Home | Comment & Analysis    Thursday 6 January 2005

Sudan peace to spur oil growth, West still wary

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By Edmund Blair

CAIRO, Jan 6 (Reuters) - An imminent peace deal to end war in southern Sudan will encourage expansion in an oil industry that has managed surprising growth despite two decades of war.

Although Western majors are likely to remain cautious on Sudan, the peace deal is likely to facilitate the operations of the Asian firms that have led developments in recent years.

The peace deal, to be signed on Sunday in Kenya, will end a war that erupted in 1983 in the south. After intense bargaining between the government and the rebel Sudan People’s Liberation Movement (SPLM), southerners secured half the oil revenues.

The deal will not cover the separate conflict that flared up in western Darfur last year and which has made some 1.6 million people homeless.

Sudan’s oil production, currently around 320,000 barrels per day (bpd), comes mainly from fields in the south, with Chinese, Malaysian and Indian firms the big investors.

"Sudan is attractive. There is large exploration upside. It is the kind of place majors would be interested in, but the risks will remain quite high until Sudan is able to resolve its internal problems," said Teju Akande, analyst at Edinburgh-based energy consultants Wood Mackenzie.

"The country has been getting investment, not from the Western world, but it has been getting investment from the East."

Analysts say state firms working to secure supply for Asia’s energy-hungry economies face less shareholder pressure over issues such as human rights than Western firms, many of whom have quit or reduced their presence in recent years.

With one new field ramping up production this year and another, giant, development set for first oil, and total output expected to reach 500,000 bpd in 2005, the country’s petroleum industry has flourished under Asian influence.

UNTAPPED EXPLORATION POTENTIAL

Estimates of reserves range from more than 560 million barrels to over one billion, but analysts say swathes of the country are unexplored so actual reserves could be much higher.

That investment has encouraged an optimistic outlook from Sudan’s government.

In December, oil minister Awad Ahmed al-Jaz said Sudan had signed a new prospecting agreement with an unnamed firm for one of its exploration blocks, and that at least one further deal on untapped acreage was expected in 2005.

As well as pushing its oil production, Sudan has struck a deal with China to refurbish and expand its Khartoum refinery.

The government is also negotiating with Indian, Malaysian and European oil firms to build a new 100,000 barrel per day refinery in Port Sudan that would expand export opportunities.

Asian dominance of prime sites has reduced openings for Western firms, if they do seek to build up their presence.

For the time being, they are likely to sit and wait for a resolution to the conflict in Darfur, analysts say.

DARFUR FAR FROM PRODUCTION AREAS

The main areas of fighting in Darfur are hundreds of km (miles) from Sudan’s key Muglad Basin production area.

Consequently the threat to the oil industry from the Darfur conflict comes more in the form of international pressure over the government’s behaviour in the crisis, including threats of sanctions, although a rebel group did attack a small South Darfur oil pumping station in December.

"Even if the conflict in Darfur is not related to the oil issue, the fact that the country is experiencing a humanitarian crisis due to conflict cannot be overlooked by anyone," said Christine Batruch, vice-president of corporate responsibility at Sweden’s Lundin Petroleum AB.

She said Lundin, which has reduced its activities in Sudan but retains an interest in one block, would plan its activities for 2005 after the signing of the north-south deal.

But she added: "Most of the prospective acreage has been taken by non-Western companies and as such there are limited opportunities."

Total said in December it had reached a deal with the government to update terms on a block it operated until security issues forced it to suspend activities in 1985, but added that operations could only resume once peace was restored.

"The conflict in Darfur could potentially impact security in the south, in which case we would have to assess the situation," a spokesman said from Paris.

Talk of imposing sanctions on Sudan over the Darfur conflict has added to uncertainty. But analysts said China, with its interests in Sudanese oil output and its veto power at the United Nations, would likely oppose any U.N. sanctions move.



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