Khartoum pressures Southern Sudan over oil

Oil figures suggest that Khartoum is cheating the South of revenue and threatening the increasingly fragile peace
Concern is growing about the economic and political conflicts which threaten the Comprehensive Peace Agreement signed in January 2005. Many of these conflicts stem from the opacity of the Government of National Unity, set up under the CPA and in which the National Congress Party (aka National Islamic Front) was meant to share political power and the country’s oil wealth with the Sudan People’s Liberation Movement (SPLM). In practice, the NCP domination of the GNU severely limits the agreed sharing of power and money.
A 7 September report by UK-based resource lobbying group Global Witness* reveals serious inconsistencies in the oil production and revenue data published by the Khartoum government and a general lack of financial accountability. Both are undermining the peace deal.
On 8 September, the SPLM began a five-day meeting in Juba with the new Northern opposition body, now called the Coalition of Sudanese Political Parties. Belatedly finding its voice, the Coalition has refused to take part in the elections due in April if the NCP maintains those laws which ‘oppose freedoms’ (AC Vol 50 No 17). These laws contravene the CPA and are one reason the SPLM withdrew, temporarily, from the GNU in October 2007. The Global Witness report will lubricate the Juba discussions because the NCP’s refusal to allow the Government of Southern Sudan (GOSS) full access to oil figures and money was another reason for the SPLM’s 2007 walkout.
This is a crucial test for the CPA, which oil wealth-sharing underpins. The NCP dominates the power-sharing government and also controls the production and sale of the oil, most of which is in the South. Under the CPA, half the revenue from Southern (but not Northern) oil wells should go to the GOSS. The money is vital to the South: it accounts for 98% of government income, making the GOSS the world’s most oil-dependent government. Although the wells subject to revenue sharing are all in the South, it is the GNU in Khartoum that markets the oil and reports on how much has been sold and at what price. In reality, this means the NCP controls Sudan’s oil industry.
Southern suspcions confirmed
Southerners have long suspected trickery in the wealth-sharing agreement, proclaimed internationally as a great success. Although Kenya, Britain, Norway and the United States played important roles in negotiating the agreement, they gave the SPLM little support when it raised complaints about inequities in the sharing of oil-revenues.
Suspicions have persisted that the NCP was withholding money, underreporting the amount of oil sold and changing the fees and figures in its favour. No one can verify what it reports; this lack of transparency has added to the feeling of mistrust. The new evidence documented by Global Witness, which investigates links between natural resource production and conflict, reveals that the production figures published by Khartoum are lower than those published by the China National Petroleum Corporation. The CNPC is the main operator of the producing oil blocks and the new report may prompt Beijing to investigate further; it already faces pressure over its arms sales to Sudan.
The report argues that without greater transparency, more timely reporting and proper mechanisms for checking by independent third parties, suspicion will grow and the peace deal could be jeopardised. The CPA officially ‘ends’ in 2011, with the referendum in the South on independence and a simultaneous one in Abyei Area (also oil-producing) on joining the South or staying with the North.
Global Witness does not take a position on which sets of figures – both from official sources – are correct. The Khartoum figures, from the Finance Ministry, were produced for reporting to the International Monetary Fund (oil has not prevented Sudan from having the world’s largest debt per head). The CNPC figures are from its annual reports.
There are two possibilities. Either Khartoum is underreporting oil production figures, in order to pay less to the South, or CNPC is overstating oil production in its reports, for which there seems no incentive. Since 2005, US$6 billion has been transferred from North to South under the wealth-sharing agreement. If Khartoum is under reporting, even by a conservative 10% (some findings suggest a disparity of 26%), then $600 million is owed to the South – more than three times the combined health and education budgets of the Juba government.
