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