Key takeaways:
China and the UAE are increasing their involvement in South Sudan’s energy sector, with China building major new oil refinery infrastructure and the UAE providing a $13 billion oil-backed loan, potentially reshaping regional energy and security dynamics.
The exit of Petronas and the nationalisation of its assets by Nilepet signal escalating risks and financial instability, deterring Western investment.
South Sudan’s reliance on Sudanese pipelines, now controlled by warring factions, poses significant risks to its oil exports and continues to threaten energy supply disruptions to European markets.
US influence in South Sudan is waning as the country pivots towards China and the UAE, undermining efforts towards democratic development and increasing the likelihood of political instability and the entrenchment of authoritarian rule in South Sudan.
The instability and geopolitical rivalry in the region will likely contribute to further non-Western military presence on NATO and the EU’s southern flank.
Turmoil in South Sudan’s Energy Sector
Following the early August withdrawal of Malaysian oil giant Petronas from South Sudan, the nationalisation of its local assets, and a controversial $13 billion oil-backed loan from the UAE, Chinese construction firm Sokec signed an agreement with South Sudan’s state-owned oil company Nilepet on 27 August to build a major oil refinery and storage facility in South Sudan’s Tharjiath region.
These developments are set to significantly impact regional and international energy and security dynamics, and come after a significant supply shock in February 2024 when one of South Sudan's two main pipelines, responsible for 70% of its oil revenue, was ruptured in the territory of war-torn Sudan. By July 2024, production had plummeted from over 150,000 barrels per day to just 40,000, slashing South Sudan’s national income by almost 70% and exposing its severely precarious economic and political position.
The increasingly difficult operating environment of South Sudan has put immense pressure on foreign firms. Citing escalating risks and an increasingly difficult regulatory environment since 2022 already, Petronas sought to make an exit from South Sudan with a $1.2 billion sale agreement with London-listed Savannah Energy for the former’s South Sudan business. However, the deal stalled after Savannah Energy sought revised terms for the sale and on 20 August, Nilepet made the surprise declaration that it would be nationalising Petronas’ assets. Nilepet’s seizure of these assets, however, has come across as expedient given its severe financial distress. Little more than a week after the declaration, Nilepet announced on 29 August that it could not pay its employees’ August salaries.
Nilepet’s actions have brought into question South Sudan’s openness to foreign investment, and the company’s financial woes reflect the broader financial crisis within the South Sudanese government, which has also failed to pay most of its civil servants for months.
US Role
The US, having no major operations or economic ties with South Sudan, has mostly focused on humanitarian aid and democratic development support and has not managed to develop South Sudan’s local economy or move it away from authoritarianism. Moreover, relations between the US and South Sudan are also set to deteriorate further after the US announced visa restrictions on senior South Sudan government members on 30 August for taxes being raised on humanitarian aid. The waning influence of the US and increasing fiscal instability and political uncertainty thus now act as a major deterrence to Western investors. However, China and the UAE, with their higher risk tolerance, are poised to capitalise on the situation, potentially reshaping regional and international energy dynamics while undermining US democratic support for South Sudan.
South Sudan’s Regional and International Dependencies
Since South Sudan’s independence in 2011, President Salva Kiir has managed to stave off collapse by using oil revenue to placate the country’s factitious elites, despite limited upstream investment in its oil sector. However, this link between political stability and oil production is deeply precarious in this case. South Sudan relies on two major pipelines that transit crude through Sudan. At a transit fee of $23 per barrel, these pipelines converge in Khartoum before a single pipeline carries the oil to Port Sudan for export. With Sudan embroiled in civil war since April 2023, these critical points are now controlled by opposing factions: the Sudanese Armed Forces (SAF) in Port Sudan and the Rapid Support Forces (RSF) in Khartoum. While South Sudan is forced to maintain diplomatic ties with both factions, this dependence has led to little of its oil revenue returning to its economy. On top of the immense transit fee, both SAF and RSF are understood to siphon oil for black market sales. In 2022, South Sudan estimated 170,000 barrels per day but earned revenue from only 50,000 barrels per day—roughly 30%—with much of that going to appease elites before any funds are allocated to national needs.
A potential solution to South Sudan’s dependence on Sudan is a proposed alternate pipeline through Ethiopia to the Port of Djibouti. Given Ethiopia’s stability and positive economic outlook, as KSG assessed earlier in August, this pivot could be advantageous. However, terms with Djibouti still need to be negotiated, and while political commitments have been made, negotiations have not moved further than a planned highway project connecting South Sudan and Ethiopia.
