Cablegate: Global Witness Recommends Greater Transparency in Sudan's

Published: Wed 23 Sep 2009 02:53 PM
DE RUEHKH #1075/01 2661453
O 231453Z SEP 09
E.O. 12958: N/A
SUBJECT: Global Witness Recommends Greater Transparency in Sudan's
Oil Industry, Attention to Post 2011 Arrangements
1. (U) SUMMARY: UK watchdog organization, Global Witness (GW), at an
open meeting September 10 in Juba, reported that there are serious
discrepancies in the reporting of Sudan's oil production and
revenues, nearly all of which result in an underreporting of
Southern Sudan's share of this national resource. This underpayment
to the South could total hundreds of millions of dollars. Sensitive
to the incendiary nature of its conclusions, GW emphasized its
analysis was based on incomplete information. It stressed that
transparency, including greater data disclosure and historical
audits, would be the best way to lift the cloud of suspicion that
hangs over oil's role in North-South fiscal relations. GW raised
concerns that the Wealth Sharing Agreement (WSA) contained in the
Comprehensive Peace Agreement (CPA) only runs until 2011, at which
point the provisions governing Sudan's oil industry since 2005 will
lapse. GW recommends that negotiations regarding wealth sharing and
contractual arrangements in the oil industry begin immediately to
avoid future insecurity. With the opportunity to re-open the WSA,
and a reasonable negotiating period, the GW report makes ten "key
recommendations" for increased transparency in Sudan's oil sector as
a pathway to building trust among relevant stakeholders. END
GoSS, AEC Reject Aspects of Report
2. (U) Mr. John Luk Jok, the Government of Southern Sudan (GoSS)
Minister of Energy and Mining (MOEM), who attended the meeting,
rejected several aspects of the report. He disputed the GW
insinuation that GoSS failed in its responsibility to monitor
Sudan's oil production, pointing out that there were currently 18
MOEM employees monitoring oil production and transportation
facilities. Minister Jok outlined the improvements made in
availability and disclosure of production, export, and revenue data,
and stated that GoSS and its Norwegian technical experts were
satisfied that revenues were being shared equally as specified in
the WSA. Minister Jok's comments were echoed by the Assessment and
Evaluation Commission (AEC) Co-ordinator, Simon Giverin, who took
issue with several aspects of the report, particularly the timing of
its release.
3. (U) According to the GW report, the key inputs necessary for
determining Sudan's total oil revenues, and Southern Sudan's share
of these revenues, are the amount of oil produced and exported, the
price at which the oil is sold, and the various deductions taken
before determination of Southern Sudan's 50 percent share is made.
GW acknowledges that Government of Sudan (GoS) agencies make oil
production, export, and revenue data available; however, they point
out that there are deficiencies and inconsistencies in the data.
(Note: Assembling data is difficult for all but the determined
financial analyst, and there is little, if any, way that data can be
verified. End Note.) For example, the report states that oil
production data for 2005 and 2006 are found on the Central Bank of
Sudan (CBoS) website, while more recent data are located on the
Ministry of Finance (MoF) website. GW also points out that the
Joint Technical Committee for Oil Revenue and Distribution, a
committee staffed by civil servants from Khartoum and Juba
established pursuant to the CPA, meets monthly to review and approve
oil export and production figures, but has no way independently to
verify GoS MOEM supplied data. In addition, published figures
seriously lag actual production/sales; most of the 2007 data, and
all of the 2008 data, were not published until April 2009, according
to the report.
4. (U) GW analyzed production data from the principal producing
fields in Southern Sudan. Government figures were taken from MoF
data (originally prepared for the IMF) that are to be found on the
Ministry's website. These data were compared against the production
data published by the China National Petroleum Corporation (CNPC),
the operator of three of three of the four productive blocks in
Sudan. Although the comparisons were not perfect and the numbers
needed massaging, the results showed a consistent undercounting in
the Sudanese production data versus that of CNPC. For example (using
2007 data), CNPC reported the daily production rate of the Greater
Nile Petroleum Operating Company (GNPOC) [Blocks 1,2, and 4] at
270,000 barrels per day (bpd), while the MoF reported a production
rate 9 percent less, at 245,614 bpd. Petrodar data [Blocks 3 and 7]
shows 2007 production of 74.5 million barrels versus the MOF
reported production of 64.0 million barrels, an amount 14 percent
less. A comparison of 2005 data for GNPOC and Petro Energy [blocks
1,2,4 and 6] shows a 26 percent difference between CNPC and
KHARTOUM 00001075 002 OF 004
Government-reported production. By way of comparison, GW reports
that CNPC and Government of Sudan 2007 production data for Petro
Energy [block 6], where there is no sharing of revenues between the
North and South, are almost exactly the same, approximately 40,000
5. (U) The GW report uses such comparisons to make a case that
there is a serious undercounting of oil production from fields where
the GoS shares oil revenues with Southern Sudan. In the report, and
in its presentation in Juba, GW softened its tone to say that
production discrepancies were sufficiently large to justify an
independent audit, and full disclosure of the results, to resolve
the issue once and for all. (Note: This approach addresses the
need to resolve discrepancies, the largest of which, 26 percent,
comes from 2005 data, and the others, 14 percent and 9 percent, use
more current, 2007, data. It also takes into account that those
close to the situation, including GoSS members of the Joint
Technical Committee for Oil Revenue and Distribution and the
Norwegian Oil Envoy, agree that oil production disclosure has
improved over time and current reporting is acceptable. End Note.)
