Special Report - South Sudan's Chinese oil puzzle
The world's newest nation struggles to decide whether Beijing is friend or foe
By Alexander Dziadosz
JUBA (Reuters) - A few months before South Sudan seceded last year, Henry Odwar drove to a Juba hotel to confront the men who would be at the heart of the new country's economy.
Scores of delegates from the Chinese, Malaysian and Indian firms that pumped Sudan's oil had flown in to see the southern capital and shake hands with the government officials who were about to inherit billions of dollars of petroleum from Khartoum in the north.
As head of the southern parliament's energy committee, Odwar thought it was time to clear the air with the companies. Many southerners blame them for providing money and infrastructure that Khartoum used to crush southern rebels and wipe out entire villages during a civil war which killed more than 2 million people.
"There is a new thinking in South Sudan that we are open for business, but we will never forget our history," Odwar recalled telling the men. "And, you, the oil companies, if you have polluted before, you will not pollute again. If you have displaced people before, you will have to pay."
Such frank speech had grown rare in the six years since a 2005 peace deal gave Sudan's south autonomy, a share of petroleum revenues and the chance to vote for independence. Many former guerrilla fighters had grown used to working with the companies they once considered enemies.
With independence just months away, Odwar thought it important to set boundaries, especially with China. Oil would be crucial to the new state, and China would be pivotal to South Sudan's oil industry. The relationship between Juba and Beijing could shape the world's youngest country for decades.
A couple of months later, the China National Petroleum Company (CNPC), the biggest investor in South Sudan's oilfields, brought Odwar and nine other officials to Beijing. They were flown business class and put up in the Kunlun, a five-star hotel with a cigar bar and a revolving restaurant. They toured the state-owned firm's facilities, where they saw "supercomputers and young PhDs all in their mid-20s doing the research," Odwar said. "It was amazing." They met senior executives and, at Odwar's request, the People's Congress member in charge of economic affairs.
Now the Chinese wanted to set their own boundaries. They refused to discuss allegations they had looked the other way when Sudan's army forced southerners from their homes in the oil regions, Odwar recalled. And when the delegation brought up new pollution laws, they told them not to set their sights so high. "I thought that was very offensive," Odwar said.
As South Sudan's leaders shift from waging war to running a state, the country's oil is proving one of the trickiest puzzles. It has 7 billion barrels in proven reserves, small compared with African oil giants such as Nigeria but enough, if it was all extracted, to meet the oil needs of the United States for a year. How South Sudan uses its oil, which accounts for almost all of the country's income, will largely determine whether or not it prospers.
As in other parts of Africa and the Middle East, petroleum has so far brought both treasure and peril to the new country, which Reuters is examining in a series of stories this year. Quick, abundant cash helped southern leaders unite the fractious militias left by the war into a national army and start building institutions. At the same time it shrunk their incentive to nurture sectors like farming and manufacturing. With little oversight, the money has also been easy to steal.
Oil has also continued to divide South Sudan and its old rulers. A dispute with Khartoum led the government in Juba to shut down its wells in January, driving both countries' economies into crisis and testing the support of foreign governments and investors.
A new agreement should soon have oil flowing again. But a lot of questions remain unresolved. South Sudan has yet to settle how it will manage its oil and what that will mean for ties with its biggest investor, China. In more than 20 interviews, officials, diplomats, analysts and oil executives highlighted China's sometimes uneasy but always central role in South Sudan's most important industry.
"The fact is," Odwar said, "oil belongs to South Sudan and China needs oil."
Looking at a map of the once-united Sudan's oil reserves, it's almost as if nature designed them to inspire conflict. Many straddle the internal boundary drawn by departing British colonial rulers in 1956 to reflect the divide between the country's overwhelmingly Muslim, largely Arab north and the south, where most people follow Christianity or traditional beliefs and tend to identify as ethnically African.
Many of the civil war's most violent episodes played out along this line, which is criss-crossed by the migration routes of semi-nomadic pastoralists and now marks most of the border between the two autonomous states. Some contested areas also produce crude.
