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.

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 exploration blocks, and Canadian independent oil company 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 kilometres from the Red Sea coast, meant that substantial capital investment was required to transport the crude oil to a seaport.

To attract the necessary capital and spread the risks, Arakis entered into a consortium in December 1996 with the Greater Nile Petroleum Operating Company (GNPOC), consisting of CNPC (40%), Petronas (30%), Sudanese national firm 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. In July 1999, the pipeline began filling with crude oil, and 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 national oil company, 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 after being strongly criticised by human rights groups for co-operating with the Khartoum government. In turn, companies from Asia - CNPC, Petronas, ONGC - have taken their place.

In August 2003, ONGC Videsh also acquired stakes in two Sudanese oil blocks, 5A and 5B, from OeMV of Austria for $115m. These blocks are in the Muglad Basin. Block 5B has an oilfield, Thar Jarth, discovered 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 the Muglad Basin adjacent to Block 5A. Production has not yet commenced in Block 5B, however, due to the security situation in the region.

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 a 200,000 b/d 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 rate declined more recently to 10,000 b/d and in 2005 it should rise to 40,000 b/d. Speculation that the Block 6 oil fields could eventually produce as much as 170,000 b/d is yet to be confirmed.

In June 2004, Petrodar, which was granted a PSA by the Sudanese government in the Melut Basin in November 2000, awarded a $239m contract to Ranhill International of Malaysia (55%) and Petroneeds Services International 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 companies, Nam Fatt of Malaysia and Bentinin of Italy, to build pumping stations for Melut. Finally, China's Petroleum Engineering and Construction Corp (CPECC) has been chosen to build a $215m oil terminal to service Blocks 3 and 7.

In June 2000, the government announced plans to begin oil exploration in north-western Sudan, the Blue Nile Basin in south-eastern Sudan, and the Red Sea area in eastern Sudan. Oil exploration in Sudan previously was limited largely to the central and south-central regions, which, according to Khartoum officials, represent only 15% of national oil reserves.

The Energy Ministry now says total oil reserves in the country exceed 5,000m barrels. But of these, the officially proven reserves still stand at 700m barrels which is a very conservative estimate. Government spokesmen said that unnamed Japanese, European and Middle East companies had expressed interest in the new oil concessions.

Development of Sudan's oil resources has been highly controversial. Numerous international human rights organisations have accused the Khartoum government of financing wide-scale human rights abuses with oil revenues, including the mass displacement of civilians living near the oilfields.

Before the recent peace talks (see News Service in this week's APS Diplomat), the Sudan People's Liberation Army (SPLA) had declared oil installations a "legitimate military target", as oil development had provided the Khartoum government the financial resources to expand its war effort. The SPLA destroyed the main well on the Heglig oilfield in September 2002. Now, however, the SPLA's political parent SPLM and the Khartoum government have agreed to sharing the oil wealth of the country under a peace treaty to be finalised and signed by Dec. 31, 2004.

In August 2000, Sudan's National Petroleum Company announced plans to lay pipelines to supply Eritrea and Ethiopia with petroleum products from its Khartoum refinery. Eritrea has not yet benefited from Sudanese oil and relations between the two countries soured in April 2003 when Sudan accused Eritrea of supporting Sudanese rebels in the eastern part of the country.

Although Eritrea has denied the charges, future trade relationships are unlikely under the current climate. Sudan has plans to export oil to fellow members of COMESA (the Common Market for Eastern and Southern Africa), including neighbouring Kenya.

Exports may be delayed, however, by concerns over human rights issues in Sudan, and some Kenyan officials have called for a boycott of Sudanese oil.

In April 2002, Sudanese and Kenyan government officials announced that they were working on logistics for construction of a new pipeline that would link oilfields in Sudan to the Kenyan port in Mombasa.

Under the COMESA treaty, trade within the zone is not subject to tariffs, which means that Sudanese oil is likely to be cheaper for COMESA member-states than other alternatives.