Focus On Diplomacy & Sudan.

For its part, China is focusing on diplomacy. Apparently it is ready to test its muscle at the UN Security Council concerning Iran, where over the past year it has secured more than $100 bn worth of oil E&P deals tied to long-term crude and LNG supplies to China. In announcing its resumption of work at the Isfahan nuclear plant, despite US and EU warnings, Tehran let it be known on Aug. 8 that it had first consulted with Beijing and Moscow (on the possibility of a UN Security Council resolution being vetoed by the latter two powers). But on Aug. 9 Russia demanded that Iran halt work at the Isfahan plant without delay.

In Sudan, China is focusing on an oil province likely to match those of the Persian Gulf in the future. Oil production in Sudan has risen rapidly in recent years, reaching almost 600,000 b/d and is expected to increase to 750,000 b/d by end-2006 and over 1.15m b/d by 2010. There are three main oil production centres in Sudan:

The Grand Heglig and Unity fields in the centre of southern Sudan, which are producing the bulk of the country's Nile Blend. The output is exported through a 1,540-km pipeline to a terminal at Port Sudan. The developing consortium, Greater Nile Petroleum Operating Co. (GNPOC) is owned 40% by CNPC, 30% by Petronas Carigali Overseas of Malaysia, 25% by ONGC Videsh of India which bought this stake from Talisman Energy of Canada in March 2003 for $771m, 5% by Sudapet, 5% by Gulf Petroleum, and 5% by Al-Thani Corp. of Dubai. With ONGC acting as E&P operator and CNPC operating the export pipeline, GNPOC hopes its output will exceed 500,000 b/d within the next two years.

Petrodar Operating Co. (POC), developing four major fields in a $1,500m project, is owned 41% by CNPC, 35% by Petronas, 8% by Sudapet, 6% by Sinopec (China's No 2 state oil giant), 5% by Gulf Petroleum and 5% by Al-Thani Corp. The Petrodar oilfields, about 650 km south-east of Khartoum, are being developed at top speed to produce 200,000 b/d from mid-2005 and 300,000 b/d by end-2006. These fields lie in the Melut Basin, a prolific area. Petrodar is having a 1,400-km crude oil export pipeline built to a Red Sea terminal near the existing one at Port Sudan.

El-Foula Block in west Kordofan held 100% by CNPC which is the operator for Petrodar and this tract, is being developed to produce 300,000 b/d by 2010. The block is west of the Grand Heglig fields and is said to contain more than 1,000m barrels of recoverable oil. CNPC intends to have a spur line to link up with the GNPOC pipeline for export. It will have a 730-km, 200,000 b/d pipeline from the block to the Elgaly oil refinery near Khartoum, a 70,000 b/d plant which is being expanded to 100,000 b/d as a 50-50 venture between CNPC and the government.

These three main production systems are creating the infrastructure required for blocks in remote areas to become more attractive to foreign investors. The three Asian firms are eager to raise their E&P investments in Sudan and too aggressive to let foreign competitors take up any of the prospective areas to be offered in the coming years. Sinopec farmed into the Petrodar consortium in 2004 with a 6% stake. Now Sinopec is on the look-out for additional E&P investments in Sudan.

Oil production in Sudan has risen quickly since mid-1999, when the crude oil export pipeline of GNPOC was ready. In 1999, output averaged 63,000 b/d, up from 12,000 b/d in 1998, 9,000 b/d in 1997, 5,000 b/d in 1996 and 2,000 b/d in 1995. It rose to 174,000 b/d in 2000, 211,000 b/d in 2001, 233,000 b/d in 2002 and 255,000 b/d in 2003. By mid-2004, it had exceeded 270,000 b/d.

Energy Minister Awad Ahmad Al-Jaz, in this job for many years, is focusing on major gas reserves found in the 1970s by Chevron of the US, as well as on Sudan's offshore oil prospects. There are also good prospects for natural gas in the offshore areas.

Aside from Heglig and Unity, fields in the Muglad Basin produce crudes with a 33-42[degrees] API range, with 0.5% sulphur. Most of the crudes are highly paraffinic, which require heating to maintain the flow in the pipeline. The Muglad Basin is part of a huge Cretaceous system which extends across central Africa and includes the Doba Basin in Chad plus oilfields in southern Sudan.

The Background: Petroleum exploration in Sudan began in the early 1960s. The activity was originally concentrated offshore in the Red Sea. The only significant offshore discovery was Chevron's Suakin gas find in 1976. Chevron's exploration in the 1960s and 1970s led to several oil finds in southern Sudan near the towns of Bentiu, Malakal and Muglad. But Chevron abandoned its concessions in Sudan in 1985, due to their location in an area where fighting was taking place between government and rebel forces. Total of France also suspended its onshore exploration activities, but retained the rights to its concessions.