After secession, talks about oil centred on how much landlocked South Sudan should pay to use northern infrastructure, including pipelines and an export terminal on the Red Sea.
Oil is vital to both governments, contributing most of the money they use to pay state wages, import food and fight rebellions. Western backers of southern independence hoped petroleum would connect Juba and Khartoum in a kind of economic symbiosis - the South needs Sudan's infrastructure to export oil, while Sudan needs transit fees and other payments to make up for the income it lost when the countries split.
But the countries' reliance on oil also gave both a powerful incentive to hold out for the best deal they could get. When South Sudan raised its flag in July last year, the two were poised for a spectacular collision.
Khartoum wanted Juba to pay about $36 a barrel for a bundle of fees to pipe the oil to port; Juba countered with an offer of under $1 and said it would pay the rest directly to the international firms who produce the oil. While they haggled, South Sudan kept exporting crude on the understanding it would pay Khartoum back once a deal was struck. But as South Sudan collected over $3 billion in oil revenue, Sudan's economy cratered. The Sudanese pound halved in value, driving up the cost of imports like wheat and sugar.
Last November, Sudanese officials, faced with mounting anger over rising food prices, accused the South of delaying a deal and said Sudan would take some oil as "payment in-kind". Southern officials said Khartoum was stealing and threatened to cut off exports entirely. The two exchanged increasingly caustic accusations as Western and Chinese mediators tried to get them to negotiate.
On January 20, South Sudan's ministers gathered in the cabinet office in Juba. Petroleum minister Stephen Dhieu Dau outlined the situation: Khartoum had blocked, confiscated or diverted essentially all the country's oil exports, and there was no deal in sight. The vote to shut down the wells was unanimous.
"People were emotionally charged," said Commerce Minister Garang Diing Akuong, who ran the energy ministry before independence. "There was a debate, but a debate where people were speaking one language. It was not a debate between two ideas."
No one in the meeting cautioned against the financial brunt of the move, which erased 98 percent of the government's revenues and the source of nearly all its foreign currency almost overnight. "In the atmosphere of anger, I don't think anybody would have listened to them," Higher Education Minister Peter Nyaba said.
The shutdown happened within 10 days. One CNPC executive said southern officials pushed the oil firms to close the wells so quickly they risked congealing the heavy, sticky crude from their eastern fields and damaging the pipelines.
Officials did not consult the American, Norwegian or British governments who advise Juba on the oil sector and are among the country's biggest aid donors, diplomats said.
Nor did they ask the Chinese, who stood to lose from the shutdown. Zhang Zhisheng, counsellor at China's embassy in Juba, said he was headed home for vacation when he heard about the decision. "If they told us before, I would never have left the embassy," he said, laughing.
A BLOODY HISTORY
Ever since kerosene replaced whale blubber as a source of cheap lighting over a century ago, petroleum has brought immense wealth and influence to those who extract and sell it. At the same time, the rush to capture its value has devastated environments and distorted politics from the Russian Caucasus to the Ecuadorian rainforest and the Niger Delta.
South Sudan's northern oil regions have little to show for their petroleum wealth. The one tarmac road in Bentiu, capital of Unity State, is flanked by dirt paths and broken streetlights. Boys push wheelbarrows and women tote sacks of grain past straw-roofed huts and shops of stick and corrugated iron. Government and U.N. officials in Landcruisers zoom past. Young, jobless men sit in fly-ridden teahouses for hours, staring into space.
Instead of prosperity, oil has brought war. Soldiers with Kalashnikov rifles pace through Bentiu's market, likenesses of petroleum derricks on their shoulder patches identifying them as members of the local army unit. Shopkeepers talk of the Sudanese Antonov planes that sometimes soar overhead. "In the evening you can see them, they are just moving," Gatmai Chuol, a 35-year-old store owner, said. "What do they want? We don't know."
U.S. giant Chevron's 1978 discovery of oil in the area almost immediately kindled strife between Khartoum and southern nationalists. Southerners protested President Jafaar Nimeiri's plans to channel the oil through a new pipeline and refinery in the north.
