POSITIVES AND NEGATIVES IN SUDAN'S OIL INDUSTRY

UNCLAS SECTION 01 OF 03 KHARTOUM 000367

SIPDIS

DEPT FOR AF/SPG, AF S/E WILLIAMSON
DEPT PLS PASS USAID FOR AFR, AND ALSO PASS USAID

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: PREL PGOV PHUM ECON EFIN ENRG EPET SU
SUBJECT: POSITIVES AND NEGATIVES IN SUDAN'S OIL INDUSTRY

REF: A) 07 KHARTOUM 1719
B) KHARTOUM 227
C) KHARTOUM 313
D) KHARTOUM 241


1. (U) SUMMARY: In separate meetings with econoff the week of
March 9, oil industry insiders, former government officials, and
petroleum experts appeared positive about the political and economic
prospects of the Sudanese oil industry: the Norwegian Petroleum
Envoy to Sudan stated that he is "optimistic" about the possibility
of post-2011 oil revenue sharing; representatives of the only
European oil company in Sudan appeared confident that their
exploratory drilling will soon yield results; Misseriya tribal
leaders admitted that oil should not be a factor in the Abyei
conflict; and multiple sources praised the leadership of the former
Minister of Energy and Mining, Awad Al-Jaz. This optimism was
tempered by continued allegations of corruption, claims of the
industry's negative environmental impact, and complaints of the
reckless approach of many operators currently working in Sudan's oil
industry. END SUMMARY.

+ : NORWEGIAN OPTIMISM
--------------

2. (SBU) On March 9, the Norwegian Petroleum Envoy, Anders
Hannevik, stated that he continues to meet with NCP and SPLM
leaders, urging both sides to consider post-2011 oil revenue sharing
options (reftel A&B). Hannevik stated that he met multiple times
with influential NCP advisor Sayyed Al-Khateeb and that he is
scheduled to meet this week with Government of South Sudan Vice
President Riek Machar. "I am more optimistic now than I have been
in a long time that a deal on post-2011 oil revenue sharing might be
possible," stated Hannevik. Hannevik stated that the Norwegian's
earlier conflict with the Ministry of Energy and Mining "has been
mostly smoothed over" and that their access to the ministry has
increased. (On a separate matter, Hannevik also hesitated about
Norway's participation in a proposed UK-US-Norway technical-level
meeting on oil revenue sharing.)

+ "ABYEI SHOULD NOT BE ABOUT OIL"
--------------

3. (SBU) Also on March 9, General Manager of Nilean Petroleum
Services and family member of the Misseriya's tribal leadership,
Hayder Nimir (see bio note in para 13) stated that oil is not a
factor for the Misseriya and "Abyei should not be about oil."
(Comment: In contrast to earlier meetings between his family and
CDA Fernandez, where many of Nimir's relatives exaggerated the
amount and importance of oil in the region (reftel C),Hayder Nimir
appeared objective, balanced, and informed about oil. End Comment.)
"Having oil in Abyei is like planting a palm tree in your own yard,"
stated Nimir, "as the tree grows so tall, it only gives shade to
your neighbor." Nimir agreed that oil production in Abyei is
declining, claiming that only 2% of what is pumped out of the ground
is oil (with the remaining 98% as waste water.) Nimir stated that
oil companies are starting to pump a heavier, poorer-quality oil
from Abyei that requires special pipes and handling before being
blended with lighter, sweeter crudes at the central processing
facilities.

+ DRILLING ON BLOCK 5B UNDERWAY
--------------

4. (SBU) The contractual disputes over block 5b have been resolved
and drilling results are promising, stated Dr. Alam Bagi, the only
permanent representative of Lundin in Sudan. (Note: Lundin, the
only European oil company in Sudan, works along with its partners
Petronas, ONGC, Sudapet, and NilePet, in block 5b using the White
Nile Petroleum company as an operator. End Note.) According to
Bagi the dispute with Ascom will soon be resolved, as a committee of
Petronas, Lundin, and ONGC will meet to evaluate Ascom's claims for
compensation.


5. (SBU) Bagi stated that he is hopeful that drilling on the Wan
Machar-1 well (formerly Umm Dandalo) will soon commence and that
earlier studies show it has a great of potential. (Note: According
to Bagi, Lundin first started work on less promising wells such as
Nyal 1 because the relations with the State Governor and local
communities in those regions helped facilitate their work. Bagi
stated that successfully finding oil at the Nyal 1 was "a long shot"
and that the Wan Machar-1 well is more important to the company. On
March 13, the Sudan Tribune reported that Swedish oil explorer,
Lundin Petroleum, said today it will abandon the Nyal-1 well in
Sudan's oil Muglad Basin in Block 5B. The well is the first of four
wells to be drilled in Block 5B during 2008. End Note).

