SUDAN: Oil investment bears political risks

Analysis

Reports about Sudan's actual and potential oil wealth are subject to both exaggeration and underestimation by different parties. However, at root it is clear that the country's oil sector has the potential to grow considerably. Since Sudan first began exporting oil in 1999, its oil industry has grown faster than most expected. By the end of 2004, output stood at around 350,000 barrels per day (b/d) and it is set to rise to around 500,000 b/d by the end of 2005. Meanwhile, proven reserves are still increasing (in 2004 they increased by some 40%). Combined with unproven reserves, this should ensure that Sudan has the capacity to produce oil for many years.

However, such potential comes in the context of a newly born peace agreement and the continuing conflict in Darfur (see SUDAN: UN recommends war crimes prosecution - February 10, 2005; and see SUDAN: Peace still precarious despite agreement - January 24, 2005). In the circumstances, oil companies considering investment in Sudan need to pay attention to a number of political and economic issues, which will have a bearing on the success and consequences of their actions.

The role of oil. Like other valuable resources, oil can -- to some extent -- be a cause of fighting or making peace. In Sudan, the development of the oil fields in the south was accompanied by widespread violence by the government and militias against local populations, with significant loss of life and livelihood. Growing oil revenues over the past few years have also tangibly shown the amount that, given the chance, Sudan can earn from oil. However, so far, the revenues have been almost exclusively to the benefit of a government that has been talking peace on one front while waging war on another. As such, it is misleading to claim that oil has played a major role in ending the civil war, even if oil revenues may yet help consolidate the emerging peace.

Therefore, at present, decisions about doing business or making major investments in Sudan's oil sector will need to be made with particular attention to several key issues:

1. Government-SPLM/A peace agreement. Successful implementation of the peace agreement is essential to reducing the likelihood of fighting in the oil fields and increasing the chances that oil revenues will benefit the country. Under the agreement, oil revenues are due to be shared equally between the national government (led by the ruling National Congress Party) and the new Government of South Sudan (led by the SPLM/A). A national petroleum commission should be established two weeks after the interim constitution is adopted, which should be by May, and a 10,000-strong UN peace-keeping force should also be deployed across southern Sudan in the second half of 2005. If these elements of the agreement are not followed, or the peacekeeping force does not materialise promptly, the environment for oil investment will be the worse for it.
2. Darfur conflict. The conflict in Darfur does not directly affect the main oil producing areas. However, over the past two years, the conflict has caused the violent death of some 50,000 people, displaced about 1.8 million people, and caused the premature death (through deteriorated health and nutrition) of many thousands (see SUDAN: Darfur has makings of humanitarian disaster - May 19, 2004). As a result, the government, and Janjaweed militia that it backs in Darfur, are accused of crimes against humanity and gross abuses of human rights (see SUDAN: Darfur talks will take time to deliver - July 16, 2004). Furthermore, for the past year the government has persistently failed to comply with the demands of the UN Security Council to end abuses in Darfur, has continued to use force, and has refused to allow a stronger mandate for the under-manned African Union (AU) monitoring force in Darfur. Unless the government abandons its existing approach, the conflict is likely to continue. At a minimum, this will lead to continuing international criticism of the government and moves to impose political and economic sanctions. However, it may also lead to increased fighting, potentially contributing to the collapse of the peace agreement with the SPLM/A.
3. Transparency. To date, the government has disclosed very little information about the terms of oil production sharing agreements and levels and use of oil revenues. This is despite the fact that the government's oil earnings in 2004 were around 1.5 billion dollars, an increase of some 500 million dollars from 2003. Coupled with rumours of secret bank accounts and corruption, a lack of transparency has prompted growing public resentment at home and criticism from abroad. As neither the government nor the SPLM/A are democratically accountable, oil-related corruption is likely to increase unless efforts are made to prevent it. One lobbying group, the European Coalition on Oil in Sudan (ECOS), has proposed standard guidelines for oil exploration under the government-SPLM/A peace agreement.

Other considerations. A number of other issues have a bearing on the attractiveness of investing in Sudan's oil sector at this stage. These include:

• Insecurity. As well as the risk of fighting between the main political parties in Sudan, local militias continue to threaten security in oil-producing areas. Under the terms of the government-SPLM/A agreement, militias in southern Sudan should be demobilised or integrated into the regular armed forces. However, carrying this out may be difficult, and in any case it does not cover other opposition groups. For example, in December, a new splinter group in Darfur, the National Movement for Reform and Democracy, claimed to have seized several oil wells in Western Kordofan, a state bordering Darfur. Oil installations have been attacked before, in particular Sudan's oil export pipeline, which runs through eastern Sudan. Two armed opposition groups in the east -- the Beja Congress and the Rashaida Free Lions -- currently remain excluded from dialogue with the government.
• Competition. The main foreign oil companies already operating in Sudan are the Chinese National Petroleum Company (CNPC), followed by Petronas of Malaysia and India's Oil and Natural Gas Company (ONGC). These three, combined with Sudapet (a Sudanese company), make up the Greater Nile Petroleum Operating Company (GNPOC), which operates the concessions that were originally explored by Chevron in the 1970s and 1980s. As such, these companies are well placed to increase their stakes in the country, especially the CNPC (see SUDAN: Oil sector growth requires peace and stability - March 26, 2004). France's TotalFinaElf is interested in beginning work on Block 5, for which it has held an exploration licence since 1984.
• US sanctions. US oil companies are currently prohibited from investing in Sudan. The Bush administration is unlikely to lift its ban until it sees improvements in the situation in Darfur.