Abstract
Selected Issues
Sudan’s Oil Sector: History, Policies, and Outlook1
The oil sector has played a crucial role in Sudan’s politics and economy, but Sudan lost 75 percent of crude oil production after the secession of South Sudan in 2012. Recent policies have focused on facilitating ballooning fuel subsidies that have intensified a vicious cycle of inflation and exchange rate depreciation, and also damaged the outlook for the sector. This paper reviews oil sector developments, discusses challenges faced by the sector, and provides preliminary recommendations for continued development in the oil industry.
A. The Booming Oil Sector Before the Secession of South Sudan
1. Foreign companies have dominated in the development of Sudan’s oil sector. U.S. oil giant Chevron, as the first foreign company to invest in the oil sector in Sudan, conducted extensive onshore exploration activities from 1974 onward, mapping out the Muglad and Melut basins, with major discoveries at Bentiu (later renamed Unity), Heglig and Adar Yale oil fields. However, due to the second civil war in 1984, Chevron suspended its operations and was forced to pull out from Sudan in 1992 following increased political uncertainty and pressure from the U.S. government. The deteriorating relationship between Khartoum and Washington, especially the U.S. sanctions against Sudan, also made other big oil companies shun Sudan, while several small oil companies stepped into the vacuum and continued to explore and build operational infrastructure for a few years before Asian companies entered the Sudanese oil market. Asian companies, including China National Petroleum Corporation (CNPC), Malaysia state-owned company, Petronas, Indian Oil and Natural Gas Company (ONGC) (Table1), have dominated Sudan’s oil market since 1995.2 On August 31, 1999, the first 1500 barrels of crude oil were exported to the international market.
Sudan: Main Oil Companies in Sudan
Sudan: Main Oil Companies in Sudan
| Consortium/Subsidiary | Shareholders | Share (%) | Country of Origin |
|---|---|---|---|
| Greater Nile Petroleum Operating Company (GNPOC) | CNPC | 40 | China |
| Petronas | 30 | Malaysia | |
| ONGC | 25 | India | |
| Sudapet | 5 | Sudan | |
| Petro Enegry E&P (PEOC) | CNPC Sudapet |
95 5 |
China Sudan |
| Petrodar Operating Company | CNPC | 41 | China |
| Petronas | 40 | Malaysia | |
| Sudapet | 8 | Sudan | |
| SINOPEC | 6 | China | |
| Tri-Ocean Energy | 5 | Egypt | |
| Petrolines for Crude Oil Ltd (PETCO) | 100 | Sudan |
Sudan: Main Oil Companies in Sudan
| Consortium/Subsidiary | Shareholders | Share (%) | Country of Origin |
|---|---|---|---|
| Greater Nile Petroleum Operating Company (GNPOC) | CNPC | 40 | China |
| Petronas | 30 | Malaysia | |
| ONGC | 25 | India | |
| Sudapet | 5 | Sudan | |
| Petro Enegry E&P (PEOC) | CNPC Sudapet |
95 5 |
China Sudan |
| Petrodar Operating Company | CNPC | 41 | China |
| Petronas | 40 | Malaysia | |
| Sudapet | 8 | Sudan | |
| SINOPEC | 6 | China | |
| Tri-Ocean Energy | 5 | Egypt | |
| Petrolines for Crude Oil Ltd (PETCO) | 100 | Sudan |
2. Oil wealth surged with new oil fields and high international oil prices. Oil production grew rapidly, especially after the end of the second civil war in 2005, from 305,000 barrels per day (bpd) in 2005 to the peak of 483,000 bpd in 2007 and stayed around 460,000 bpd till 2010. Sudan therefore became the third largest African oil exporter after Nigeria and Angola. In the early 2000s, rising international oil prices also boosted oil exports, which increased by 30 percent per year on average while the share of oil in exports increased from 36 percent in 1999 to 95 percent in 2008, with gross foreign reserves rising to US$12 billion in 2011. The booming oil sector also contributed to steady economic growth averaging 6 percent in this period. Fiscal revenue doubled from 7.6 percent of GDP to 15.2 percent of GDP between 1999 and 2011 as oil revenue contributed to 60 percent of the total revenue.