Investment and Financing from China and the UAE
Although most of South Sudan’s oil production is sold as crude, mostly to China and Italy, the agreement between Sokec and Nilepet to build a major new refinery and storage facility is significant in several ways. While China is helping capacitate South Sudan to further service its internal demand for petroleum products to some extent, it also implies Chinese diversification of energy sources and reduced vulnerability to supply shocks such as the current oil blockade in Libya. However, given the financial woes of Nilepet, Chinese operators and contractors will remain necessary for both maintenance and operations.
Alongside Chinese expansion, the $13 billion loan from the UAE, roughly equalling the GDP of South Sudan, will tie up much of its future oil production for short-term financing. While there is much public uncertainty about the terms of the loan, the agreement will see South Sudan receive cash in exchange for crude oil delivered at a $10 discount to benchmark prices. The expectation is that 70% of the funds will be utilised for infrastructure investment, and 30% toward South Sudan’s working and operating capital. While there is doubt over how effectively these funds will be used for development purposes, a major political problem lies with the financial and military support that the UAE has lent to the RSF in Sudan, which has exacerbated its civil war.
Looking Forward:
KSG assesses that Sokec’s building of a major new refinery in South Sudan reflects China’s strategy to develop a broad economic dependence in the country. This is achieved not just by acting as a major buyer of South Sudan’s hydrocarbons, but also by gaining from the infrastructure used to extract and transport these products. KSG expects that China is also looking to develop the local economy in South Sudan steadily over the long term to develop an export market for itself. Moreover, the dramatic exit of Petronas and the failed deal with Savannah Energy will likely also stand as a further deterrence for Western investment and thus further opportunity for Chinese entrenchment.
The civil war in Sudan and the threat it poses to South Sudan’s oil production and export will mean that South Sudan remains an unreliable source of crude import to Europe and will not be an effective alternative to the supply cut from the current oil blockade in Libya. This puts roughly 150,000 barrels per day supply at risk on top of the potential Libyan supply cut of just over 1,000,000 barrels per day. Italy is thus likely to bear the brunt of the energy instability in both Libya and South Sudan. Moreover, the threat to the existing infrastructure moving South Sudan’s crude remains high, and the potential for another crippling rupture cannot be ruled out. This may further pressurise Italy to purchase relabeled Russian oil from Turkey which, given upward pressure on benchmark prices, may help fuel the Russian war chest further.
KSG assesses that the $13 billion oil-backed loan from the UAE will not be used effectively to develop the South Sudan local economy as funding from an institution like the IMF would. Although KSG expects that Salva Kiir will use these funds to pay government salaries and create the illusion of progress, local elites in South Sudan will likely pressurise the Kiir regime for portions of these funds alongside the expected general mismanagement and corruption. This means that South Sudan will likely not be able to fulfil its debt obligations to the UAE in the long term. Moreover, given the current transit fees and siphoning of South Sudan’s crude, the country will only be impoverished further by the required oil deliveries at $10 below benchmark prices.
KSG furthermore expects that the UAE loan will be an additional source of instability in the civil war in Sudan and South Sudan’s diplomatic relations with the SAF and RSF. Although the SAF and RSF are also dependent on South Sudan’s oil flow, a blockade like that seen in Libya cannot be ruled out if the SAF sees the loan as South Sudan moving closer to the UAE and, by extension, shifting the power balance to the RSF. This positions the UAE as a key actor in the continuation of the Sudanese civil war.
KSG assesses that while South Sudan will still look to gain as much humanitarian aid from the US as it can, efforts toward democratic development are likely to fail. Even if South Sudan holds elections in December 2024, it is highly unlikely to be a free and fair election. Salva Kiir has placed himself at the center of the country’s patronage network, and any movement toward electoral representation will not likely be substantive. There is little incentive for South Sudan to move closer to the US or accept its terms for political development, and US influence in South Sudan is set to be undermined further as it pivots to China and the UAE.
The instability and geopolitical rivalry in the region will likely contribute to further non-Western military presence on NATO and the EU’s southern flank. Since the UAE is already providing military support to the RSF in Khartoum, there is a growing chance of its troops turning attention to South Sudan. Given the oil-backed loan to South Sudan, the UAE may look to “secure” its oil interests by moving military assets south and thus expand its military foothold in the region. Such a move, exposing weakness in the Kiir regime, may well trigger a civil war in South Sudan as local elites look to seize power. Although Beijing has shown little appetite for military deployment in Africa, such a scenario will only raise its incentive to do so, bringing it into closer proximity with US military presence in Kenya and the Horn of Africa.
Lastly, KSG assesses that even without direct conflict between warring factions in South Sudan, food insecurity is likely to drive migration both north and eastward. Toward the north, flourishing human smuggling trade in Libya may incentivise further migration over the Mediterranean. To the east, migration will likely impact the stability of US-backed Ethiopia’s western region, which is where most of its coffee production and gold extraction takes place.