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Cablegate: Sudan's Oil - Debt, Dysfunction, and Distrust

VZCZCXRO8210
PP RUEHROV
DE RUEHKH #0163/01 0341444
ZNR UUUUU ZZH
P 031444Z FEB 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 9866
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 02 KHARTOUM 000163

SIPDIS

DEPT FOR AF/SPG, AF/EPS, EB/IFD, AND EB/ESC
DEPT PLS PASS USAID FOR AFR, AND ALSO PASS USAID

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: PREL PGOV EFIN ECON EAID SU
SUBJECT: SUDAN'S OIL - DEBT, DYSFUNCTION, AND DISTRUST

REF: KHARTOUM 1719

1. (SBU) SUMMARY: In separate meetings with econoffs from January
24-31, leading oil experts expressed concern about significant
northern oil revenue arrears to the south estimated to be between
$150-250 million USD. Contacts were also critical of the
dysfunctional institutions managing petroleum in both the North and
in the South. The meetings also reveal a startling lack of attention
by the GoSS to oil industry revenues, which are available for them
to review. These leading oil experts, including the Norwegian
Petroleum Envoy and the Director General of the GoSS Petroleum Unit,
urged greater transparency, institutional development, and planning
for the oil industry, warning that disagreements over petroleum
could lead to war if the South secedes in 2011. END SUMMARY.

2. (U) Meetings: On January 24, EconOff met Catriona Laing and
Andrew Hall, the Country Director and lead Economist for the U.K's
Department for International Development (DFID). On January 29,
EconOffs met Yousif Ramadan, the Director General of the Petroleum
Unit, and one of the few southerners working on oil issues in
Khartoum. On January 31, econoffs met Anders Hannevik, the
Norwegian Petroleum Envoy to Sudan. Hannevik has been in Sudan for
approximately 5 months of his two year tour.

NORTHERN OIL ARREARS
--------------------
3. (SBU) According to figures compiled by Yousif Ramadan, the
Director General of the Petroleum Unit of the Government of South
Sudan (GoSS), northern arrears to the South by the end of November
2007 amount to approximately 177 million U.S. dollars. (Note: With
estimates as high as one-quarter of a billion dollars, neither
Ramadan nor Hannevik were able to verify the exact amount of
arrears, as debts from 2005 are disputed. End note.) Ramadan stated
that he has voiced concern to senior GoSS leaders such as President
Salva Kiir about the size of the arrears, but that senior leaders
have not raised the issue with GNU politicians. The Norwegian
Petroleum Envoy, Anders Hannevik, said that Ramadan's figures for
the arrears are accurate and that it is "absolutely worth pushing
this issue with senior politicians, as this is a significant amount
of money." (Note: Ramadan's report is available at
www.petrolgoss.net and the November figures for the GoSS share from
oil revenues published by the Ministry of Finance have been sent to
AF/SPG. End Note.)

DYSFUNCTIONAL INSTITUTIONS
--------------------------
4. (SBU) Ramadan stated that the National Petroleum Commission
(formed by a Presidential decree in 2005) still does not have an
office, representatives, or any functioning bodies except for the
joint technical committee which distributes revenues. Working out
of a decrepit office rented from the Sudanese Council of Churches,
Ramadan said he remains physically isolated from other colleagues at
the Ministry of Finance (MoF) and the Ministry of Energy and Mining
(MEM), and that there is still no indication that the NPC will build
a physical office any time soon. The Norwegian Petroleum Envoy
confirmed that the NPC is dysfunctional, meeting only once in the
summer of 2007 to decide the fate of Block B. (Note: The
Assessment and Evaluation Commission's factual report on the Status
of the CPA Implementation, from October 2007, notes that "The NPC
has been established. Internal regulations were adopted April 19,
2007. The Joint Technical Committee on Oil Revenue has been formed
and is functioning. The Secretariat is partially functioning, but
is awaiting GOSS nominees." End Note.)

5. (SBU) Ramadan also stated that "the amount of information that
we receive from the Ministry of Energy and Mining is in decline."
He complained that key government ministries are not anywhere close
to the CPA's goal of having 20-30% of all civil service positions
designated to southern Sudanese (as stipulated in the power sharing
protocols of the CPA, 2.6). Ramadan was equally critical of his own
southern government, saying "We need our GoSS ministers to do
something to put our house in order. Our representatives at the
Ministry of Energy and Mining say the same thing over and over and
there is a lot of indifference about oil issues." Ramadan said that
despite his position as one of the lead interpreters of oil revenue,
senior southern leaders have only called on him "once or twice" to
ask questions or seek more information about the figures.