In 1984, a few months after insurgents took up arms, they attacked a Chevron camp near Bentiu and killed three workers. Chevron shut down operations, selling their concession to a Sudanese firm in 1992. The concession changed hands several times over the next few years; China's CNPC and Malaysia's state oil firm Petronas bought shares in 1996, and Canada's Talisman entered two years later. Sweden's Lundin bought into a nearby oil block in 1997.
As those companies laid pipelines and dug wells, government troops, helicopter gunships and allied militias sacked villages and killed thousands of people, sometimes using airstrips and roads the firms had built. Human Rights Watch, the International Crisis Group and other pressure groups published long reports on the violence. The furore pushed Talisman to sell its stake to India's national oil company ONGC Videsh, and Lundin to sell out to Petronas in 2003.
At the time, the firms said they tried to make sure Khartoum did not use their facilities for its war effort and that they believed developing Sudan's economy could help the country prosper, thereby speeding the end of the war.
This means little in Bentiu. When Odwar, parliament's energy chief, confronted the oil firms last year, he was articulating what many people in the area think.
The oil companies helped the northern army, Unity state's deputy governor Michael Chiangjiek said. "They facilitated them. They built roads for them."
Many South Sudanese officials say they have put such grievances behind them, but the upheaval that followed independence shows that suspicion still runs deep.
A senior Western diplomat notes that the south fought for decades and will not be pushed around. "The South Sudanese are as tough as old boots," he said.
SOVEREIGNTY AT STAKE
A few weeks after January's shutdown, South Sudan's oil ministry announced it had expelled Liu Yingcai, head of the Chinese-led Petrodar consortium that pumped most of the country's petroleum.
Officials accused Petrodar of helping Khartoum confiscate southern crude, under-reporting the number of wells in southern fields, and other offences, all of which the company denied in a detailed public rebuttal.
"We take pride in our ethical conduct and for being transparent to our stakeholders and we will continue to do so in the future," it said in a statement. China's CNPC and Malaysia's Petronas own most of the group, which has since been renamed Dar Petroleum.
Liu was "shocked" by the order, a CNPC executive who worked in the country before secession said. Along with the shutdown, the expulsion made some in the Chinese firm wonder whether they should review their strategy in South Sudan. "The incidents were like a wake-up call," the executive said.
The order - and the confused reaction that followed - also exposed divisions among South Sudanese leaders about how best to deal with Beijing and, more broadly, how to manage a resource many former rebel fighters see as too important to fully trust to firms who once worked with Khartoum.
Plenty of southern officials still defend Juba's decision, even as others continue to deal with the fallout. "Whatever we have done was not even equivalent to what they had done to us. He should have been taken to court, actually," one ministry official said, referring to Liu.
Many argued the expulsion was part of a costly but necessary battle for primacy over oil, which accounts for 98 percent of South Sudan's income and much of its leverage with Khartoum in disputes over territory, the Nile and other issues.
"After the shutdown everybody in this country began to understand that we are not going to be taken for a ride," said Paul Adong Bith Deng, managing director at South Sudan's state oil firm, Nilepet. "I think the Chinese got that one very well."
But some bureaucrats were clearly unnerved by Liu's expulsion, which diplomats and officials said the oil minister ordered without consulting the cabinet or the president.
Information Minister Barnaba Marial Benjamin acknowledged Dau may have "overreacted" and said the foreign minister and cabinet should have been involved in the decision.
Attempts to reach Dau and Liu - who was replaced by another Chinese national after the expulsion - were unsuccessful.
Zhang, the Chinese embassy counsellor, said southern officials told him the order had been made emotionally and did not represent the government as a whole. He did not want to talk about the expulsion in detail. "If we solve the problem, it's left behind," he said.
FROM FOES TO PARTNERS
The South's efforts to mend ties with China after the shutdown and expulsion - and Beijing's response - show how the two have built an ever more practical relationship since the 2005 peace deal.
