pound
will worsen the humanitarian crisis, given that the population largely
survives on imported food. The head of South Sudan’s central bank said
in May that its hard currency reserves are now at an “historic low”.
Without petrodollars, the central bank is unable to support the
currency, driving up the cost of food and fuel imports. Since
February, the South Sudanese pound has lost almost half its value
against the dollar. On top of that, getting aid deliveries into South
Sudan risks becoming more complex as the government tries to levy new
fees on relief supplies in order to fill state coffers, a measure that
has angered the country’s major humanitarian donors.

The second concern is political. If South Sudan cannot resume the bulk
of its oil exports and proves unable to find an alternative source of
income, Kiir will likely struggle to keep South Sudan’s factious
security elites in check. Without patronage, Kiir’s allies could turn
on him or on one another. Since South Sudan’s political class has
grown so weak, Kiir’s survival now largely rests on the loyalty of
power brokers within South Sudan’s main security institutions, namely
the presidential guard, the security service, the army and the police.
Any sign of weakness in Kiir’s camp could also tempt outsiders,
including Sudan’s main belligerents, to destabilise his government.
Quiet jockeying to succeed Kiir, who is reportedly in poor health, has
already begun. Even for Kiir, who over the years has proven adept at
staving off challengers and managing dramatic oil price fluctuations,
such meddling could prove overwhelming. It could also ratchet up
violence in South Sudan’s hinterland, given how much of that unrest
stems from intra-elite quarrels in Juba.

Political disputes about South Sudan’s first-ever elections slated for
December muddy the picture further. Many South Sudanese expect the
vote, promised as the final chapter of the country’s 2018 peace deal,
to be delayed due to a lack of preparations for the poll and disputes
between politicians about the path forward. Indeed, South Sudan’s
recent history gives cause for concern. Many blame the elite divisions
sown by South Sudan’s sudden loss of oil revenue in 2012 (amid a
standoff with Sudan over transit fees) for the civil war that erupted
just over a year later as elections neared.

Responding to the Crisis

Ending the war in Sudan is the best way to prevent instability from
rippling across its borders, and as Crisis Group has argued, will
require unwavering diplomatic efforts from a number of countries.
Meanwhile, the human cost of an economic catastrophe in South Sudan
and the region’s inability to handle another major crisis makes it
vital that regional and international partners also turn their
attention to South Sudan’s worsening plight. They should stress the
need to restore South Sudan’s oil exports with those who have
influence, such as the United Arab Emirates (UAE), which could
encourage the RSF to cooperate toward that end, and also work to
prevent more violence from breaking out in South Sudan. South Africa,
an influential broker in South Sudan, should continue to mediate among
the South Sudanese elite, as should neighbours Kenya, which launched
its own mediation initiative in May between the South Sudanese
government and exiled opposition groups, and Uganda. Should Juba’s
relations with either Hemedti or Burhan grow openly hostile, mediators
should strive to limit the fallout and stop Sudan’s war from
spreading.

In the meantime, unless it secures foreign-backed loans to keep
affairs of state running, South Sudan is on shaky ground. It is
unclear which country might be willing to lend the hefty sums that
would make up for lost oil revenue, though in some cases there may be
a bilateral rationale for doing so. Juba could talk with China, whose
41 per cent stake in the Dar Petroleum Oil Company might give it an
incentive to keep South Sudan’s economy afloat. During the oil
shutdown in 2012, Beijing helped Juba with loans. Still, China’s
recent lending to African countries has dropped sharply – and it has
substantially reduced its dependence on South Sudanese oil in recent
years.

South Sudan is also trying to secure loans from the UAE, which has
made massive investments in the region and has rising influence. The
pipeline disruption appears to have disrupted negotiations for a
multi-billion dollar loan, which started in late 2023, but Juba hopes
to revive those talks while obtaining smaller, short-term loans to
tide over the administration in the meantime. Any negotiations with
the UAE are likely intertwined with South Sudan’s discussions with the
RSF about repairing the pipeline, given Abu Dhabi’s close ties to
Hemedti’s force. In all these scenarios, however, creditors will worry
about South Sudan’s capacity to remain solvent until it is clear when
the damaged pipeline will be fixed. South Sudan’s chequered history
paying its debts may also give them cold feet.

If President Kiir is unable to secure alternative revenue, outsiders
should be wary of bailing out a system rotten to the core. If called
on to shore up the country’s finances, institutions like the IMF
should consider stopgap support only if South Sudan’s government
ensures that more of its oil revenue enters the public coffers, where
it could be used to rebuild basic administrative capacity as a first
step toward reducing chronic violence and hardship throughout much of
the country. Otherwise, the prevalence of slush funds drawing on oil
revenues means elites will continue to jostle with one another for a
cut of the pie, fuelling violence, even as foreign donors try to meet
South Sudanese people’s basic needs.

So long as South Sudan’s financial straits are worsening and its
political tensions heightening, donors and countries mediating in its
neighbour’s conflict should remain on high alert. While outsiders
should continue to support the South Sudanese people’s desire for
elections, they should recognise that the current timetable appears
non-viable. Pressing ahead with the present calendar runs too high a
risk of further dangerous ruptures among the country’s cash-starved
elites, absent a new agreement on the path forward. Donors also need
to keep a watchful eye on the immediate threat of famine in Sudan and
South Sudan, and hike their support for international agencies,
including the World Food Programme, which currently lack the funds to
meet the overwhelming humanitarian needs in the region. Until
mediators manage to halt the war in Sudan, stepped-up efforts to
protect South Sudan from the collateral effects of that conflict are
fast becoming an additional imperative.

https://www.crisisgroup.org/africa/horn-africa/south-sudan/south-sudan-edge-its-neighbours-war-disrupts-oil-exports?

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______________________
John Ashworth

ashwor...@gmail.com

+254 725 926 297 (Kenya mobile, WhatsApp and Signal)

PO Box 403 - 00206, Kiserian, Kenya