3. Sudan developed refinery capacity to extend its value chain. In 1996, CNPC and Sudanese Petroleum Corporation (SPC) jointly built the Khartoum Refinery Co. Ltd (KRC) to produce fuel products domestically. With the rapid growth of crude oil production, refinery capacity was expanded to 100,000 bpd in 2006. The KRC also built the world first delayed coking unit (DCU) to process heavy Fula oil (maximum refining capacity of 40,000 bpd), which is highly acid crude oil (measured by the total acid number, or TAN) and needs special methods to reduce the risks of corrosion. Later, CNPC also built Port Sudan Refinery (currently out of service due to high cost of its modernization). In addition, Sudan has three other small refining plants, namely El-Obeid, Shajirah, Abu Gabra, but only El-Obeid is active with a capacity of 10,000 bpd of Nile blend, and produces gasoline, diesel and fuel oil for electricity generation. In 2019, CNPC reduced its ownership from 50 percent to 10 percent.
4. Oil pipelines were built to bring oil from the south to the northern port for export. Two pipelines are currently running from the oil fields in the south to the Bashayer Marine Terminal in Port of Sudan or to oil refineries in Khartoum. The first, Great Nile oil pipeline (1600 km), built in 1999, transports Nile blend crude oil from the Heglig oil fields (Blocks 2 and 4) in Sudan and the Thar Jath and Mala oil fields in South Sudan to the Bashayer Marine Terminal for export and to two refineries in El-Obeid and Khartoum. The second, the Petrodar (PDOC) pipeline (1380 km), transports crude oil from Palogue and Adar Yale oil fields in the Melut Basin to the Bashayer Marine Terminal. The two pipelines could transport 1.5 million barrels of crude oil per day. In September 2014, ownership of the pipelines and facilities was fully transferred from joint ventures to a local Sudanese pipeline operator, Petrolines.
5. However, oil wealth is now close to depletion after the secession of South Sudan in 2012. Because most oil blocks are in the territory of South Sudan, Sudan’s oil production capacity reduced substantially after the secession. In addition, existing oil fields are nearing depletion. Thus, crude oil production has dropped from about 130,000 bpd in 2013 to about 72,000 bpd in 2019 (Figure 1). According to BP Statistical Review of World Energy for 2019, Sudan’s proven oil reserves at end-2018 are at 1500 million barrels only, with a low recovery to production ratio of 41.1.
Sudan: Crude Oil Production and Exports
(Thousand barrels per day)
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A003
Source: U.S. Energy Information Administration.6. An Oil Agreement between Sudan and South Sudan was signed as one component of the secession agreement. South Sudan voted to separate from Sudan in 2011 after the Comprehensive Peace Agreement (CPA) signed in 2005. With international community mediation, the two parties separated according to a series of cooperation agreements, including an Oil Agreement, which stipulates how to share the oil facilities and use of the pipelines. The Government of South Sudan would pay US$3.028 billion under the Temporary Financial Arrangement (TFA) to the Government of Sudan for the oil field infrastructure over 3.5 years, or US$15 per barrel of oil produced in South Sudan, until the total amount would be paid. South Sudan would also pay Sudan US$11 per barrel for crude produced in block 1, 2, and 4 in South Sudan, including oil processing fees (US$1.6 per barrel), transportation fees (US$8.4 per barrel), and transit fees to the sovereign (US$1.0). In addition, crude oil from blocks 3 and 7 in South Sudan will pay oil transit fees (US$9.1 per barrel) for oil transported through the pipeline in the territory of Sudan.3 The Oil Agreement has been extended several times since then. As at end-2019, South Sudan still owns US$574 million in TFA payment to Sudan.
B. Complex Opaque Financial Flows, Weak Governance, and Large Subsidies
7. The oil sector faces significant challenges in addition to the dwindling reserves. Production could be increased to more than 100,000 bpd easily by investing in primary recovery techniques according to an expert assessment.4 However, all foreign investors, except CNPC, chose to leave Sudan by 2020 after their contracts terminated. No new foreign investors expressed interest in exploring this market when the authorities offered 15 blocks to international investors after the United States lifted economic sanctions in 2017. While the lack of interest could reflect low expectations of large new oil finds in Sudan, it also appears to reflect governance and policy weaknesses. Without foreign investment, the Government of Sudan has been unable to develop this sector due to resource constraint and lack of a clear development strategy. Notably:
The State-Owned Enterprises (SOEs) in the oil sector are not operated on a commercial basis. SOEs now dominate the oil sector, including Sudan National Petroleum Corporation (Sudapet), SPC and KRC, but none of them are run on a market basis. Sudapet is reportedly not active in oil exploration, but only manages revenues the government receives from the profit-sharing agreement (PSA) with foreign partners. SPC used to be responsible for import and distribution of fuels, but it was dissolved in March 2019 by order of the Prime Minister with no reasons published, and all assets and employees were transferred to the Ministry of Energy and Mining (MOEM). KRC also operates on non-commercial basis: it only processes crude oil delivered by the government and hands the final products back to the government. As a result, these SOEs have no incentives to further invest to improve production or reduce costs.
