Oil Sector Thrives in Sudan

09-11-2007

Sudan's government is benefiting from a booming oil sector; however, despite this, it has to take difficult decisions in the near and medium term including the possibility of Southern Sudan’s secession and the question of whether or not the country should become a full member of the OPEC.

Over recent months, political relations between the north and south have become increasingly strained, with the ruling National Congress Party’s (NCP) commitment to various aspects of the 2005 Comprehensive Peace Agreement (CPA) apparently waning.

The Sudan People's Liberation Movement (SPLM) accuses the NCP of dragging its feet on the implementation of key elements of the agreement such as security arrangements, the continued presence of northern troops in southern areas, the disarmament of militias, and crucially the protocol on the oil-rich Abyei region.

Issues surrounding the Abyei region and the Abyei boundary commission report continue to dominate political discourse; recently, for example, a bitter public dispute erupted between senior SPLM officials and the NCP following the SPLM Secretary-General Pagan Amum’s suggestion that the United States should establish temporary control of Abyei. Tensions were also made clear when a Southern Sudanese army official suggested yesterday that Northern Sudanese troops still in the south's vital oil areas are now to be regarded as "occupation forces", since they failed to leave the area as agreed under the CPA .

Because of Sudan's pariah status and the sanctions against it, the country is limited to which countries are able to invest in it. US firms have been barred from doing business in Sudan since 1997 and this scenario is unlikely to change in the medium term with the current government in power and the genocide in Darfur. This means US oil companies especially the supermajors ExxonMobil, Chevron, and ConocoPhillips are unable to prospect for hydrocarbons in a country with potentially huge reserves of crude. Houston-based mid-major Marathon Oil is no longer active in the country after being excluded from the new consortium in Block B (see Licensing Update below). Marathon has had no involvement in Sudan's oil sector in recent years, largely for fear of bad publicity resulting from human right abuses in the country and the genocide in Darfur. While US companies are not allowed to operate there, European companies simply choose not to, knowing that the adverse publicity that would be generated from earning profits in the pariah state would generate huge amounts of negative publicity.

This has allowed NOCs from Asia to dominate the country's oil sector. China has the most significant interests in Sudan and has invested billions in building the oil industry up from the ground, but it has also been joined by India and Malaysia. The Greater Nile Petroleum Oil Co. (GNPOC), a joint venture between the China National Petroleum Corp. (40 per cent), Malaysia's Petronas (30 per cent), India's ONGC (25 per cent), and national oil company Sudapet (5 per cent), is the key player. Sudan's Oil Minister Awad Ahmed al-Jaz in an interview with Xinhua has said that the energy industry is the most important area of co-operation between China and Sudan. CNPC has developed eight major oilfields, has invested in the country’s main refinery in the capital, Khartoum, where it owns a 50 per cent stake, and has trained numerous local Sudanese employees. This has been vital for the country, producing a new class of skilled manpower able to work in the oil industry.

Last year, crude production passed the 500,000-b/d mark and in July the Oil Ministry confirmed that Sudan is currently exporting around 425,000 b/d of crude. The country produces two major streams of crude: about 300,000 b/d of Nile Blend, which has an API gravity of 32.76° and a sulphur content of 0.045 per cent, some 75,000 b/d of which is consumed domestically; and about 200,000 b/d of Dar Blend, all of which is for export. The high acid Dar Blend has an API gravity of 26.42° and a low sulphur content of 0.116 per cent. Sudan's crude production is currently at around 500,000 b/d; the average production in 2006 was 414,000 b/d, an increase from the 363,000 b/d in 2005, and the U.S. Energy Information Administration (EIA), in its latest report on Sudan, believes that the country will reach a production capacity of 1 million b/d by the end of 2008. Over the last year, production has started from Blocks 3 and 7 and the Thar Jath field in Block 5A is currently producing 40,000 b/d. The Mala field, also in Block 5A, should be producing 20,000 b/d by 2008.

Sudan has four main refineries, with a total capacity of 142,000 b/d. The country's main refinery is in Khartoum and can refine 100,000 b/d; its second largest is a refinery at Port Sudan, which can manage 25,000 b/d. Sudan's two other refineries are located in Abu Jabra in western Sudan (2,000 b/d) and one in el-Obeid with a 15,000-b/d capacity. Al-Jaz has announced the construction of a new refinery in the country with Malaysia's Petronas, which will take a 50 per cent stake in the project, while Sudan's Ministry of Mines and Energy holds the other half. The refinery, which will be located at Port of Sudan, initially had a capacity of 100,000 b/d, but it could handle 150,000 b/d or as much as 175,000 b/d. Under the joint venture, both parties will develop and operate the export-oriented refinery.

Licensing Update

Out of the country’s 18 blocks only two now are unlicensed. Most recently, Pertamina, the Indonesian state-owned oil and gas company, signed an agreement with the Sudanese government to take a 15 p;er cent interest in Sudan's Block 13, which is located in the north of the country between Port Sudan and the Egyptian border and covers part of the shallow waters of the Red Sea. CNPC has taken a 40 per cent stake in the block and Sudapet will take a small interest, while the rest of the holding will be taken up by smaller local companies.

Following the recent debacle over Block B in the south of the country, French supermajor Total has announced it will be sharing the development rights for a 67,000-sq.-km field with Sudapet, Nilepet, and Kuwaiti Kufpec Sudan Ltd, and there could also be room for another company to be included in the consortium. UK explorer White Nile has been excluded from the block and is now set to leave the country following a request from Sudan's National Petroleum Commission (NPC).

Outlook and Implications

Sudan's oil sector is thriving, but vital decisions need to be taken over the coming years, which could see a new round of violence between the north and south. This is a significant worry, not least because the violence in Darfur continues unabated. Last year, US President George W Bush signed an executive order increasing the sanctions against Sudan and its oil industry in a bid to force the Sudanese government to accept UN peacekeepers and end the genocide in Darfur. The order emphasised to Western oil majors that Sudan is not a place to conduct business, which will have the end result of seeing companies from Asia, whose governments take a non-interventionist approach, exploit Sudan's crude reserves without much competition from the West.

Awad Ahmed al-Jaz has said that the country is still considering whether to become a member of OPEC. The invitation in May 2006 was seen as largely political as the addition of Sudan at this time would have little impact on OPEC's overall market position. However, the government may feel that accepting the invitation to the prestigious producers’ club will increase the nation's status.

One of the CPA’s key provisions gives the south the right to vote on secession from the north by 2011; so far, southerners are becoming increasingly intolerant of the central government in Khartoum’s backtracking and empty promises with regards to fulfilling its commitments, making the prospects of ‘unity’ for the underdeveloped south appear much less attractive. Unless the government radically alters its current stance, it is likely to find itself increasingly faced with the prospects of a messy and costly secession by Southern Sudan.