OIL REVENUE: 2007 GNU BUDGET BASED ON QUESTIONABLE

C O N F I D E N T I A L SECTION 01 OF 02 KHARTOUM 000194 SIPDIS SIPDIS DEPARTMENT FOR AF/SPG, EB/IFD AND EB/ESC PLEASE PASS TO USAID FOR AFR E.O. 12958: DECL: 02/05/2017 TAGS: EAID ECON PREL EPET SU SUBJECT: OIL REVENUE: 2007 GNU BUDGET BASED ON QUESTIONABLE ASSUMPTIONS REF: A) KHARTOUM 00133 B) KHARTOUM 00166 Classified By: P/E Chief E. Whitaker, Reason: Section 1.4 (b) and (d) ¶1. (c) Summary: The 2007 budget for the Government of National Unity (GNU) assumes relatively high oil prices and production figures. Revenue, and therefore expenditures, are based on these optimistic projections. Non-discretionary spending, primarily salary and wage commitments, will consume the largest part of spending. The budget allocates substantial revenue to military and security expenditures, leaving relatively small amounts available for development, health and education. End Summary. Production Projections for 2007 -------------- ¶2. (C) Director of the Petroleum Unit in the GOSS Ministry of Finance and Economic Planning, Yousif Ramadan Mohammed El Hassan (protect),met with the economic officer February 5, 2007 and provided details on projections for petroleum production for 2007 and the related budgetary implications. He is an SPLM member of the Oil Revenue Technical Committee, which is under the National Petroleum Commission. El Hassan said that he believes the figures on production and prices used to compile the budget are overly optimistic. He said that the projections in the budget assume oil production for 2007 will average 480,000 barrels per day (bpd),with production broken down as follows, according to the areas of production. from blocks 1, 2 and 4 - 250,000 bpd from blocks 3 and 7 - 200,000 bpd (Petrodar pipeline) from block 5A - 30,000 bpd El Hassan noted that the budget for last year, 2006, was based on production reaching 500,000 bpd by the end of the year, but in the event, this proved to be too optimistic. He believes that a similar error is being made in this year's budget. (Comment: Information from the Ministry of Energy supports El Hassan's conclusion. In a public presentation on January 27, a representative of the Ministry of Energy stated that at the end of 2006 production from blocks 1,2, and 4 was 260,000 bpd; from blocks 3 and 7 at 160,000 bpd; and from block 5A , 26,000 bpd; for a total of 446,000 bpd. This is below the estimate used for the budget. While production may rise, there could also be continued problems with the production moving through the Petrodar pipeline. This pipeline came on stream months later than planned and has yet to reach the originally projected levels of production and flow. In addition to the amounts detailed by El Hassan, the Ministry rep added that production from block 6, which is entirely in the north, is expected to rise from 12,000 bpd to 40,000 bpd, but only in 2008. End comment.) Prices are a Problem -------------- ¶3. (C) Sudanese oil sells at a discount relative to the widely quoted crudes such as Brent or West Texas Sweet. There are two blends currently being marketed from Sudan, the Nile blend and Dar blend each with its own specifications. The Dar blend, from blocks 3 and 7, is very heavy and requires heating or the se of solvents to move it through pipelines, presenting technical problems in transportation and export. El Hassan said that some shipments from blocks 3 and 7 have not even met the specifications for Dar blend, resulting the sale of the oil at steep discounts, for as little as $15 per barrel in late 2006. He stated that the projection is for the Petrodar production for 2007 to be sold at an average price of $30 per barrel. ¶4. ( C ) In constructing the GNU budget, a benchmark price for petroleum is set annually. El Hassan confirmed that the benchmark price for 2007 will be $45 pb. All revenue up to $45 a barrel is allocated directly to the budget. Any amount realized above $45 a barrel goes into the Oil Revenue Stabilization Account (ORSA),which is intended as a reserve to compensate for fluctuations in the price of oil. However, he noted that the budget assumes Sudan will realize an average export price of $55 per barrel over the year. Given the discounts Sudanese oil receives, international oil prices in the low $50 range could potentially cause a revenue shortfall for the budget. Any shortfall in oil revenues will impact both the GNU budget as well as the Government of Southern Sudan (GOSS) budget. How the Money Flows -------------- KHARTOUM 00000194 002 OF 002 ¶5. (C) Econ officer asked how the money from petroleum sales is received by the government. El Hassan said that money from the sales of oil are first deposited at the Central Bank of Sudan account at Bank Paribas in Geneva. From there, the money is transferred to the Bank headquarters in Khartoum, the amount due to the GoSS is transferred to the Bank of Southern Sudan (BOSS). BOSS is simply the southern branch of the Central Bank. The BOSS maintains accounts in commercial banks in Khartoum (e.g., Bank of Khartoum, Omdurman National Bank and Dubai Bank of Khartoum) as well as in Nairobi (at Stanbic Bank). (Comment: Given the nearly nonexistent financial infrastructure in the South, it does not seem unusual that BOSS maintains accounts outside of Southern Sudan.) Implications for the South -------------- ¶5. (C) El Hassan, a southerner, elaborated on the implications of fluctuations in oil revenues for the GOSS. He said that he senses there has been a change in attitudes among his contacts in the south. While a year ago the common complaint was that the northerners were not transferring oil revenues to the south, today the complaint is that the south is not properly using the money it has received. The Petroleum Unit of the Ministry of Finance publishes a monthly breakdown of oil revenue distributions. According to this publication, the amount of oil revenue accruing to the GoSS was $953.3 million for 2006. El Hassan said that this amount is nearly all absorbed in salaries and wages in the GOSS budget. He described the salary payments in the south as "social employment" in that payments are made to individuals without regard to actual work performance. He noted that he had participated in a review of the state government of one southern state in which the governor had claimed that 13,000 employees were employed by the state, but on further examination, only 3,000 were found to be bona fide employees. El Hassan expressed concern that the opportunity to develop the south is being lost as oil revenue is filtering away into non-productive salary payments. HUME