One side benefit of East Africa’s nascent oil and gas boom is that it opens the prospect for South Sudan to break its dependence on Sudan for exporting its oil, which accounts for more than 90% of government revenue — and with it change China’s role in the region.
To exploit its newfound if scarcely developed energy resources — oil in the Rift Valley, massive natural gas fields in Tanzania and Mozambique — East Africa needs to build the pipelines, railways, roads and refineries to get the oil and gas to its ports. From there, it will be shipped to the energy-hungry Asian countries on the other side of the Indian Ocean.
The presidents of Uganda, Kenya and Rwanda, meeting on the sidelines of an East Africa trading bloc summit in Kampala earlier this week, agreed to go ahead with building two pipelines. One will extend to Uganda and Rwanda an existing Kenyan pipeline from Mombassa. The other will run from the Kenyan port of Lamu to South Sudan, with a spur to Ethiopia.
No details of timing or costs for either pipeline were released, but they would inevitably be multi-year projects running to $10 billion-$20 billion at least. The South Sudan pipeline would form part of the eastern leg of envisioned grand transcontinental land bridge between Kenya and Cameroon on Africa’s west coast intended to open up Kenya’s less developed north, South Sudan and Ethiopia.
When landlocked South Sudan became independent from Sudan in 2011 after four decades of civil war, it took 75% of the oil reserves of Sudan. Sudan retained the (Chinese-built) pipeline infrastructure, refineries and export terminal at Port Sudan on the Red Sea. Relations between Khartoum and Juba have remained fractious. Each accuses the other of supporting insurgents operating across their shared border.
South Sudan’s use of the pipeline north has repeatedly been suspended by Sudan, because of the security issues and because of disputes over transmission charges Sudan requires South Sudan to pay. Oil is a ready hostage in the countries’ antagonistic relationship.
The new pipeline south, if and when it is built, could change not just the logistics of oil distribution, but also the region’s geopolitics. Not only did Chinese state-owned companies build and now operate Sudan’s oil-export infrastructure, China takes two-thirds of the oil collectively produced by Sudan and South Sudan. Malaysia, Japan and India buy most of the rest.
Well aware that three quarters of its two thirds — i.e., half — of the oil comes from South Sudan (at least when the pipeline is open), China has painstakingly sought to balance the attention it pays to both countries since their split. Beijing, however, never offered to build a second pipeline that bypassed Sudan, preferring to maximize the return on the investments it has already made, and choosing not to weaken Khartoum’s leverage over Juba. Beijing has reportedly even detached People’s Liberation Army troops to Sudan to guard the infrastructure it has built.
Meanwhile, China’s regional rival, Japan, is starting to be a bigger presence in South Sudan. The low-sulphur fuel oil South Sudan produces is particularly suitable for use in Japan’s oil-fired generators, and South Sudan is now Japan’s second largest supplier.
Unlike China, Malaysia and India, Japan does not have much of a stake in Sudan. Crucially, it is not a shareholder in the Greater Nile Petroleum Operating Co., which runs the Sudanese pipeline. The company’s shareholders are China National Petroleum Corp (40%), Malaysia’s Petronas (30%) India’s ONGC (25%) and Sudan’s state oil company, Sudapet (5%). That gives Japan a freer hand. Though Kenya is to take responsibility for building the pipeline from Lamu to South Sudan, Toyota Tsusho, a division of Japan’s Toyota Corp., will reportedly do the construction of the estimated $4 billion project.
Earlier this month, at a Japan-Africa development conference in Yokohama, Japan’s prime minister Shinzo Abe pledged $14 billion in official development aid to Africa and $6.5 billion for infrastructure development. While that would be for the continent as a whole, Japan is already financing a bridge over the Nile in Juba. Part of its new aid package is earmarked to insure Japanese companies taking on risky projects in Africa.
The building of any new pipeline through South Sudan is unlikely to proceed peacefully. It is unclear at this point what the practical consequences of Sudan’s loss of much of its economic leverage over its southern neighbor would be. Its government-friendly media has been testy, to say the least, in its reaction to the proposed new pipeline.
It is also unclear how China would react. While it has a strong political and economic stake in Sudan, it is also getting involved in energy exploration in Uganda and Kenya. The Great Rift Valley is now thought to contain 10 billion barrels of oil — half as much again as Sudan and South Sudan’s known reserves combined. China is also buying natural gas assets in Mozambique, which, with Tanzania, may hold as large gas reserves as Iraq.
Such large reserves are not yet proven and production in Uganda and Kenya is in its nascent stages, but East Africa is shaping up as a future critical source of supply to Asian markets over the coming decades. It will need huge amounts of infrastructure. Its ability to develop it is one of the critical factors in whether it will live up to the high hopes being held for it. For China’s part, it would not be out of character ultimately to choose to act pragmatically in its national self-interest. It will lay pipe where it can and where it needs it.