The North African country of Sudan has been beset by civil wars, famine and poverty seemingly for decades. The ancient land recently divided into two, with the formation of a new country called “South Sudan” -- however, this partition has not ended the ethnic and tribal conflicts.
While much of the outside world has long ignored Sudan, the territory has vast reserves of oil and gas, which make it an attractive investment target for foreign companies and might eventually help to lift its people out of poverty in the coming years. But given its lack of sufficient infrastructure and endless political instability, Sudan’s energy sector faces many monumental challenges.
International Business Times spoke with an energy expert on the future of Sudan as an oil exporter.
Peter Kiernan is lead analyst-energy at the Economist Intelligence Unit in London.
IB TIMES: How much in oil reserves are there believed to exist in Sudan (including South Sudan)?
KIERNAN: Estimates vary between several sources, but 5 billion barrels is the most common one for all of Sudan before it was broken up into two nations.
Since the break-up, it is estimated that 75 percent of Sudan's productive oilfields are now in the new South Sudan. However, South Sudan claims that its own reserves total 4.5 billion barrels. With more exploration, in both the north and south, these figures could be revised upwards.
IB TIMES: When did oil drilling first commence in Sudan?
KIERNAN: Production began in Sudan in 1999.
IB TIMES: Are gas and oil reserves in Sudan severely under-explored and under-developed?
KIERNAN: There are plenty of blocks that have not been explored fully yet, so there could be more finds. Sudan has announced licensing rounds for several blocks in its own territory, while South Sudan claims that there is plenty of reserve potential in blocks on its side of the border as well. But it is hard to put a figure on these things.
IB TIMES: Since most of the oil located in South Sudan -- is this the principal reason for the cross-border conflicts?
KIERNAN: Three-quarters of the productive fields in all of Sudan are now in South Sudan. The conflict has arisen as South Sudan still depends on Sudan as the only transit route for the export of the oil.
Disputes have arisen about the transit fees that Sudan is charging South Sudan for oil transport. South Sudan only wants to pay Sudan 69 cents per barrel, while Sudan wants to charge $36 per barrel, according to one recent report from early March.
You can therefore see the disparity between the two positions.
At the moment South Sudan depends on Sudan as a sole transit country for its oil exports, which gives Sudan considerable leverage. South Sudan also accuses Sudan of diverting some of the oil flow to its own refineries.
IB TIMES: South Sudan’s dependence on Sudan to transport the oil to customers/markets must be a very difficult problem for the South.
KIERNAN: Yes, as it currently stands the only export route for South Sudan's oil is via pipeline to the Sudanese coast on the Red Sea. South Sudan has looked at pipelines to be constructed elsewhere, but this takes time, several years, in fact, and a lot of money.
South Sudan has reportedly signed memorandums of understanding with Kenya and Ethiopia for alternative pipeline routes, but these are just on paper and need financing.
IB TIMES: Have the seemingly endless civil wars and now cross-border conflicts between Sudan and South Sudan severely hampered development of the area’s oil industry?
KIERNAN: Obviously that has had an impact, as poor security and sanctions have left exploration and development to just a few companies.
Often Chinese firms go where other companies fear to tread. The fact that South Sudan's exports have shut down because of a dispute over transit fees shows that the political risks of getting involved in Sudan's energy sector is high.
The two major producing areas, Blocks 1, 2 and 4 and Blocks 3 and 7, are expected to decline quite rapidly in production by the end of this decade, so exploration efforts need to be stepped up.
The resources might be there, but it is the above-ground risks that still may prevent Sudan, both north and south, from reaching their full production potential.
In the north, however, it will be easier, as it can export its crude oil quite easily, while the south depends on the north to get its oil out to the markets.
Thus, exploration opportunities are there but have not been tapped. The current major producing fields are reaching a peak in output, so in the coming years output from other blocks will be needed to maintain exist production rates.
IB TIMES: Who are currently the largest buyers of Sudanese/South Sudanese oil?
KIERNAN: The major customers of Sudanese and South Sudanese oil is and will continue to be China.
In 2010, China acquired 67 percent of Sudan's oil exports, followed by Malaysia, Japan and India.
In 2010, Sudan produced 470,000 barrels per day (b/d), of which 100,000 b/d was used for domestic consumption, leaving about 370,000 b/d left for export. Of this latter total, about two-thirds were exported to China.
With Sudan now broken up, South Sudan now produces about 345,000 b/d and Sudan about 150,000 b/d – but these figures are just estimates.
IB TIMES: What foreign companies are involved in Sudanese oil exploration and production?
KIERNAN: U.S. sanctions have prevented American companies from being involved in Sudan's energy sector, while public pressure has kept away other Western energy firms as well.
As a result, the major players in Sudan/South Sudan's oil sector are from China (China National Petroleum Corp.-CNPC), Malaysia (Petronas), and India (Oil and Natural Gas Corp.).
U.S. sanctions have since been lifted to allow investment in South Sudan, but we expect Asian oil companies to dominate Sudan's oil scene. For Western companies the political risk may still be considered too high.
IB TIMES: Discuss China’s involvement in Sudanese oil/energy projects.
KIERNAN: China is the dominant foreign force in Sudan's oil sector, with CNPC the lead player in the two consortiums that currently produce most of Sudan's oil -- these are Petrodar in Blocks 3 & 7 (mainly South Sudan), and the Greater Nile Petroleum Operating Company (GNPOC) in Blocks 1,2 and 4, which inconveniently overlaps the Sudan/South Sudan border.
Sudan also has Block 6 (CNPC), and South Sudan 5a (Petronas), which are also producing.
CNPC also constructed the pipeline that traverses Sudanese territory to Port Sudan, where the oil is then exported, mostly to China. This pipeline transports oil from the Petrodar fields, which are now mainly in South Sudan.
IB TIMES: Does South Sudan have any other industry aside from oil, or are they wholly dependent on energy exports for their income?
KIERNAN: South Sudan is virtually entirely dependent on oil exports for its national revenue -- 98 percent, in fact. Moreover, half of Sudan's government revenue and 90 percent of Sudan's export revenue is dependent on oil sales.
IB TIMES: Does Sudan/South Sudan have any kind of infrastructure to sustain its energy industry and its economic development?
KIERNAN: The oil fields are located in both countries, but the pipeline branches run through Sudan to the Red Sea. Sudan's and South Sudan's economies are heavily undeveloped, and thus rely on oil exports for both their export income and national revenue. Much of the infrastructure has been financed, built and operated by the Chinese.