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Special Report: Southern Sudan: oil boom to bust-up?

TEREKEKA, Sudan (Reuters) - With southern Sudan stumbling toward independence next year, the Chinese oil workers in Africa’s biggest country are bracing for trouble. For southern villagers like Maria Jande, trouble is already here.

A woman stands outside her house with a Southern Sudanese flag in Soba Araadi village in capital Khartoum in this January 7, 2010 file photo. REUTERS/Mohamed Nureldin Abdallah/Files

Dinka tribesmen briefly abducted Jande, her family and more than a dozen other women and children in a raid last month that destroyed crops and food stores and killed five men from her Mundari tribe.

It’s a far cry from the hopes that sprung up in southern Sudan five years ago, when a peace deal with the Arab-dominated government in Khartoum in Sudan’s north promised to end a generation of conflict.

Elections this month and a secession referendum by January were meant to secure a stable future for the south after 22 years of civil war and the loss of two million lives.

Instead, age-old rivalries between the south’s dozens of different tribes are resurfacing.

“If we stay here, we’ll die of hunger. There’s no food,” Jande said, standing beside a pot of rancid goat meat cooking beneath a mango tree in Terekeka, a tiny town 100 km (60 miles) north of southern Sudan’s capital, Juba.

As she spoke, her five-year-old twins hid in the folds of her tattered brown skirt, which would be scant protection from the annual rains and malaria-carrying mosquitos due in force within days.

A host of foreign governments including the United States, Kenya, Uganda and Britain backed Sudan’s 2005 Comprehensive Peace Agreement (CPA) which gave the south autonomy, a 50-50 share of oil revenues from wells within its borders and a route to independence via referendum by January 2011.

Mutual distrust and vitriol between Khartoum and Juba in the run-up to the April 11-13 elections mean the plebiscite is not assured: if it does proceed the south is almost sure to split and declare itself an independent state within six months.

So the deeply impoverished region’s outlook is far from clear.

In the worst-case scenario, the hostility between north and south that has riven Sudan since before its independence from Britain in 1956 will boil over once again, rekindling a civil war that would destabilize east Africa and halt oil output from the sub-Saharan region’s third-biggest producer.

Or the south could negotiate -- as the United States is hoping -- a “civil divorce, not a civil war” with Khartoum, securing billions of dollars in oil revenues that it can use to drag itself out of its war-induced time-warp.

Under this view, a flood of foreign investment should ensue, developing hoped-for oil reserves across the region and giving birth to state-of-the-art farms and fisheries fed by the waters of the upper Nile and its tributaries.

In their more fanciful moments, southern ministers even talk of droves of foreign tourists flying in to witness wild animal migrations said to rival those in Kenya’s Masai Mara.


History suggests optimists in southern Sudan, a region nearly as big as Texas and with a population estimated at anywhere between 8 and 13 million people, are more likely to be wrong than right. A return to war is not out of the question.

In the five years since the peace accord, the bulk of oil money accruing to the south -- more than $2 billion a year -- has gone on pay for civil servants and the Sudan People’s Liberation Army (SPLA), the southern rebel movement that has morphed into its government.

But the SPLA, whose soldiers rescued Jande and her family from her Dinka captors, has also spent at least some of the cash re-arming, according to the Small Arms Survey, a global arms trade watchdog.

Citing satellite images and reports of arms shipments from Ukraine via Kenya, the Survey estimates the south bought more than 100 Soviet-era battle tanks, anti-aircraft guns, rocket launchers and 10,000 AK-47 assault rifles from 2007 to 2009.

Not only do such flows break an agreed weapons embargo, they also ensure that any conflict would have implications beyond southern Sudan’s borders.

“The southern Sudanese arms acquisitions are rooted in civil war-era political alliances, with regional allies, including Ethiopia and Kenya, acting as conduits for arms supplies from their own stocks or acquired on the international market,” the Survey said.

Alongside reported arms purchases by the north from China, Iran and Belarus, this has set nerves jangling at the Chinese, Indian and Malaysian oil firms running the south’s oil fields, which all lie close to the unofficial border.

In the event of conflict, they would have little option but to halt production from a country that was China’s fourth or fifth largest supplier of crude oil for much of 2009.

State-owned China National Petroleum Corporation (CNPC), the largest foreign player with a roughly 40 percent stake in Sudan’s oil industry, is “hoping for the best but preparing for the worst,” according to an industry source familiar with Chinese operations in Sudan.

“An independence vote for the south is likely to lead to clashes between the north and south, a worst-case scenario that we do not wish to see,” said the source, speaking on condition of anonymity.

CNPC would have no option but to “halt production and evacuate our 2,000 people in Khartoum and the oil-fields,” the source added.

