Risks for Oil Investments in Sudan

Political and Ethical Risks For Investors in Sudanese Oil

After meeting with Sudan’s newly appointed Oil and Mining Minister Adel Ali Ibrahim US-based oilfield services company Schlumberg Ltd has expressed a readiness to work with Sudan in finding and developing oil deposits [1].

In efforts to support Sudan’s economic recovery from US sanctions and a fall in oil revenue, Ibrahim has urged international energy companies to invest in Sudan’s oil and gas sector.

However, energy companies face considerable political and ethical risks should they invest in Sudan – particularly in an industry that lacks transparency, thereby making enhanced due diligence checks challenging.

Nonetheless, a stronger understanding of Sudan’s rapid evolving and intricately complex post-Bashir political environment post-Bashir will help identify the risks incurred for companies seeking to stimulate Sudan’s oil industry.

· Risk 1 - Sudan’s democratic transition is based upon a power-sharing agreement, whereby the deep-state linked to former president Omar Al Bashir retains its economic monopoly and commanding influence over Sudanese politics and security. Thus, the very high risk of corruption and political interference in the natural resources sector remains.

· Risk 2 – The Rapid Support Forces (RSF) militia, widely accused of atrocities, is increasing its profile in Sudanese politics and the natural resources sector. Partnerships with the RSF’s associated companies poses the risk of doing business with politically exposed persons. Oil exploration sites in conflict zones should also watch out for being subjected to an RSF ‘protection’ racket.

· Risk 3 - Sudan’s petrol-rich zones are conflict-ridden marginalised peripheries, where armed movements and their local constituents feel disenfranchised from a power-sharing process that is perceived as elitist. Oil companies must be wary of militant incitement in the event of labour unrest or environmental neglect.

· Risk 4 – Sudan hosts the processing facilities and pipelines needed to export South Sudan’s oil. Given that South Sudan-based oil companies are fuelling human-rights abuses in South Sudan’s civil war, Sudan-based oil companies also incur the risk of complicity.

Risk 1 – Corruption and political interference

Sudan’s power-sharing agreement will see five military representatives in the 11-member sovereign council which rules Sudan – among them Himedti, the commander of the RSF. The three-year transitional agreement will also see the military chief Abdulfattah Al Burhan lead the sovereign council for the 21 months – giving the giving the military ample time to shape laws that entrench their economic and decision-making. In addition, while Sudan’s 18-member Cabinet is dominated by civilians, the strategic posts of minister of defence and minister of interior affairs are held by military figures.

Crucially, Sudan’s petrol rich areas are located in militarised conflict zones such as Kordofan, the Blue Nile and Darfur [2]. In addition, a state of emergency has recently been declared amid tribal clashes in the eastern city of Port Sudan [3], which hosts the pipelines and processing facilities need to export South Sudanese oil. [4]

Therefore, the presence of violent unrest around Sudan’s best oil exploration sites make Sudan’s military apparatus major stakeholders in any business, potentially outweighing the importance of the civilian technocrats at Sudan’s oil ministry.

The risk for western energy companies in particular is that entering the Sudanese oil market poses the risk of unfair competition – with preferential access being granted to companies from states that are likelier to secure the Sudanese deep-state’s geopolitical interests.

China has long been a major player in Sudanese oil, with Russian companies increasing their profile in Sudan’s natural resource extraction industry [5]. Chinese and Russian seats at the UN Security Council form the basis of preferential treatment for their energy firms in Sudan – particularly given their advocacy of the Sudanese position that UN peace efforts in Sudanese conflict zones infringes on national sovereignty [6].

Indeed, Canada’s Arakis Energy Corporation suffered the fate of western energy companies losing out due to geopolitical interests. In 1996, Sudanese government threatened to cancel Arakis’ oil venture unless state-owned Chinese and Malaysian companies received 40% and 30% stakes in a joint operating company – the Greater Nile Oil Project. China was and remains a major arms supplier to Sudan, and Malaysia was a key ally of the Islamist regime. [7]

In addition, given the amount of companies linked to the deep-state, there is a risk of entering business with politically exposed persons allegedly involved in human rights atrocities – particularly those linked to the RSF militia.

The Sentry, an investigative team that follows dirty money connected to African war criminals, which was co-founded by A-List celebrity George Clooney, is lobbying for the US to apply targeted sanctions on the associated companies and international partners of corrupt Sudanese officials, particularly those linked to the RSF. [8]

With Sudan’s civilian government members keen to reduce spending on Sudan’s security apparatus from 80% to 20% of the budget [9], the RSF and other security forces will be keen to diversify their sources of funding. The RSF’s associated companies already dominate Sudan’s gold mining sector, and there are strong signs that they are keen to gain a foothold in oil exploration [10].

Risk 2 – Dealing with the RSF’s business network

International oil companies investing in Sudan should be wary of any involvement with the business network RSF commander Himedti – who also sits on Sudan’s sovereign council. The RSF and Himedti have been accused of atrocities across west and central Sudan, and most notably, the infamous June 3 massacre in Khartoum.

To seek domestic and international legitimacy as Sudan’s leader, and to attract oil company investments, Himedti has signed a $6m deal Canadian lobbying firm Dickens & Madson [11]. The RSF’s wealth stems from mercenary fighting and the take-over Sudan’s most lucrative gold-mines, with trading set up under a company known as Al-Junaid. [12].