The MOEM is heavily involved in the oil business. It regulates the oil sector and also manages the financial operations of SOEs in the sector. As regulator, the MOEM is responsible for establishing the sector’s development strategy, cooperating with foreign investors, and administrating domestic fuel markets. It also manages the above-mentioned SOEs, including their production, imports and sales of fuel products to distributers in the retail market, and pays taxes to the government. Since many financial transactions are charged by MOEM internally, the SOE’s financial situation is not transparent to the public, and there is a potential conflict of interest between the government and SOEs.
Rising energy subsidies have dried up government resources and triggered a vicious cycle of inflation and exchange rate depreciation in the economy. With limited access to external financing and the limited domestic securities market, monetization by the Central Bank has become the principal channel for financing government deficits. Moreover, the energy subsidies have forced to central bank to engage in a variety of quasi-fiscal operations to acquire forex to support government import of strategic goods-including fuel, medicine, and wheat5 These actions have undermined central bank independence and led to very rapid reserve money growth, high inflation, and currency depreciation (Figure 2).
Sudan: Inflation, Exchange Rate and Fuel Subsidies
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A003
Source: Sudan Authorities and IMF staff estimates.8. Domestic fuel prices in Sudan are among the lowest in the world (Figure 3). Prices of gasoline, diesel, fuel oil/heavy fuel oil, kerosene and liquified petroleum gas (LPG) are all administrated by government and are far below the cost of production/import. For example, gasoline is priced at US$0.14 per liter while diesel is at US$0.09 per liter, among the lowest in the world.6 Gasoline is used mainly by private vehicles, diesel is for public transportation and agricultural activities, fuel oil for electricity generation, and kerosene and LPG for household cooking.
Sudan: Gap Between Domestic and International Fuel Prices
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A003
1/ Evaluated at exchange rate of SDG 82/US$.9. Fuels importing needs increased since domestic production could not meet demands. Sudan used to only import 50 percent of diesel and 15 percent of LPG consumed in the domestic market and export a small amount of gasoline. However, fuel import needs increased once domestic refineries could not run on full capacity due to reductions in crude oil production. Particularly after 2016, the share of domestic production in total consumption dropped significantly, with 50 percent of gasoline, more than 60 percent of diesel, and 50 percent of LPG needing to be imported in 2019. Moreover, the MOEM also paid very high credit premiums to import fuels because it had to delay payments when the Central Bank struggled to allocate limited foreign exchange.
10. The MOFEP has had to make various efforts to supply crude oil for the domestic refineries. To maintain the proper operation of the refineries, they must process at about 80 percent or more of its full capacity, or 77,000 bpd of crude oil. With the government share of crude oils dropping to close to 40, 000 bpd, it had to seek crude oil from other sources, including purchases from foreign partners and converting payments of South Sudan under the Oil Agreement into crude oil transported in the Sudanese pipelines (14,000 bpd in 2019 was diverted to the refineries).
11. Multiple exchange rates have been used by oil sector companies. For example, domestic refineries use exchange rate of SDG 18/US$ to convert the cost of crude oil (which is in line with international market price) to calculate the processing fees that are used to measure the cost of domestic production (US$6.99 per barrel in 2018 and 2019 and US$4.42 in 2016 and 2017), and SDG 45/US$ for importing of other materials. Government has paid foreign partners for their crude oil in domestic currency by using exchange rate of SDG 26/US$ and purchased foreign exchange from central Bank at exchange rate of SDG 18/US$, while the Central Bank’s cost of obtaining foreign exchange from domestic gold miners is at parallel market exchange rate (about SDG 85/US$ in December 2019) (Figure 4).