6. (SBU) The Norwegian Petroleum envoy also emphasized that the
institutions responsible for managing Sudanese oil need to be
improved. Hannevik stated that there is an unnecessary delay in
calculating and transferring the revenue owed to the south.
According to Hannevik, the Ministry of Energy and Mining receives
daily production reports and this information should be immediately
available to the GoSS. Hannevik stated that there is no system or
schedule for distributing revenue, for analyzing the data, or for
withdrawing money from the Oil Revenue Stabilization Account (ORSA).
Hannevik stated that given the amount of money and the dependence
on this revenue, it is ridiculous that there are not firm procedures

KHARTOUM 00000163 002 OF 002


in place. According to Hannevik, the Government of Southern Sudan
still has not received any funds since January 1, 2008 and that this
may start to affect their ability to function.

SECESSION AND OIL
-----------------
7. (SBU) Returning to themes from his November 2007 presentation
to S/E Natsios (reftel), Hannevik stated that the latest oil figures
show even more dramatically that the North will lose almost all of
its oil revenue if the South secedes in 2011. He said that his
current modeling of the net value of projected total production
shows that this revenue drop to the North may be unacceptable for
the NCP and could potentially lead to disastrous results including a
return to war. According to Hannevik, production in the North is
declining dramatically, while it is gradually increasing in the
South. Hannevik added that production in block 6 located in the
North is declining and all of it is going to Sudanese refineries for
local consumption, leaving essentially no oil for export produced in
the North. Hannevik said that Abyei's declining oil reserves "make
it less of an issue than the larger question about the 2011
referendum." Hannevik said that he has shared his oil prediction
estimates with many senior GoSS leaders including Salva Kiir, and is
scheduled to give his first presentation to senior NCP leaders the
week of February 3. Yousif Ramadan agreed that oil could be a
destabilizing factor following secession, saying "I am afraid of
2011," adding "all of the oil in the South will belong to us in
2011, but the North will not accept a sudden decline in revenues."


INCENTIVES FOR 2011 PLANNING
--------------------------------------------- --
8. (SBU) Hannevik emphasized that it may be possible to offer
incentives to the North and the South for planning for the oil
industry after 2011. Hannevik emphasized that this would require
close cooperation with China, noting that the Norwegian Foreign
Minister is currently in China and that the Norwegian MFA had even
considered sending Hannevik on this trip to discuss Sudanese oil
issues. Hannevik stated, "The oil contracts were written when the
price of oil was $18 a barrel. It is now around $100 a barrel and
it is my personal opinion that too much oil revenue is going out of
the country." Hannevik stated that he believes that if pressured,
the Chinese might be willing to renegotiate oil contracts, as they
are more concerned about energy security and access to oil than to
its price. "They could spare to lose a few dollars and still be
happy with their arrangement in Sudan," stated Hannevik.

9. (SBU) DFID's Catriona Laing and Andrew Hall also told econoff
that the U.K. is interested in long-term planning for the oil
industry. Laing stated that the British have modeled different
options for post-2011 revenue sharing and are interested in offering
incentives such as debt relief for the North and the South should
they agree to a deal. Laing said that one scenario would establish
milestones for cooperation (the first being the 2009 mid-term
elections) that would be tied to oil revenue post-2011. Laing
emphasized that the British are interested in debt relief as one
option, and that the U.S. might be able to give other incentives in
a larger package. Laing stated that linking secession and petroleum
in one discussion is a sensitive issue that will require support
from the U.S., UK, Norway, the Netherlands, and China.

10. (SBU) COMMENT: Contacts painted a bleak picture of the
Sudanese oil industry, hampered by non-existent institutions,
disorganization, shocking lack of oversight by the South, and great
distrust. The GoSS appears paralyzed by these challenges, satisfied
with its current revenues, distracted by constant crises, and
disadvantaged by its lack of experience in the industry. The elite
in the GNU appear to benefit from this, making key decisions by
themselves, building up arrears to the South to make them even more
dependent, and doing little to make the industry more transparent,
comprehensible, and inclusive. Much can be done to improve the
industry including: training key GoSS personnel; facilitating
information-sharing between the North and the South; supporting
southern representation in key government ministries; and
standardizing procedures and timelines associated with revenue
transfers. The meetings also reveal a startling lack of attention
by the GoSS to oil industry revenues, which are available for them
to review. Absolutely essential for long-term peace and stability,
the discussion on post-secession oil revenue sharing should commence
as soon as possible and should be linked to discussions on Abyei.

FERNANDEZ

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