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UNCLAS SECTION 01 OF 04 KHARTOUM 001075 
 
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E.O. 12958: N/A 
TAGS: EFIN EPET ECON PGOV SU
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 
SUMMARY. 
 
---------------------------------- 
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. 
 
----------------------------------- 
VERIFYING OIL PRODUCTION AND EXPORT 
----------------------------------- 
 
¶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 
bpd. 
 
¶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.) 
 
 
-------------------------------- 
VERIFYING THE PRICE OF OIL SALES 
-------------------------------- 
 
¶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. 
 
---------------------------- 
VERIFYING THE COSTS AND FEES 
---------------------------- 
 
KHARTOUM 00001075  003 OF 004 
 
 
 
¶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. 
 
---------------------------------- 
ENSURING OVERSIGHT OF OIL REVENUES 
---------------------------------- 
 
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 
 
 
END OF THE WEALTH SHARING AGREEMENT 
----------------------------------- 
 
¶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. 
 
----------------------- 
TEN KEY RECOMMENDATIONS 
----------------------- 
 
¶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 
follows: 
--  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 
policies. 
--  Employment of Southern Sudanese in the oil industry should be 
increased. 
 
 
¶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 
relations. 
 
WHITEHEAD