Darfur scares European investors off Sudan’s oil

By Opheera McDoom

August 3, 2007 (KHARTOUM) — Sudan has strong potential for oil exploration and expansion but big European players will be reluctant to invest for fear of pressure from groups advocating divestment because of violence in its Darfur region.

This has left the door open to Chinese firms, less sensitive to shareholder opinion, whose country is hungry for energy.

European caution is unlikely to change given the high profile of the rape and killing in Sudan’s remote west, which international experts estimate has claimed 200,000 lives.

Sudan, emerging from decades of civil war, produces around 500,000 barrels per day of crude, mostly the sweet refinery grade Nile Blend and the more acidic Dar Blend.

Most of the oil lies in the south, scene of a bitter civil conflict for all but 11 years since independence in 1956.

However, as the former foes in Sudan signed a north-south peace deal in January 2005, a conflict was fully under way in the western Darfur region, which Washington branded genocide.

European powers are reluctant to use the term, which Khartoum rejects.

Lack of progress on Darfur and backsliding on the southern deal prompted the United States in May to strengthen sanctions it had placed on Sudan in 1997, which most analysts say have not affected the oil industry, except for banking administration.

Analysts say Sudan has instead looked east to Asia for investment, a policy that is unlikely to change.

“If you look at production, it’s not affected production,” said Christopher Brown, Sudan analyst from Wood Mackenzie.

The only major Western operator in Sudan, France’s Total , has been kept from starting work by a long-dispute on ownership rights to its Block B. A small British firm had been drilling until the government ruled in favour of Total.

“There are no Western operators, other than Total SA, which has not started yet,” Brown said.

DIVESTMENT CAMPAIGN

While the sanctions are not directed against European companies, many fear reprisals from lobby groups that have waged an effective Sudan divestment campaign in the last few years.

“The European players would be worried about reputational risks,” said O.B. Sisay, deputy Africa analyst from Exclusive Analysis.

The Sudan Divestment Taskforce, http://www.sudandivestment.org, has pressed U.S. universities and even large funds and financial institutions to divest from companies with interests in Sudan, in what activists say is the largest movement since the anti-apartheid campaign.

Sisay said the Darfur war activists were influential.

“The pressure groups could create serious risks for the companies…which leaves a lot of space for Chinese companies.”

Top state-owned firm Chinese National Petroleum Corp. (CNPC) has major interests in eight of Sudan’s oil blocks, as well as owning 50 percent of Sudan’s largest refinery and partnering oil pipeline construction.

Malaysia’s state-owned Petronas [PETR.UL] and India’s ONGC have invested heavily in recent years as Western companies left.

Analysts said there was good growth potential in Sudan’s oil industry, which has remained opaque for years because of its role in the north-south civil war and associated rights abuses.

With the peace deal, new areas for exploration were opening.

Sudan’s oil blocks total an area of around 1 million square km (386,100 sq miles), with only a small area so far drilled.

The full extent of its oil reserves are unclear but BP’s Statistical Review of World Energy in 2007 put Sudan’s proved reserves at 6.4 billion barrels, the fifth largest in Africa.

“As the country becomes explored more there is a huge possibility…and huge potential,” Sisay said.

Wood Mackenzie’s Brown said exploration was relatively cheap in Sudan so even as current oil fields slow down, the country could make new finds to sustain production.

“We expect production to rise to somewhere in the region of 700,000 barrels per day over the next couple of years and then probably decline unless they make new finds,” he said.

“They are exploring at a high rate so they may be able to sustain that.”

But one source close to oil production in Sudan said the government was overpumping its Nile Blend and Dar Blend, to get as much revenue as possible ahead of a southern Sudanese vote on independence in 2011.

“They want to get out as much as possible before the south goes its own way,” the source told Reuters.

Sisay at Exclusive Analysis said a return to war, which some observers say is possible, would be more of a threat to investors than any separation.

But he said Sudanese oil would become more important in global markets, as there is a supply crunch with production problems in Nigeria and the Middle East.

“As China, Brazil and India increase in their demand, Sudanese oil will be key,” he said.

(Reuters)