Early on, Beijing more or less ignored the former rebels. But in 2007 President Salva Kiir, then leader of the autonomous south and first vice president of Sudan, went to Beijing and laid out a map showing that most of Sudan's oil was in the south.
"Khartoum was telling them it was in the north, which was not true," said Benjamin, who was on the trip. Kiir also pointed out a clause in the peace deal that allowed South Sudan to vote for independence in 2011.
Beijing understood the implications. Over the next several years, China opened a consulate in Juba and the CNPC funded projects like a computer lab for the capital's university. South Sudan sent finance, infrastructure and other officials to Beijing. A Chinese company made the stage from which Kiir declared independence.
A few months after the oil shutdown this year, the sudden loss of income forced Juba to soften their stance towards China. Inflation was close to 80 percent and the South Sudanese pound had lost a third of its value. Plans to build schools, power lines and other projects had been put on hold.
Diplomats and analysts say southern officials may have been naive about how much money Western governments would lend them after the shutdown. Southern officials may also have expected more support for plans to build a pipeline through Kenya, an idea southern nationalists have pushed for years but which will be hard to build because of declining oil reserves, rough terrain and unrest. The International Monetary Fund says South Sudan's oil output will halve within a decade without new discoveries.
With no extra Western help, Juba turned to China. In April this year, Kiir visited Beijing to seek loans.
At least publicly, Chinese leaders have remained pragmatic about the turmoil in South Sudan's first year. China's special envoy to Africa, Zhong Jianhua, has visited South Sudan three times since he was appointed this year. He said South Sudan's decision to shut down its oil wells was born both of an urge to flex its newfound sovereignty and of inexperience.
"I can only guess, but when you are young and newly established and suddenly discover unlimited power in your hands, it's hard to resist using it," Zhong said.
"They have now dealt with the drawbacks of the decision and paid the price. Through this process they will mature."
"WE SAY 'HARD LUCK'"
The question for Odwar, head of parliament's energy committee, is what maturity will mean - what sort of state will the new nation become? Oil sits at the heart of that issue.
One path could see South Sudan come to resemble its northern neighbour, a one-party state with highly centralised authority, dependent on a single resource and willing to tolerate a huge gap between rich and poor. Another could see it follow countries like Ghana and Kenya where governance and civil society has grown in fits and starts, despite corruption.
So far, powerful forces have pushed it in the first direction. In June, Kiir said southern officials had stolen $4 billion of public money - roughly a third of the south's petroleum revenue between the peace deal and independence.
As the patronage networks sustained by this corruption calcify, the theft will be harder to stop. And some South Sudanese politicians, warning of northern espionage, have resisted the kind of transparency it would take to quash it.
The country's rulers are also struggling to crush several militias that have taken up arms in remote regions, and may be grateful to China for keeping out of domestic politics as they wrangle to maintain their dominance.
Odwar said companies in South Sudan tended to go straight to top officials with plans, often bypassing the law, an arrangement many politicians and businessmen seemed comfortable with. "That is exactly what has been happening in Khartoum, and this is what people want to adapt here," he said.
Pressure from Western donors and from the country's nascent civil society could reverse this trend. Many of South Sudan's roughly 8 million people are aware oil makes their country one of the region's wealthiest per person on paper but that few have the income to show for it.
A host of southern technocrats have returned from Sudan to work in the new country's oil industry, many versed in global standards and inclined to publish figures like oil output and revenue, which some politicians consider too important to reveal.
A law passed in July on how to manage the industry has won praise from diplomats and industry experts, but for now it is unclear how zealously officials will carry it out - particularly clauses that could trigger disputes with oil companies.
One article calls for an "environmental and social" audit of the oil firms' activities that would let officials demand compensation if the firms are found to have done wrong.
Companies complained about the line, Odwar said, but parliament left it in. "We say, 'hard luck'. I think as a new nation we have a right to chart our path forward."
(Reported and written by Alex Dziadosz; With reporting by Michael Martina and Chen Aizhu in Bejing, Hereward Holland in Juba, and Dmitry Zhdannikov in London; Edited by Simon Robinson)
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