The Khartoum government sub-divided Chevron's concessions into smaller E&P blocks, and the independent Canadian oil firm Arakis Energy (Arakis) acquired the portion of Chevron's concession north of the town of Bentiu in 1993. Greater Nile Oil Project Arakis began development of the Heglig and Unity fields (Blocks 1, 2, and 4) within its concessions, and started production on a small scale (around 2,000 b/d) in 1996. This oil was processed and consumed within Sudan. The remote location of the fields, more than 1,500 km from the Red Sea coast, meant that substantial capital investment was required to transport the crude oil to a seaport.

To attract capital and spread the risks, Arakis entered into a consortium in December 1996 with the GNPOC, consisting of CNPC (40%), Petronas (30%), Sudapet (5%), and Arakis (25%, and the field operator). Pipeline construction from the fields to an export terminal near Port Sudan began in May 1998 on an accelerated schedule. Originally built to move 150,000 b/d, the pipeline's capacity has been expanded to 450,000 b/d. It will be expanded further by adding a major pumping station.

The Nile Blend is exported primarily to China and India, with Petronas taking some of its entitlement to Malaysia. Recoverable reserves from the Heglig and Unity fields have been estimated at 660m to 1,200m barrels.

Arakis' involvement in Sudan, even after the formation of the GNPOC consortium raised $700m, remained hindered by a lack of capital. US sanctions against Sudan prevented investment in the project by American corporations or individuals, and the high-risk nature of investment in Sudan also had an effect. In October 1998, Arakis agreed to be purchased by another Canadian independent, Talisman Energy, for $277m in Talisman stock. The Talisman acquisition provided an infusion of capital which allowed the project to be completed on schedule in 1999. The first cargo of the Nile Blend departed the export terminal in early September 1999.

In March 2003, Talisman - under pressure by human rights organisations - sold its 25% in GNPOC to India's NOC, ONGC Videsh, for $771m, leaving Lundin Petroleum of Sweden as the only Western oil company with any equity in Sudan. Talisman - and other Western companies - have left Sudan in recent years. In turn, CNPC, Petronas, ONGC have taken their place.

In August 2003, ONGC Videsh acquired stakes in two Sudanese oil blocks, 5A and 5B, from OMV of Austria for $115m. These are in the Muglad Basin. Block 5B has an oilfield, Thar Jarth, found in March 2001 by Lundin. In April 2003, Lundin sold its 40.4% stake in Block 5A to Petronas for $142.5m. But Lundin has retained its 24.5% stake in Block 5B, in partnership with Petronas, Sudapet, and ONGC Videsh. Block 5B is in the southern part of Muglad Basin adjacent to Block 5A.

In August 2003, Petronas took a stake in Block 8, located in the Blue Nile Basin. Sudapet is a minority partner in this. Petronas currently has stakes in as many as eight Sudanese oil blocks - 1, 2, 3, 4, 5A, 5B, 7 and 8.

A Pakistani company, Zaver Petroleum, was in August 2003 awarded a three-year exploration contract for Block 9, 750,000 sq km, in the northern state of Khartoum and parts of the Nile Valley, Al-Gezira, Northern Kordofan and White Nile states. Sudapet is a minority stakeholder in this acreage. Zaver began exploration work in June 2004.

CNPC, the main stakeholder in GNPOC, on August 2003 signed two contracts with the government to build the 200,000 b/d pipeline and expand the Elgaly refinery near Khartoum from 58,000 b/d to 100,000 b/d. The refinery's expansion is to cost about $340m.

In late 2003, production tests at Block 6 reached 60,000 b/d. But this fell later to 10,000 b/d and in 2005 it should rise to 40,000 b/d. There is speculation that the Block 6 oilfields could eventually produce as much as 170,000 b/d.

In June 2004, Petrodar, which was granted a PSA by Khartoum in the Melut Basin in November 2000, awarded a $239m contract to Ranhill Int'l of Malaysia (55%) and Petroneeds Services Int'l of Sudan (45%) for development work on Blocks 3 and 7. Among other things, they are to build a 300,000 b/d central processing facility at Al-Jabalayan, production facilities at Palogue, and 250 km of water pipelines to link the two sides. The blocks cover an area 44,700 square miles in size, and contain four fields, of which Adar was found in the 1970s by Chevron.

Also in June 2004, Petrodar contracted two other firms, Nam Fatt of Malaysia and Bentinin of Italy, to build pumping stations for Melut. China's Petroleum Engineering and Construction Corp (CPECC) was chosen to build a $215m oil terminal to service Blocks 3 and 7.

In June 2000, Khartoum opened oil exploration areas in north-west Sudan, the Blue Nile Basin in south-east Sudan, and the Red Sea area in eastern Sudan. Oil exploration in Sudan previously was limited largely to central and south-central regions, which according to Khartoum represented only 15% of national oil reserves.

The Energy Ministry now says oil reserves in Sudan exceed 5,000m barrels.