6. (U) The report notes that most Southern Sudanese express their
concerns in terms of an undercounting of oil production. However,
the GoSS does not receive the oil itself, but rather a percentage of
oil revenues. The MOEM in Khartoum has the exclusive right to
market Sudan's oil, and oil industry experts agree, especially given
the unique characteristics of most Sudanese crude oil, that it would
be far easier to manipulate oil export prices than production. In
the report, GW made the case for developing a joint North-South oil
marketing organization, improved contract tendering processes, and
verification of sales prices by an independent auditor, whose audits
would be made public.
7. (U) The report explains that Sudan produces three sorts of crude
oil: Nile, Dar, and Fula Blends. There is no quoted price for Fula
Blend, which is produced entirely in the North and used as feedstock
for domestic refineries. Dar and Nile Blends are exported, and the
MoF and CBOS publish sales price data on their websites. However,
the delay in releasing price data is comparable to that of
production data, the report states. Nile Blend is reasonably high
quality crude sold at prices close to world benchmarks. Due to the
difficulties of transporting and processing Dar Blend, though, it
trades at substantial discounts to benchmark crudes, GW points out.
8. (U) GW analyzed the 2007/2008 sales price data disclosed on the
MoF website against the data for Sudanese Government oil sales
published in RIM Crude Intelligence Daily (Note: A respected trade
publication. End Note.) Of the 23 price comparisons available for
Nile Blend, 20 had a higher price reported in the industry press and
three had a higher price in the MoF figures, the report states.
Measured on an overall basis, RIM Crude Intelligence Daily reported
prices were $1.14/barrel higher than those reported by the GoS MOEM,
which represents a revenue loss of $65 million on 57 million barrels
of crude sold during this period, according to the report. As a
knowledgeable observer would expect, the pricing of Dar Blend was
much less continuous, the discrepancies were larger (as a percent of
sales price), and there was not a clear pattern of over/under
pricing, the report stated. Significantly, there were some outliers
in the pricing of Dar Blend. In particular, there were four sales
of Dar Blend in February 2007 that ranged between 15 and 23 cents
per barrel when earlier sales had been at USD 14.38. A Sudanese
delegation traveled to China soon after that and negotiated
increased prices, the report states.
9.(U) GW made a series of recommendations to improve the marketing
of Sudanese oil including establishing an independent sales
organization with a Supervisory Board composed of GoS and GoSS
representatives. In addition, they recommended that the practice of
"closed tenders" at which only Chinese companies can bid be
eliminated, and all oil sales be made by open tender. Finally, GW
argued that publication of sales data should be timelier and more
widely disseminated than on the MoF website. As with oil production
levels, GW argues that an independent audit of sales volumes and
prices would be an important way to build credibility in both the
North and South.
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10. (U) The cost of operating Sudan's oil fields, which can run as
much as 45 percent of total revenues, are deducted before the North
and South split profits, the GW report points out. Most of these
costs are controlled by the GoS MOEM or the field operator (usually
CNPC), allowing ample opportunity for manipulating the profitability
of operations. Sudanese oil is extracted under "Production Sharing"
agreements, which provide for crude oil production to be divided
between the operating companies and the Government, the report
explains. Companies recover their operating and development costs
from "cost oil," up to a maximum percentage termed the "cost stop."
Oil companies do not automatically receive this maximum, but they
can claim back-documented expenses up to this amount. The remaining
oil is termed "profit oil," and the contract specifies the basis on
which this oil is split between the oil company and the Government.
GoS profit oil is subject to the CPA Wealth Sharing Agreement.
"Excess Oil" is a component of profit oil that relates to the
difference between the cost stop and the actual costs that have been
claimed. (Comment: Given the relatively high cost of oil
production in Sudan, it is surprising how little attention is paid
to operating costs and fees, or their effect on Southern Sudan's oil
revenues. End Comment.) The GoS MOEM does not disclose any cost
figures, nor are these data available for the Joint Technical
Committee for Oil Revenue Distribution. It is not possible for the
Southern Sudan Government or its people to independently verify such
costs, the GW report points out.
