Black Gold

9 Aug 2009

Black Gold

Once a month, 10 men file into a conference room in a two-story villa overlooking the waters of the Blue Nile in Khartoum to sift the latest financial data of Sudan's most important industry.

Once a month, 10 men file into a conference room in a two-story villa overlooking the waters of the Blue Nile in Khartoum to sift the latest financial data of Sudan's most important industry.

Drawn from key government ministries in Khartoum and Juba, the participants sit on the Technical Committee for Oil Revenue Sharing. Although their monthly meetings are held without fanfare or publicity, they are among the most important parleys that bring together officials of the Government of National Unity (GoNU), led by President Omar al-Bashir, and the Government of Southern Sudan (GoSS), headed by First Vice-President Salva Kiir Mayardit.

Established by presidential decree in February 2006, the committee is charged with the weighty task of apportioning the country's monthly oil income in accordance with the wealth-sharing provisions of the 2005 Comprehensive Peace Agreement (CPA).

Under the agreement, net revenues derived from oil wells operating in the 10 southern states are to be equally divided between the GoNU and GoSS after two per cent of the total income has been earmarked for individual states where rigs are located.
That sounds straightforward enough. Yet from the time that oil revenue sharing began four years ago, the process has been dogged by suspicion, public rows and the unresolved status of the oil-rich Abyei area.
Black gold, which the country began exporting in 1999, is big business for the Republic of Sudan. In recent years, the industry has consistently accounted for over 90 per cent of Sudan's total export income.
Current production levels hover in the vicinity of 450,000 barrels per day, making Sudan the sixth biggest oil producer in Africa.
The industry is of even greater importance to Southern Sudan, where approximately 80 per cent of the country's producing oil fields are located.

The money accruing to the GoSS under the CPA's wealth-sharing provisions represents 98 per cent of the regional government's entire revenue base. By the end of last year, an estimated $6.9 billion in oil monies had been transferred to the GoSS through its central bank, the Bank of Southern Sudan.
But as the new year dawned, the GoSS was still owed approximately $265 million in delayed revenue payments. Most of that sum has been since paid out. As of early June, Khartoum owed less than $7 million in arrears to the Juba-based regional government.

Ongoing disagreements over the allocation of oil revenues were among grievances cited by the Sudan People's Liberation Movement when it formally suspended its participation in the GoNU during most of the fourth quarter of 2007.
An Oil Revenue Stabilization Fund that was supposed to build up a cash reserve during periods of high market prices has been drained dry by both CPA signatories.
A new bone of contention surfaced at the start of this year when the GoNU began unilaterally deducting seven-figure sums from the GoSS' monthly share of oil income to cover expenses related to preparations for the 2010 national elections.
A total of $52 million was subtracted for that purpose from the GoSS' cut of oil income during the first four months of this year, before the practice was ended by mutual agreement, said Yousif Ramadan, head of the petroleum unit of the GoSS Ministry of Finance and Economic Planning and one of five GoSS members of the technical committee on revenue sharing.

An accountant by training who has served as the GoSS' eyes and ears on oil revenue matters since he joined the regional government at the end of 2005, Mr. Ramadan hailed the committee as one of the most successful examples of north-south cooperation and described its proceedings as "transparent".
But others are not so sure. A dossier published by the European Coalition on Oil in Sudan (ECOS) in April 2008 questioned the inherent fairness of the oil revenue sharing mechanism.
"The production figures that the Government (of National Unity) gives cannot be verified," asserted the report. "There is suspicion that real production figures are higher."

An outside expert who was brought in to advise both CPA parties on the country's oil industry disagrees with the ECOS skepticism.
"There are unresolved issues related to outstanding arrears, deductions for elections, administrative costs, the Oil Revenue Stabilization Account and the revenues of the state-owned Sudapet company," said Anders Hannevik, a 25-year veteran of the international oil industry, who accepted an appointment as the Norwegian embassy's petroleum envoy in 2007.
"Still, we have no indications that the volumes that are being reported are incorrect and are not being allocated in a correct and fair way," Mr. Hannevik said.
According to the petroleum envoy, employees of the GoSS Ministry of Energy and Mining have been physically deployed recently at the functioning oil wells in Southern Sudan for training and to assist in verifying production figures supplied by the GoNU.

He said the biggest outstanding issue dividing the CPA partners is the sharing of oil revenue coming out of Abyei, the historic cradle of Sudan's oil industry, whose contested borders will be addressed by the Permanent Court of Arbitration in a ruling scheduled for this month.
During the first three years of the CPA interim period, the government in Khartoum kept all of the oil revenue coming out of Abyei, on the grounds that it had yet to reach a consensus with its southern counterpart on the area's borders.

Revenue sharing was formally introduced with the signing of the Abyei Road Map Agreement in June of last year. But by that point, the amount of oil income generated by Abyei that had poured into Khartoum's coffers stood at well over $2 billion.

Also, under the terms of the road map agreement, Khartoum pledged to deposit half of its share of Abyei oil revenue into a Unity Support Fund that is intended to promote economic development throughout the north-south border areas. The GoSS agreed to donate one-quarter of its Abyei oil income to the same fund.

The GoSS has paid its share, which is automatically subtracted from its monthly transfer of oil revenue, said Mr. Hannevik. But the GoNU, he added, has yet to deposit any of the $130 million it is supposed to have contributed to the fund by now.
The upcoming ruling by the Permanent Court of Arbitration on the long-running Abyei border dispute could have significant implications for the final disposition of oil income originating in the area that has been collected by the GoNU thus far.
But regardless of how the judicial process plays out in The Hague this month, there are strong indications that Sudan's oil industry may have peaked and is about to enter a period of steadily declining production.
Optimistic production forecasts in excess of 600,000 barrels per day in 2009 have failed to pan out. The ECOS dossier on the industry foresees a steady decrease to daily levels of approximately 300,000 barrels of crude by 2016.
None of the six holes drilled in the once promising Block 5B in Unity State has yielded a single drop of oil to date. Experts warn that only the discovery of a new field of truly world-class proportions could offset falling production in Abyei, which today accounts for about 15 per cent of the country's total output.

Oil ups and downs

After hitting a five-year low last February, world oil prices climbed steadily throughout the second quarter of 2009 to peak at $73 a barrel by the end of June. However, a spate of grim unemployment figures in the United States and Western Europe as well as mounting evidence that Americans are cutting way back on their summer holiday driving this year drove crude prices down to the $60-a-barrel level during the initial days of July. Some industry analysts expect the downward trend to continue at a moderate pace in the coming weeks.