There are other ways in which the money due to the South is being diverted. For example, Khartoum charges pipeline fees, which amounted to $44 mn. in September 2008 alone. It is not clear to whom this money goes. Meanwhile, Khartoum retains a ‘management fee’ of 3% of the total revenue. Again, it is unclear what this is spent on and, although service costs presumably remain the same, this management fee rises with oil prices. Oil companies operating in the South employ oil service companies from the North, many of which are linked to the ruling NCP. Oil consortia then claim back expenses for employing these companies: the more costs they claim, the less money is available for revenue sharing. So this is another way in which a larger share of oil revenue goes north than the Peace Agreement specifies.
Sudan Oil Map
Sudan’s state-owned oil company, Sudapet, has equity stakes in all the oil blocks, which means it gets a share of both oil and profits. Yet, the South’s state-owned company, Nilepet, has no stake in productive oil blocks. Clearly, this situation threatens the CPA and the NCP must be aware of that. A return to conflict looks all too likely: armies are massing on either side of the North-South border. Agreement on demarcating that border (again, under the CPA) seems unlikely any time soon.
Even if peace holds, a deadline looms which is not just that of the referenda. If, in less than two years’ time, the South votes for independence, as seems likely if the NCP doesn’t block the referendum, the new country will be landlocked. Its only way of exporting oil, at least for the first few years, will be via the North. The newly independent Southern government would have to work with Khartoum, which could use its well practised obstruction skills.
Even if Southerners vote for a united Sudan, the wealth sharing agreement will need to be re-negotiated. There has been little planning for either of these eventualities. The NCP’s track record suggests it will have well honed strategies to thwart the referendum or failing that, to control the aftermath. The South may not. Many doubt that the CPA’s international guarantors – especially the USA, Britain, Norway and the African Union – can match the NCP’s strategic sense.
The Southern government is ill-prepared to be oil-rich. It faces a stark and extreme version of the ‘resource curse’ and will need technical help to manage revenue. It has no Auditor General at present, although the constitution requires one. The GOSS oil company, Nilepet, has little experience and operates under a clear conflict of interest. Energy Minister John Luk Jok (a lawyer, former SPLM London representative and short-term member of Riek Machar Teny Dhurgon’s breakaway faction in the early 1990s) sits on the Nilepet board and is therefore responsible both for selling oil and regulating its sale.
China weighs conflicting interests. CNPC is state-owned and Beijing backs the NCP regime, voting in its favour at the United Nations Security Council. It also supplies arms, many of which end up in Darfur in breach of the UN arms embargo there. Beijing’s relations with the South remain tentative, although there has been grandiose talk of China financing a pipeline to Mombassa port in Kenya (once a project beloved of Lonrho’s Roland ‘Tiny’ Rowland), which would help an independent Southern Sudan to break its dependence on Port Sudan.
Technically, there are straightforward solutions. Global Witness’s report calls for independent audits of the oil sector, so that both sides can trust the figures, and for legislation requiring companies to disclose the payments they make to governments. Khartoum has shown interest in the Extractive Industries Transparency Initiative, which promotes accountability in natural resource extraction. The EITI requires civil society to play a watchdog role; that is impossible in Northern Sudan for the NCP relentlessly suppresses civil society. As a ‘sub-national government’, Southern Sudan cannot join.
The political will to make changes is the main challenge. It is unlikely to come from Khartoum. Meanwhile, China gets 5% of its oil from Sudan, worth $6.3 bn. in 2008, and has made substantial investment in the country. Its energy security and investments are at stake if the CPA breaks down. Japan is, quietly, a main purchaser of Sudanese oil, as it has refineries which can deal with the highly acidic Sudanese Dar blend. The other main refineries with this capacity are in the USA and currently barred by US sanctions.
Norway is deeply involved in Sudan’s oil industry, providing oil-related technical assistance to North and South, which could be worth millions of dollars in extra oil revenue. Although Norway has an international reputation for promoting accountability and the effective management of oil revenues, it has failed on both these counts in Khartoum, as the Global Witness report suggests. Indeed, Norway’s critics say its assistance to Khartoum may simply be helping the NCP raise funds to buy arms for the next round of fighting with the South.
* ‘Fuelling Mistrust: the Need for Transparency in Sudan’s Oil Industry’, Global Witness, London, September 2009.