China, Sudan, and a dose of irony

By Willis Sparks

Western officials (and more than a few Western celebrities) have criticized China in recent years for its protection of Sudan's government. They've charged Omar al-Bashir's regime in Khartoum with support for ethnically motivated militia attacks on civilians in the country's Darfur region -- and China's government with complicity. Bashir, the world's only fugitive head of state, was indicted by the International Criminal Court in 2008 for Darfur-related crimes against humanity. Beijing uses its veto power to block international efforts to supply UN peacekeepers for Darfur, critics say, to protect its oil interests in the country.

It's ironic then that China's energy needs are now helping forestall a broader (and perhaps bloodier) confrontation in Sudan.

Last July, Sudan became two countries. The mostly Muslim North and mainly Christian South finalized a relatively amicable break-up as South Sudan became an internationally recognized independent state. But like most divorces, this one did not produce a clean break, because the two countries share custody of the country's oil wealth.

Before the separation, Sudan produced about 500,000 barrels of crude oil per day. South Sudan now sits atop 75 percent of that total, but the pipelines that transport the oil and the ports that move it to market lie in the North. Since July, the northern government in Khartoum has faced a series of political and economic crises, and its foreign reserves have dwindled to dangerously low levels. Bashir's government needs some way to draw more cash from the oil it has lost.

Not surprisingly, North and South have yet to agree on how to share oil revenue, and each side has used its leverage to pressure the other. An opening of negotiations offered little promise of progress: Khartoum demanded a transit fee of $36 per barrel. The southern government in Juba offered less than a dollar.

On Nov. 8, President Salva Kiir of South Sudan dramatically upped the stakes in the dispute by ordering the expulsion from the south of Sudapet, the North's national oil company and a financial lifeline for its government. Khartoum countered with an announcement that oil exports from South Sudan would be suspended.

China quickly jumped in.

This oil is especially important to the China National Petroleum Corporation (CNPC), which has equity production in Sudan of about 200,000 bpd, 15 percent of its total overseas output. Despite its growing involvement in oil exploration and production abroad, CNPC is still a newcomer to this game, with fewer options than its international peers.

And CNPC is important for China's government, because the company is a guarantor of China's energy security. Most of the crude that CNPC draws from Sudan is not shipped home to China but is sold on international markets. Yet Beijing has emphasized the importance of holding oil assets overseas, providing fuel that can be directed to China if events threaten a sharp drop in supply.

The country's thirst for energy -- and management of the political vulnerabilities it creates -- remain a top priority for Beijing. Sudan represents less than 5 percent of China's crude oil imports, but add an extended export shutdown in Sudan to the current range of worries and headaches across oil-producing North Africa and the Middle East, and you could have significant upward pressure on global oil prices at a time when the Chinese leadership is already worried over price inflation and the risk of unexpected foreign economic shocks.

This is an especially anxious time for Beijing's economic policymakers. Volatility in Europe and the slow recovery in the United States -- China's largest trading partners -- fuel fears of a sharper-than-expected slowdown inside China. It's also a delicate moment for the country's politics as a leadership transition begins in earnest in 2012.  That's why China moved quickly to pressure the North to renounce its threatened blockade.

To save face, Khartoum announced it would allow the oil to pass but would seize about a quarter of the profits as compensation. Low-level violence will continue, and we can expect to see more of the increasingly common attacks on oil fields along the two countries' poorly demarcated border. There will be more turmoil in restive oil-producing regions in the North. But thanks to aggressive Chinese mediation, the oil continues to flow, and Chinese diplomats are now trying to broker a long-term deal on transit fees.

Don't expect China to dive more deeply into conflict resolution in other countries. On foreign policy, China's leadership is risk-averse even in the most confident of times, and the looming transition to a new president, premier, and party elite over the next two years will make officials even more cautious. Only when political and commercial interests clearly coincide, as they do in Sudan, will Beijing move quickly to intervene in the politics of other countries.

In this case, however, Chinese intervention helped avoid a dangerous foreign conflict -- at least so far -- even if Western critics are cynical about its motives.

Willis Sparks in an analyst in Eurasia Group's Global Macro practice.