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However, analysts say neither north nor south have much to gain from a resumption of hostilities: the disruption of oil exports would cut a cash lifeline that both governments need, now and in the foreseeable future.

“As much as oil has been a major source of conflict in the past, it also potentially represents the single greatest disincentive to renewed conflict if the parties can agree on wealth-sharing,” said Zachary Vertin, a Sudan analyst for the International Crisis Group in Nairobi.

Southern oil accounts for the lion’s share of Sudan’s total output, although the precise proportion depends on the final demarcation of a north-south border in areas such as Abyei, which was too sensitive to be included in the 2005 pact.

However, more importantly for the south, all its oil goes by pipeline through the north to Port Sudan on the Red Sea. This means that if it wants to, Khartoum can cut off a revenue stream that accounts for 98 percent of Juba’s budget.

In that event SPLA soldiers would quickly find themselves without pay, suggesting the south’s generals would struggle to mobilize large numbers of troops.

For the north, the prospect of disrupted or no production is almost as alarming, given that oil currently accounts for 45 percent of Sudan’s national budget.

As southern Presidential Affairs Minister Luka Biong Deng put it, both sides know what they stand to lose.

“Peace is our common objective because nobody will benefit from going back to war or seeing either party collapsing,” he told Reuters.

The United States has broadly backed the south, mainly due to its dislike for Sudanese President Omar Hassan al-Bashir, wanted by the International Criminal Court for crimes against humanity allegedly committed in the western region of Darfur.

But analysts say Washington will be loathe to take sides in a fiendishly complex conflict in the heart of Africa, and is more likely to focus on avoiding a new north-south war and keeping an independent south in one piece and on its feet.

“I would guess that the preference for the U.S. government all along is the unity of Sudan,” former U.S. ambassador to Ethiopia David Shinn told Reuters.

“But you have to make plans for a divided Sudan -- and then just hope that it doesn’t divide into more than two parts.”


Despite the lessons of history, foreign investors and business interests from the world’s second largest brewer to enterprising Ugandan and Kenyan taxi-drivers are betting on a bright future.

Juba, a chaotic mish-mash of prefabricated buildings and wooden huts on the banks of the Nile, is reputed to be one of the world’s fastest growing cities, although nobody has any real idea of the pace of its expansion.

A population of 300,000, three times its total five years ago, is the most widely quoted figure.

More tangible evidence comes in the convoys of Kenyan trucks battling along the south’s unpaved roads and Ugandan barges floating down the Nile with everything from fuel to cement to bottles of Johnny Walker whisky destined for Juba’s only supermarket with a price tag of nearly $300.

The arduous route to Juba, and the presence of thousands of well-paid foreign aid workers and southern civil servants reaping the benefits of five years of oil wealth, make it one of the most expensive corners of Africa.

A hotel “room” -- more accurately a converted shipping container -- is $130 a night, while a bottle of locally brewed beer costs $1.50 in even the most-run down roadside shack.

But all that means rich pickings for those hardy enough to take the plunge.

“Earning $100 in Kenya is difficult but here it’s easy -- just one day’s work,” said Amos Njay, one of many Kenyan taxi drivers plying Juba’s potholed streets. “But you have to be careful. There are no rules here. It’s the law of the jungle.”

Kenya Commercial Bank, Kenya’s largest bank by assets, and rival Equity Bank have both opened Juba branches. Ethiopian Commercial Bank is also in on the act, alongside more than two dozen money changers catering to foreign workers sending cash back to Nairobi, Kampala and Addis Ababa.

On Juba’s outskirts, global drinks giant SABMiller has built a $50 million brewery to serve the least-tapped market in east Africa.

With the plant’s first birthday approaching, its bosses could not be happier.

Every week it produces nearly a million bottles of soft drinks and White Bull beer -- named after the south’s famous long-horned cattle -- and they say it is on track to make a profit within 18 months of starting commercial operations.

“Our market is the average southern Sudanese citizen who is battling to make a living and who goes to the local market for a beer in the evening,” said managing director Ian Alsworth-Elvey, a South African who’s been in the industry for 21 years.

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“And it’s our belief that that market will grow.”

Businessmen and political leaders in Uganda and Kenya also need the Juba boom to continue to provide an alternative source of growth for their own economies.

According to Uganda’s central bank, informal trade with southern Sudan amounts to $170 million a month, around 60 percent of all exports, lending support to the Ugandan shilling.

Similarly, India’s Sanghi Cement and Kenya’s Cemtech are planning a $105 million cement plant in northwest Kenya solely with a view to supplying southern Sudan with concrete.

World Bank and government officials also talk of keen investment interest from Gulf states, particularly to tap the fertile south’s huge farming potential.

Catering for their needs are the trim offices of the Southern Sudan Investment Agency in Juba, touted as a “one-stop shop” for foreign investors, even though it has yet to get round to hanging the sign up above its door.


