41.A Possible Kenyan Alternative for Southern Sudanese Oil

A Possible Kenyan Alternative for Southern Sudanese Oil September 14, 2010 | 0020 GMT ISAM AL-HAJ/AFP/Getty Images A major Sudanese oil refinery north of Khartoum Summary Kenya is set to take bids for construction of a new deepwater port in Lamu, and it has simultaneously raised the possibility of a pipeline to this port from Southern Sudan’s lucrative oilfields. In addition to the economic benefits for Kenya, Southern Sudan could see the pipeline as economic freedom from the north, especially in the context of an upcoming referendum for Southern Sudanese independence. Analysis The Kenyan Ministry of Transport announced Sept. 13 that international construction companies interested in participating in the development of a new deepwater port in the northeastern town of Lamu have until Oct. 15 to submit a bid. Nairobi’s long-term vision is to combine the envisaged Lamu port with a new transport network that will reach the capitals of Ethiopia and the currently semi-autonomous region of Southern Sudan, thereby integrating these neighboring economies into Kenya’s trade sector. (click here to enlarge image) The real geopolitical significance of the Lamu Port-Southern Sudan-Ethiopia Transport Corridor (LAPSSET) project, however, lies in the effect it could have upon Southern Sudan’s potential to exist as a viable independent state. Southern Sudan, which is responsible for more than 80 percent of Sudan’s estimated 480,000 barrels per day (bpd) of crude oil production, is scheduled to hold a referendum in January 2011 on whether to stay in union with the north. If the government in Khartoum allows the referendum to happen, it is widely expected that voters will opt for Southern Sudanese independence. This will not lead to the creation of a viable Southern Sudanese state overnight, however, because the south cannot simply begin making money from its oil industry the day after becoming independent. The only export route by which the oil can be shipped goes through the north, exiting at the Red Sea town of Port Sudan, thereby giving Khartoum the ability to choke off Southern Sudan’s crude exports at any time. The fundamental question that has always plagued advocates of Southern Sudanese independence, then, has been how the state could ever function as a viable entity of its own. As it stands, the Southern Sudanese government in Juba gets 98 percent of its revenue from an oil-revenue-sharing agreement formed in 2005, when the signing of the Comprehensive Peace Agreement (CPA) ended the second Sudanese civil war. The CPA affords Juba just under half of the proceeds from oil pumped out of its territory, but it is set to expire in July 2011, six months after the referendum on independence. Should the south vote for separation, Khartoum will not sit back and allow Juba to simply take all the oil money with it. A vote for secession could therefore either lead to war or to a revenue-sharing arrangement very similar to the one that exists under the CPA. An independent Juba would prefer the latter, of course, but its long-term interests would be best served with a third option: a pipeline from Southern Sudan to Kenya. The LAPSSET project creates this possibility. It envisions the construction of a deepwater port in Manda Bay, just west of Pate Island in the Lamu Archipelago, which will then be connected to a road and rail network that, when completed, will reach Juba and the Ethiopian capital of Addis Ababa. It also includes plans for a potential accompanying pipeline, with some plans indicating that a crude oil refinery will also be built in the vicinity. The Kenyan government’s Sept. 13 announcement deals with only the first phase of the project, however, which focuses specifically on developing the port; the rest of the project is still years from being launched. While the total estimated cost of this first phase is not yet known — a Japanese consulting firm is currently finishing a feasibility study it was contracted to carry out last April — rough estimates for the overall LAPSSET project peg it at around $16 billion with a window of 3-5 years before completion. This is an enormous sum, and Kenya is clearly looking for help from foreign investors in financing the project. So far, the two countries that have shown the most interest have been China and Japan (though a South Korean company has expressed interest as well). These parties are interested in the pipeline especially. Earlier this year, Toyota Tsusho Corp. (TTC), the trading affiliate of Toyota Motor Corp., proposed building a $1.5 billion, 450,000 bpd pipeline to transport crude oil from Southern Sudan to a planned port on Lamu Island. TTC agreed to help construct a port, an export terminal equipped with a storage tank and an oil jetty, and expressed interest in possible participation in the rail project as well. TTC also said that a joint venture would be possible, mentioning the possibility of Chinese involvement. The Chinese, meanwhile, have also expressed interest in helping Nairobi finance the project, after Chinese President Hu Jintao reportedly offered his Kenyan counterpart, Mwai Kibaki, a 1.2 trillion shilling grant (just under $15 billion) in May. China is believed to import roughly 64 percent of Sudan’s crude (neither Sudanese nor Chinese production figures, which contradict one another, are considered particularly reliable). State-owned China National Petroleum Corporation is the largest stakeholder in Sudan’s two biggest oil-producing consortiums, and the Chinese built the pipeline connecting Southern Sudanese oil fields to Port Sudan — ironically, the same pipeline Juba is hoping to get around by linking up with Lamu. Japan, meanwhile, is not involved directly in the Sudanese oil industry like China but is nonetheless a large consumer of Sudanese crude. Both countries have an interest in ensuring the unimpeded flow of oil from the country, and, like many other countries, appear to be hedging their Sudanese policies to account for the possibility that they may need good relations with the south, in preparation for any scenarios that may follow the referendum. Though Kenya, as a coastal trade center, is already one of East Africa’s leading economies, it wants to improve its position through the development of a second deepwater port. Kenya’s Mombasa port is the leading deepwater port in East Africa, but it suffers from chronic delays due to overcrowding, it is also shallower than Lamu and it is unable to accommodate post-Panamax vessels (which Lamu would be able to handle). Having only one major port at Mombasa, which is 320 km (200 miles) by road from Lamu, also prevents Kenya from being able to effectively integrate the economies of the region that abut northern Kenya, as there is no effective road or rail network that can transport goods between these regions. (Ethiopia, for example, is largely reliant on the port of Djibouti for its outlet to the world, and Addis Ababa also wants to diversify.) A deepwater port at Lamu would also be beneficial for the trafficking of military supplies from the United States, which holds regular military exercises with the Kenyans there. It is strategically located near Somalia but safe from the dangers of piracy. Despite all of the benefits the LAPSSET project promises to bring, its completion may also create a separate problem for Khartoum. So long as Southern Sudan depends on the north to be able to export its crude deposits, it holds significant leverage over Juba. The long-term prospect of an alternative pipeline weakens the Sudanese government’s hand. Then again, Juba, due to its geography, can never rest easy when it comes to Khartoum. Even if a new pipeline were to be built, it would have to maintain good relations with the north to prevent Khartoum from fomenting instability within its territory.