The search for oil and natural gas is taking oil companies and their investors to the far ends of the planet, including those countries with considerable political risk.  Along these lines, Sudan has it all – ethnic cleansing, a war between the Islamic and non-Islamic worlds, competition between the West and China, the ineffectiveness of the United Nations, famine, disease and oil. Sudan has had a history of military regimes, civil wars and border disputes since its independence from the UK in 1956. Despite the stark imagery from the famines of the 1980s and recent Darfur crisis, Sudan, Africa’s largest nation by size, is well endowed with large areas of cultivatable land as well as mountain ranges, swamps and rain forests. Apart from oil, Sudan is also rich in gold reserves. Sudan’s proven oil reserves are less than 1bn barrels, however that number could rise dramatically as capital is invested in exploration. Indeed, this is what is attracting a growing group of international oil companies to the country.

Not Exactly Axis of Evil, But…

While not important enough to be part of the “axis of evil”, Sudan is definitely in the cross hairs of the Bush administration. Most recently, the Sudanese government, dominated by Northern Arabs, has been accused of genocide against its own black population by former Secretary of State Colin Powell and the U.S. Congress. Washington also sees Sudan, with its deeply Islamic regime, as a breeding ground for Islamist terrorists. Recently, Sudanese nationals were among those apprehended in Iraq for insurgent activities. America’s last direct commercial interest in the Sudan was closed down as far back as 1984 with the exit of Chevron due to security reasons during the North-South civil war.

Meanwhile, America’s friends, as well as its competitors, continue to do business in Sudan. Some of the countries that filled the void left by Chevron include Canada, Malaysia, Qatar, Sweden, Austria, France, China and India. While Canada’s Talisman Energy left Sudan in 2002, France’s Total SA still maintains ownership of some of the largest oil fields in Sudan.

A Country of Fault Lines

Sudan’s North-South divide has its roots at least as far back as 1898 when Britain and Egypt began their joint administration of Sudan. Until 1946, the two halves of the country were ruled independent of each other. The predominantly Muslim North, with its historical ties to Arab lands to the North and East, was the focus of economic and infrastructure development. The South was of little use to anyone but was open to Christian missionaries thus resulting in a sizable Christian population along with the native animist population. When the British decided to integrate the North and South ahead of independence in 1956, it caused great resentment among Southerners who felt underrepresented and unorganized politically to match the North.

The first civil war was sparked by mutinous Southern army officers before independence and lasted until 1972. The second civil war began in 1983 and has led to hundreds of thousands of deaths and displaced over 4 million Southerners. Oil, which was discovered in the South in 1978, has played a major role in the second civil war. In order to control the oil producing areas, the government deliberately armed militias (Murahleen) of the Baggara, who are Arab speaking nomads, to force southerners off their ancestral lands through intimidation and murder. The opening of a new 1500 km pipeline in 1999 made by the Greater Nile Petroleum Operating Company (GNPOC), whose current partners include CNPC (China), ONGC (India), Petronas (Malaysia) and Sudanese government further escalated the humanitarian crisis in Sudan’s Southern region. This new pipeline has made previously hard to reach fields within easy reach of transportation to Port Sudan on the Red Sea.

Peace talks between the government and the southern rebels have progressed well in theory but not in application. The two sides signed a peace agreement on January 9, 2005, under which the South will enjoy autonomy for six years followed by a referendum on secession at the end of this decade. During the interim period, oil revenues would be shared equally between the government and the rebels. However, this arrangement has already been tested many times and has compounded the legal hurdles facing companies willing to do business in Sudan. After Total stopped producing at its giant oil field (the size of Greece) in Southern Sudan over twenty years ago, it continued to pay royalties to maintain its right to come back one day. It also made sure it updated its deal with the central government before the peace agreement was signed in January. However, the new provisional authority in the South proceeded to allocate rights to the same oil field to another company – White Nile Ltd, which is incorporated in the UK. Contract disputes such as these could cause the collapse of the entire peace agreement and lead to further bloodshed and misery for the people of Sudan.

And Now Darfur

The more recent conflict in the Darfur region of Western Sudan has now become the focus of the world’s attention. The Darfur conflict came out of concern among the non-Arab natives of that part of Sudan that they had been sidelined in the peace agreement with the South. Since the government had deployed most of its army in the South and many of the Darfur based soldiers were natives of the region, the government used aerial bombardment and yet another Arab militia, now the Janjaweed, to put down the rebels. Unlike the earlier North-South civil wars, the Darfur conflict is between Muslims, Arabs and non-Arabs.  The rebels started the conflict by attacking government installations, but it was not long before the better armed Janjaweed were able to drive more than a million natives away from their homes. As many as 100,000 refugees ended up in Chad, pursued by the militia, leading to a clash between the Janjaweed and Chadian soldiers in April 2004. Despite a deadline and other threats from the UN Security Council – Resolutions 1556 and 1564 – as well as an accord to establish a no-fly zone over the area, the Janjaweed and the government have not stopped their onslaught against the non-Arab population of the region.

Economic sanctions from the Security Council are unlikely due to China’s economic ties with Sudan and veto power in the Council. While the African Union, supported by U.N. and E.U. funds as well as U.S. logistics support, has taken the lead role in solving Sudan’s problems (by providing a token peace keeping force), the U.S. has been the most vocal foreign power against the Sudanese government’s behavior in Darfur. The U.S.’s recent relationship with Sudan has been mixed. Since 1993, Sudan has been on the State Department’s list of countries supporting terrorism and the US government has voted against Sudan in all international lending institutions. Post September 11, 2001, the Sudanese government, keen to escape the wrath of the US due to its earlier refuge to Osama Bin Laden, has made a show of accepting some of the US’s conditions for normalizing relations and has cooperated in anti-terrorist actions. Thus, this relationship is not much different from that of the US’s relationship with Syria.

Oil: A Wasted Resource

Most of the people of Sudan have not seen any benefit from its oil industry. On the contrary, oil money has enabled the central government to update its military that to a large extent has been used to subdue it own people, first in the South and now in Darfur. Moreover, the Chinese dominated GNPOC consortium, which produces most of Sudan’s oil, has not even made a major effort to train many local Sudanese, instead relying on legions of imported Chinese labor. Thus, far from being a boon, oil to date has been the reason and the enabler of mass suffering in Sudan.

Sudan represents part of the ongoing challenge in extracting oil from Africa.  On one hand, the country probably holds far greater hydrocarbon reserves and could make a contribution to the world energy supply.  If there was any accountability on the part of the Sudanese government, oil could also make a positive contribution to developing the nation.

On the other hand, the Sudanese government has misused oil revenues.  Instead of money going to train accountants, doctors and teachers – all necessary human capital for providing a better business environment (not to mention quality of life) – it has gone to financing genocide, a sad commentary.  Moreover, the weak nature of the government and its inability to police a rule of law have left the issue of contracts in limbo as reflected by the experience of Total.  No doubt Sudan will continue to attract oil business – countries such as China and India are driven there by rising consumption – but the massive inflow of foreign capital needed for the country to reach its true potential is going to lag while a civil war rages. Other countries, including many in West Africa and North Africa have much more to offer and are making the effort.

Rohit Sethi serves as Director and Senior Analyst at Aladdin Capital Management.

© 2005 Rohit Sethi, Contributor for KWR International, Inc.
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