+ LEADERSHIP
--------------

6. (SBU) In separate meetings both Lundin's Bagi and the former
Minister of Finance, Abd Al-Rahim Hamdi, told econoff that the
administration of the oil sector and the government's finances will
continue to improve with the exchange of leadership between the

KHARTOUM 00000367 002 OF 003


Ministry of Finance and the Ministry of Energy and Mining.
According to Hamdi, Awad Al-Jaz transformed the Ministry of Energy
and Mining into a modern, functional bureaucracy and that not much
will be required from its new minister, Zubair Al-Hassan. According
to Hamdi, Al-Jaz will now "clean up the Ministry of Finance as he
did with the Ministry of Energy and Mining." Lundin's Bagi also
exhibited great praise for Awad Al-Jaz. Bagi stated that during a
recent social function for Khartoum's elite, he told President Omar
Al-Bashir to his face, "If you had two or three people like Awad
Al-Jaz, you could really relax." According to Bagi, President
Bashir responded, "I know." (Note: Which is no doubt why President
Bashir transferred Al-Jaz to the Finance Ministry - to clean up the
mess left by Al-Hassan, reported reftel D. End note.)

- CORRUPTION
--------------

7. (SBU) According to Misseriya leader Hayder Nimir, the oil
industry has varying degrees of corruption at multiple levels, with
widespread dishonesty in petroleum service contracts and the pricing
of oil, especially from Blocks 3 and 7. "People can make millions
just off of the issuing of contracts," stated Nimir. Although the
GoSS and many southerners always demand more transparency in the oil
industry, Hayder alleged that "the Southerners are the real kings of
corruption."


8. (SBU) Lundin's Bagi also stated that corruption pervades the
Sudanese oil industry. According to Bagi, there is corruption at
the lower levels of the industry, especially with many of the
Chinese service companies. Although the senior leadership of the
Government of South Sudan recognizes the importance of resolving
contractual disputes, stated Bagi, there are prominent personalities
within the government who are likely corrupt. Bagi stated that one
of the main reasons for Kuol Manyang's appointment as governor of
Jonglei State was to confront companies and individuals who have
complicated oil operations. "It is likely that Manyang was
appointed to that position just to stand up to Riek Machar," stated
Bagi. Bagi said that the consortium in Block 5b (of which Lundin
is a part) will be stronger without Ascom, as "it was a dirty
company" with "questionable ties" to some individuals in the GoSS.


- ENVIRONMENT
--------------

9. (SBU) In addition to not financially benefiting the people of
his region, Hayder Nimir complained that the oil industry has
damaged Abyei's environment. "Oil companies do not honor the
regulations," said Nimir. According to Nimir, oil companies have
leaked drilling fluids and other hazardous chemicals that have
resulted in dead cattle, poisoned water, and damaged land. The
Norwegian Petroleum Envoy stated that although he only has anecdotal
evidence of the oil industry's negative environmental impact, there
is cause for concern. He stated that in April a Norwegian
environmental assessment team will come to Sudan for one month and
that a report should be completed by May. Due to the vast size of
Sudan's oil producing areas and the limited nature of this
assessment, "we will only partially know what is going on," said
Hannevik.

- FLY-BY-NIGHT OPERATORS
--------------

10. (SBU) Lundin's Bagi also expressed concern that many of the
companies operating in Sudan are smaller companies unable to invest
in large-scale exploration. He stated that without Chevron's
investments (and particularly their seismic studies) Lundin would
not currently be at the stage of drilling. "We did not conduct any
seismic studies, relying totally on the data we received from
Chevron. Without Chevron these areas would never have been
discovered," stated Bagi. According to Bagi, there are some blocks
in Sudan (such as Block 12A in northwest Sudan along the Libyan and
Chadian border) where "we have no idea what is going on there,
because smaller companies do not have the money or the foreign ones
from China or India are not willing to spend on exploration."


11. (SBU) The Norwegian Petroleum Envoy agreed that without the
presence of large, western multi-national companies, long term
development and Sudan's environment may suffer. According to
Hannevik, many of the companies operating in Sudan have less regard
for environmental standards, the longevity of wells and fields, and
their own reputations than big multi-national western companies.
Hannevik stated that many of Sudan's current operators do not have
access to the latest technology that would yield the cleanest, most
efficient, and most sustainable results.

COMMENT
--------------

12. (SBU) The voice of balance and reason from the Misseriya
leadership was reassuring, especially as many parties with a stake
in the region falsely assume that Abyei has great reserves of oil.
(Norwegian, ICG, and other independent studies have shown that

KHARTOUM 00000367 003 OF 003


Abyei's oil reserves are quickly declining and new fields have not
been discovered.) Hyder Nimir should be supported to provide a more
objective analysis of Abyei's petroleum to his family members and
the greater public. Although many players in Sudan's oil industry
tempered their optimism with a focus on corruption, the environment,
and reckless oil companies, there were other complaints which
warrant further investigation. Contacts also criticized the lack of
GOSS involvement in the industry ("to the point of almost being
non-existent," as Hannevik stated,) difficulties in establishing the
GoSS state oil company Nilepet, and dysfunctional national
government institutions such as the National Petroleum Commission.
The comments about long-term environmental impact and lack of
capacity and professionalism among the oil companies operating in
Sudan are vexing, and demonstrate a clear downside to the current
U.S. sanctions regime.

BIO NOTE
--------------

13. (U) Hyder Nimir hails from a prominent Misseriya family that
traditionally has led this important Arab tribe. Hyder earned a
degree in geology from the University of Khartoum, and later worked
for the Ministry of Energy and Mining. He was removed from this
position in 1989 when the National Islamic Front came to power. He
later moved to Saudi Arabia to work in the petroleum industry for
most of the nineties. He returned to Sudan to work for Petrodar,
the operator of blocks 3 and 7, until he started his own oil
services company several years later.

FERNANDEZ