Kampala — THE OIL CURSE

An NGO report that shows a discrepancy between the oil revenues declared by the Khartoum government and those provided by the Chinese National Petroleum Corporation does not augur well for north-south ties.

The oil figures published by the Khartoum Government do not match those from the oil company, a report by Global Witness, an international NGO, has found. Khartoum reports up to one quarter less in certain blocks than what is stated in the annual report of the Chinese National Petroleum Corporation, the company operating in those blocks.

This is the more serious since the 2005 Comprehensive Peace Agreement (CPA), which brought to an end to the conflict between North and South Sudan, was based on an agreement to share oil revenues.

Oil comprises 98% of the income of the government of Southern Sudan. It received $2.9b in oil revenues in 2008 and $6b since the signing of the peace agreement.

According to the CPA, oil revenues from wells in Southern Sudan should be shared equally between the north and the south.

"The problem is that the southern government cannot verify that the oil figures published by the Khartoum government are correct," says the report, titled 'Fuelling Mistrust: The need for transparency in Sudan 's oil industry'.

"Even the World Bank states that transparency in the Sudanese oil sector is unusually weak in comparison to other oil-exporting developing countries which are often not very transparent themselves."

The fact that the government of Southern Sudan cannot verify the oil figures fuels mistrust between the two sides that were at war for 22 years, mainly over oil. The report raises another serious concern. In early 2011, the wealth-sharing agreement will come to an end and a referendum will be held on southern independence.

"A new revenue-sharing deal must be struck whether the result of the referendum is unity or independence," says Global Witness.

"If the result is unity, Southern Sudan will need to be allocated a fair share of the country's revenues. If the outcome is independence, the new country will be landlocked and will depend upon the north to export its oil, something Khartoum could refuse or make prohibitively expensive."

If Southern Sudan votes for separation, there will have to be some form of co-operation and revenue sharing between north and south, if only in the form of pipeline fees, the researchers argue.

They warn that total collapse of the peace agreement and resumption of war has not yet been ruled out.

"A return to conflict looks all too likely. Armies are already massing on either side of the border.

Discrepancies

The NGO found discrepancies of 9% to 26% between Khartoum's figures and the oil company's figures. The findings cover six of the seven productive oil blocks in Sudan.

The volume of oil claimed Khartoum claimed was produced in blocks 1, 2 and 4 was 9% less than that stated in the annual report of the oil company, the report established.

The amount of oil Khartoum claimed in blocks 3 and 7 was 14% less than that stated by the oil company.

And the number of barrels Khartoum claimed was produced in blocks 1, 2 and 4 and block 6 in 2005 was 26% less than that stated by the Chinese state company.

That means that the government of Southern Sudan missed out on substantial amounts of money it was entitled to under the peace agreement.

"If it were found that the oil figures published by the Government of National Unity had been under-reported by, for example, 10%, the southern government would be owed more than $600m."

Interestingly, the NGO found that the amount of oil Khartoum reported for the only oil block located entirely in the north and not subject to revenue sharing, was approximately the same as that stated by the company.

No verification

The southern government is not able to verify whether the oil revenues received from the Khartoum government as part of the peace agreement are correct, the report further points out.

"It is the Khartoum government that compiles the figures on how much oil is produced and the price for which it is sold. The southern government is not involved in those processes."

Marketed by one side

The oil is marketed by just one of the two governments that share in its revenues - the Khartoum government, the report notes.

"This makes it impossible for the southern government to verify that the price stated by the Khartoum government for which the oil was sold is correct."

It gives an example of four sales of Dar blend in February 2007 that went for between 15 and 23 cents a barrel.

Yet, the product in the previous month sold for more than a hundred times this amount.

"At times, the Khartoum government has sold oil via closed tenders in which only Chinese companies were able to bid."

Not its fair share

The southern government does not receive half of the oil revenues from southern oil wells because of additional costs Khartoum is claiming, Global Witness reports.

It found that Khartoum deducts a 3% 'management fee' from revenues shared with the south.

In addition, pipeline fees are being deducted. In August and September 2008 these amounted to between 3% and 8% of the value of the oil, according to Global Witness.

"It is not clear who receives these fees: the companies that operate the pipelines, the Khartoum government or both."

In addition, the researchers found that the Sudan state-owned oil company, Sudapet, which owns equity stakes in all the Sudanese oil blocks, does not share its profits with the south.

Ruling party

Another point raised in the report is that the oil consortia employ oil service companies which are widely believed to be linked to the Khartoum ruling party.

"The oil consortia claim back the costs for employing these companies; the more costs they claim, the less is left over for revenue sharing between the governments."

That means a larger share of the oil revenues goes to the north than is specified in the peace agreement.

No audits

The report further points out that there is insufficient oversight of the oil revenues. "In Southern Sudan, there is no Auditor General, despite this being a constitutionally required post."

The report also found that the national and southern state oil companies, Sudapet and Nilepet, are set up in such way that the same people are responsible for selling oil and regulating the sale of oil.

"At present, Sudapet, despite being a substantial oil-producing company, does not publish annual reports or accounts."

Arrears

As if this is not bad enough, Khartoum owes the southern government millions of dollars in oil revenue arrears, the report says.

"As of March 2009, the arrears due to the southern government, excluding those due from Abyei, amounted to $180 million."

There are also arrears due to the southern government from the Abyei oilfields.

"Even though the ruling of the tribunal of the Permanent Court of Arbitration found some oil fields to be outside Abyei, there are still some productive oil fields inside the area."

Insufficient and late release of data

Another problem identified by the NGO is the late release of figures by Khartoum, at times with a delay of two years.

"The Khartoum government does not publish all of the figures upon which the revenue sharing depends, and those that it does publish are often published late," the report says.

"At times, the most recent data available have been two years out of date."

In addition, the oil companies' investment costs are not published, despite these having a large impact on the governments' revenues from oil, it notes.

"Opening up the oil companies' costs to scrutiny is in the interest of both the Government of National Unity and the Government of Southern Sudan," the NGO says.

"In other countries oil companies have been found to over-claim the amount of cost oil, leaving fewer revenues for the government."

Recommendations

The NGO recommends that the oil production and sales figures be verified by an independent third party and by legislation that requires oil companies to disclose their payments.

"The audit should go back to 2005, to the start of the wealth-sharing agreement, and its results should be made publicly available."

Global Witness also recommends that an agreement be reached on what happens to the oil revenue sharing when the peace agreement ends in 2011.

"If the south votes for independence, they will have to rely on oil pipelines going through the north of Sudan to export oil; the chances of building a pipeline to export oil via a different route are zero in the short term," the report notes.

"An agreement needs to be reached now on how north and south will cooperate to export oil post-2011."

Any proposed revenue sharing post-2011 should include independent third party monitoring, funded by Sudan's donors, it recommends.

"Both parties to the peace agreement should be involved in overseeing the marketing of the country's oil and approving the oil companies' costs."

On China, the report says that renewed conflict in Southern Sudan would also threaten the Asian giant's energy security and its investments. China currently gets five percent of its total crude oil from Sudan.

"It is in China's interest to use its influence in Sudan to help reduce the risks of conflict."

The report also appeals to the international community, particularly the brokers of the CPA, the UK, the US and Norway, to do more to promote transparency and ensure that the agreement is implemented.