11. (U) GW identifies a number of elements in the cost structure of
Sudanese oil production that merit improved disclosure. For
example, details of the contracts between the GoS MOEM and the oil
companies need to be disclosed, including division of the profit
oil. At present, many in the South suspect that revenues from excess
oil are retained by Khartoum, instead of being divided according to
WSA provisions. The GoS MOEM deducts a three percent management
fee, which is not provided for in the CPA, from oil revenues that
accrue to Southern Sudan. (Comment: This fee appears unjustified,
especially when the GoS retains half the profit from Southern
production. Pipeline fees, although not included in the WSA, are
more justifiable. End Comment.) However, there is no identifiable
basis for calculating pipeline fees, which vary from USD 4.05 to USD
8.60 per barrel (3 percent to 8 percent of revenue), nor is it clear
which party/parties ultimately receive these fees. The report notes
that management and pipeline fees add up. In August 2008, the
management fee exceeded $25 million and pipeline fees totaled $40
million. The report points out that the GoS also deducts the cost of
services it provides Southern Sudan, such as road building, from the
amounts the South is due. Finally, through its ownership of Sudapet
(the state-owned oil company), the GoS has an equity stake in all
the oil consortia operating in the country. The GoS keeps 100
percent of Sudapet profits, without sharing this income with the
GoSS because Sudapet profits were not included in the WSA.
12.(U) GW repeatedly makes the case that current levels of
disclosure are inadequate. This is particularly true for oil
development contracts, pipeline contracts, and operating and
development expenses, for which there is little, if any, disclosure.
However, the need for disclosure also applies to data such as
production, export, and selling price data, which are disclosed, but
too far in arrears and on difficult-to- access websites. GW
applauds the increasing activity of the North/South Joint Technical
Committee for Oil Revenue Distribution, as well as the decision to
provide representatives of the Norwegian Oil Development program
with access to previously confidential contracts and related
documents. However, GW recommends that others, both domestic and
international, must become involved, if mutual trust between the
North and South is to be established. GW argues that the Southern
Sudan Audit Chamber needs to be expanded and strengthened to take
over expanded responsibilities for the audit of oil industry data.
In addition, GW advocates that the Southern Sudan Legislative
Assembly become more active in mandating the disclosure of oil
industry data by law, noting that many confidentiality agreements
contain clauses that prohibit the disclosure of information "except
as provided by law." Internationally, GW advocates greater
involvement of a number of parties, including China (producer),
Japan (refiner), Norway (technical assistance provider), United
States (significant influence on the North and South), the
International Guarantors named in Sudan's CPA, the IMF (published
guide on resource transparency), and the Extractive Industries
Transparency Initiative.
KHARTOUM 00001075 004 OF 004
13. (U) GW warns that the CPA contains a wealth of information as to
the conduct of the North-South relationship during the interim
period, but it supplies nothing governing the future of this
relationship after the 2011 end date. Whether the outcome of the
referendum vote is unity or separation, the parties need to agree
what will happen to the oil, oil contracts, oil revenues, and the
Oil Revenue Stabilization Account in the post-CPA period, the report
states. Hammering out an effective and enduring agreement will be a
challenge against the backdrop of the referendum; however, such
agreement must be found. There is an uneasy mutual dependency
between the two: the North needs the revenue it earns from oil
produced in Southern Sudan, and in turn, Southern Sudan cannot get
its oil to market without access to the North's pipeline and the
Port Sudan terminal. While, ultimately, Southern Sudan may be able
to break the North's monopoly on the transportation and delivery of
oil, the construction of such alternate pipelines is still in the
planning stage. In the meantime, the GW report urges the
international community to facilitate the GoS and GoSS coming to
agreement on these issues in advance of the CPA end date.
14. (U) GW made ten key recommendations for improving the
transparency of Sudan's oil industry. Each is a crucial step
necessary, in their view, to build trust between the North and South
as they navigate the contentious issues surrounding the upcoming
elections and referendum vote. These recommendations are as
-- The oil production, export, and sales figures, upon which
revenue sharing depend, should be verified.
-- An agreement should be reached covering wealth sharing and
contractual arrangements when the CPA ends in 2011.
-- Costs and fees deducted from oil revenues should be audited,
including reimbursements of oil companies' investments, pipeline
fees, and the management fees paid to the GoS.
-- Both GoSS and the GoS should oversee marketing arrangements for
Sudan's oil.
-- The international community must increase efforts to promote oil
industry transparency.
-- The National, Southern, and State Governments should increase
their oversight of the oil revenues accruing to them.
-- The state oil companies of Sudan (Sudapet) and Southern Sudan
(Nilepet) should be restructured to avoid conflicts of interest.
-- The National Petroleum Commission should be strengthened
allowing it to assume its responsibility to set Sudan's energy
-- Employment of Southern Sudanese in the oil industry should be
15. (SBU) Comment: The Southern Sudanese have long suspected that
the GoS has underreported oil revenues as a way of cheating the
South out of its rightful share of the country's oil wealth. The
GW report does much to vindicate Southern Sudanese suspicions on
this score. Sensitive to the incendiary nature of its conclusions,
GW's emphasis on transparency, including greater data disclosure and
historical audits, appears to be the best way to lift the cloud of
suspicion that hangs over oil's role in North-South fiscal
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