However, even in their most positive moments, Juba’s political leaders and its band of hardy foreign diplomats admit southern Sudan faces a long and bumpy road toward becoming an even vaguely successful independent nation.

By many yardsticks, it is the least-developed place on earth: 70 percent of its people have no access to any form of healthcare, one in five women die in childbirth and one in five children fail to make it to their fifth birthday.

The experience of the World Bank in administering a $526 million trust fund on behalf of international donors is testament to the difficulties of doing business in one of the roughest corners of an infamously rough continent.

By the time its mandate expires in January with the scheduled referendum, the Bank will have dispersed only two-thirds of its promised cash -- and yet it still trumpets this as an achievement.

Besides helping build a government from scratch out of a rebel guerrilla movement, the Bank has spent much of its time beating down tenders from external contractors charging sky-high premiums to work in a war-scarred, landlocked country.

“Don’t underestimate the costs of putting investments into southern Sudan,” Laurence Clarke, the Bank’s representative, told Reuters in its compound in Juba’s ‘government quarter’, a collection of prefab or hastily erected low-rise office blocks.

“We’ve had our full share of tenders for schools or buildings coming in 200-300 percent higher than the costs of doing business in neighboring countries like Kenya or Uganda,” he said.

“In Liberia, I used to see 150 percent, 200 percent higher, and I would think, ‘Jeez!,’ but southern Sudan is even bigger. It’s the geography, but it’s also the risk premium of coming out of war. Is the rule of law fully established? Is the security situation comfortable enough?”

Furthermore, the south is also likely to have to absorb some of the north’s mountain of external debt, racked up over decades of war and international isolation and estimated by the Central Bank in Khartoum at $30 billion, or equivalent to half the country’s annual output.

Until that can be rescheduled -- in all likelihood two years -- foreign private or multilateral investors are likely to remain cautious.

French oil giant Total, for instance, has had an exploration concession for years for huge tracts of the lower portions of the south but has so far done nothing.

Adding to the uncertainty is a very ambitious political timetable.

Even before the referendum, north and south will have to agree on borders that were too contentious five years ago to address in full, and decide on the citizenship and rights of the hundreds of thousands of southerners living in the north.

If its people give the green light for secession, Juba will also have to negotiate an oil revenue deal with Khartoum, decide what to do with its currency, the Sudanese pound; and renegotiate a host of international treaties.

To the chagrin of southern leaders, some foreign diplomats are starting to consider the possibility of deferring any independence declaration to make time to prepare for statehood.


However, it is the south’s patchwork of feuding tribes that may pose the biggest threat to its future as a nation state.

Last month’s Terekeka raid by the Dinka, the south’s dominant ethnic grouping, could have happened at any time in the last 500 years given the region’s myriad tribes and a tradition of sparring over cattle, land and water.

But warriors now use automatic rifles rather than spears.

Instead of easing as independence approaches, the violence seems to be increasing, with analysts saying as many as 2,500 people died in 2009 in fighting between cattle herders and pastoralists of different ethnic groups.

The Norwegian Refugee Council, an aid agency, estimates that 390,000 people fled their homes last year, compared with 187,000 in 2008.

The further south such raids occur, the harder it is for Juba to blame a trouble-making government in Khartoum for stoking tensions between the groups in the south’s 10 states.

Yet until the government puts the lid on the raids and fighting, southerners will have little incentive to plant crops or start tiny businesses, leaving the region forever on the brink of food shortage and with stunted growth prospects.

“When the Juba government is talking about security, their number one concern is the relationship with the north,” said Michael Elmquist, head of the Joint Donor Team in Juba. “But officials from the states say internal tribal fighting is their biggest concern.”

A disarmament program designed to limit the violence by cutting the number of weapons in circulation may even be having the opposite effect, with disarmed tribes such as the Mundari becoming soft targets for their fully armed neighbors.

“We just ran. We had no weapons because of the disarmament,” said cattle-herder Joseph Mody, in Terekeka’s spartan health center for treatment to a bullet wound to his left elbow.

Next to him, his friend James Wani, shot through the lung with a rifle round, sat in silence: talking was still too painful.

Suspicions -- strenuously denied by the Juba government -- that disarmament is being rolled out in favor of the Dinka represent a major threat to a shaky unity built mainly on fear and loathing of Khartoum.

With that threat of Arab domination potentially removed by secession, the risk increases that the south will unravel along tribal lines.

“We’re trying to separate ourselves from the Arabs because of marginalization,” said Clement Maring Samuel, a Mundari SPLA pastor now serving as Terekeka’s Commissioner..

“But if the Dinka don’t behave, we will separate again.”

additional reporting by Chen Aizhu in Beijing and Andrew Quinn in Washington; editing by Sara Ledwith