In September 2019, events in the eastern city of Port Sudan – which hosts the processing facilities needed to export South Sudanese oil [13], left Himedti and the RSF in a prime position to expand their business interests into Sudan’s oil market . Amid a pre-existing tribal dispute, the Sudanese sovereign council declared a state of emergency [14], and the RSF entered Port Sudan under the guise of restoring order [15]. With Himedti presenting himself as a peacemaker [16], videos circulated on social media of tribal leaders in Port Sudan swearing allegiance to Himedti and the RSF [17].

With the RSF poised to enter the oil market, the potentially inevitable need to do business with the RSF poses reputational and environmental risks. The RSF may leverage its dominant position in Sudan’s security apparatus to insert its associated companies or individuals into potential contracts, thereby incurring the risk of business engagements with politically exposed persons, some of whom have been involved in war-crimes.

Given that the RSF generally operates above the law and with impunity, there are environmental risks posed by entering business partnerships with RSF associated companies. For example, despite public outcry at Al-Junaid’s use of cyanide in a gold-mining operation in South Kordofan, the RSF ignored instructions from the local government to halt its activities, with the RSF militias also blocking attempts to inspect facilities or approach Al-Junaid’s headquarters. [18]

With respect to the oil market in Port Sudan in particularly, oil companies may find themselves subjected to an RSF ‘protection racket’ – in which the militias are paid to protect sites and facilities. The RSF has previously offered its protection services to oil refineries in South Sudan in 2018 [19], and it is contracted to protect them in Libya [20].

The risk for oil companies is heightened considering Himedti’s history of inspiring insurgencies before gaining funding from influential stakeholders by recruiting troops to restore order – a strategy that has shaped Himedti’s rise from camel-trader to the de-facto military leader of Sudan. [21].

The risks of being subject to a protection racket are further heightened by Sudanese petrol-rich areas being located in conflict-zones where armed movements hold grievances and feel excluded by the power-sharing agreement.

Risk 3 – Militant incitement in petrol-rich areas

Energy companies seeking to develop Sudanese oil must be wary of fuelling, or getting entangled in, Sudan’s internal conflicts. Sudan’s petrol-rich areas are in conflict-zones – the Blue Nile, Kordofan and Darfur- where armed movements and bandits are active.

Sudan’s uprising and widespread revolutionary fervour has created a greater risk of popular unrest, making it a necessity for international oil companies seeking to enter Sudan to adequately prepare for and mitigate labour disputes or environmental damage.

In February 2019, hundreds of oil workers in Port Sudan went on strike for three months, following the transfer of a container terminal to a Philippine company [22]. Port Sudan’s oil unions had long been resisting privatisation with sit-ins and road blockages amid uncertainty over their employment contracts. [23]

Furthermore, disposal of toxic oil “production water” and radioactive elements across Sudan has contaminated waterways and wetlands, leading to widespread disease, crop damage and droughts. [24].

Sudan’s armed movements are poised to exploit any popular grievances in Sudan’s conflict-zones – given that they feel that they (and their local constituents from the marginalised peripheral, resource-rich peripheral regions) have been excluded from Sudan’s power-sharing agreement [25].

Therefore, popular grievances directed towards international oil companies related to employment or environmental concerns may turn into violent unrest, potentially leaving international oil companies with no choice but to engage with Sudanese security forces to protect their sites.

However, international oil companies seeking to develop Sudanese oil may mitigate reputational risks by developing socially responsible schemes to win-over the locals in oil-rich areas.

This would mean greater adherence to attempts to prevent negative environmental consequences from oil activities. In addition, oil companies that may opt to develop the area by building schools, water stations and health centres should avoid the mistakes of their some oil companies already present in Sudan, by linking educational, sanitation and health centres to Sudan’s official institutions. [26].

Risk 4 – Complicity in war-crimes in South Sudan

Companies seeking to explore oil in Sudan must also consider how their operations may be linked to atrocities in neighbouring South Sudan, where the UN Human Rights Commission has accused oil companies of driving human-rights abuses. [27]

South Sudanese state-owned oil company Nilepet is alleged to have demonstrated a “total lack of transparency and independent oversight” in its diversion of oil revenues into the hands of government elites, which is in turn siphoned off to security services which are accused of human-rights abuses.

Upon secession, South Sudan took away 75% of Sudan’s oil reserves. However, all the processing facilities, pipelines and the port needed for exporting South Sudan’s oil are located in Sudan [28] – most importantly the Bashair oil terminal in Port Sudan.

Therefore, involvement in helping to export South Sudan’s oil would see companies complicit in human-rights abuses. Indeed, the US Commerce Department has designated foreign and domestic oil entities operating in South Sudan as threats to U.S. national security because of their role in the conflict. [29]

It is also worth noting that the dominant international oil companies in South Sudan, are the same as those in Sudan - the Chinese National Petroleum Company, Petronas of Malaysia, and the Indian Oil and Natural Gas Corporation. Many western companies have abandoned oil production in both of the Sudans altogether [30].

With an evolving political risk landscape given the rise of the RSF militia and Sudan’s political tensions, western oil companies are best advised to carry out enhanced due diligence checks before investing in Sudanese oil.