Sudan: Financial Flows in Energy Production and Consumption
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A003
12. The MOFEP bears the full cost of fuel distribution. The MOEM is responsible for the cost of fuel production and import, while the MOFEP bears the cost of diesel and gasoline transportation and distribution from Port of Sudan and distribution center to different cities, which is about SDG 1.8 per ton per km. In addition, the distribution margin charged by private companies are determined by the government and adjusted when companies need to increase their capital investment.
13. The MOEM pays various fees and taxes to the MOFEP on behalf the SOEs. Every month, a committee comprising of representatives from the MOFEP and MOEM meets to settle various claims between them. In summary, the MOFEP incurs charges to pay the refinery processing fees to the MOEM, while the MOEM will need to pay various fees and taxes from revenues of fuel product sales in the domestic market. Those fees and taxes include: (i) fuel stabilization fees based on the difference between current domestic fuel prices and those existing in 2013, currently at SDG 620 per ton for gasoline, SDG 536 per ton for diesel and SDG 80 per ton for LPG; (ii) development tax (13 percent of C&F import price) for LPG and gasoline; (iii) custom fees at 10 percent of C&F import price; (iv) fuel fees for both imported and domestically produced fuels, which is at SDG 960/ ton for LPG, SDG 5956.65 for gasoline and SDG 3207.96 per ton for diesel; (v) berth fees and crossing fees for LPG and gasoline imports, at SDG 41/ton and SDG 2.5/ton respectively; (vi) value added tax (VAT) (17 percent) and sea port VAT (SDG 7.41/ton) on diesel, gasoline and LPG imports, and VAT on domestically produced LPG, gasoline and diesel at rate of SDG 86.29 per ton for LPG, SDG 154.62 per ton for gasoline and SDG 85.06 for diesel; and (vii) supply of crude oil which is calculated at international price and converted to SDG by using SDG 18/US$.
14. Fuel consumption has increased steadily except in 2012 (Figure 5). Although private vehicle ownership in Sudan is relatively low, gasoline consumption volume increased on average at 12 percent in the past 20 years. Diesel consumption increase has been slightly smaller than gasoline at 8 percent on average.
Sudan: Gasoline and Diesel Consumption Changes
(Percentage change, year-o-year)
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A003
Source: Ministry of Energy and Mining and IMF staff calculations.15. Fuel oils are provided at zero cost for electricity generation. Sudan has both thermal and hydro power generating facility, but relatively cheap hydropower could not meet domestic demand, accounting for 60 percent of total electricity generation. The state-owned electricity generation company uses fuel oil from the refineries for power generation. In recent years as electricity consumption increased, the MOFEP also used crude oil from South Sudan (14, 000 bpd in 2019) and imported fuel oil for power generation. However, the electricity company does not pay for the supply of fuel oil or crude oil. According to a World Bank report, in 2017 the revenue from sale of electricity could only cover 21 percent of the cost of operation, and the rest was subsidized because the average electricity tariff is only about US$0.007/kWh in 2018 (calculated using the official exchange rate of SDG 45/US$), the lowest in Sub-Sahara Africa.
16. The power exchange agreement with Ethiopia also imposes additional costs on Sudan. As the state-owned power generation company does not have funds to invest in its equipment to improve electricity production, the government also agreed to provide 12000 barrels of gasoline per month to Ethiopia in exchange for electricity. Since Sudan already needs to import gasoline for its own consumption, they agreed that Ethiopia will send electricity to Sudan based on a gasoline import price marked down by US$20. Therefore, the government bears additional costs for this transaction.
17. The total amount of subsidies is neither transparent nor fully reflected in the government’s balance sheet. Given the complexity of various transactions between the MOFEP and MOEM, recording energy subsidies is very challenging in Sudan. The MOFEP’s fiscal report only discloses energy subsidies on a partial netting basis. Because the government uses multiple exchange rates in these transactions, a substantial portion of subsidies arising from the use of different exchange rates are recorded the Central Bank’s balance sheet. IMF staff estimate the total fuel subsidies by evaluating the gap between cost of production—which includes cost of supply at international prices, refining costs, transportation and distribution costs, tax payments and importing cost—and domestic retail prices. The estimated full fuel subsidies in 2019 are about SDG 215 billion, or 10.6 percent of GDP, in contrast with the SDG 52 billion reported as the outcome for 2019 budget.
18. While energy subsidies are huge and costly, they benefit mostly high-income households and neighbor countries. The 2014/15 National Household Budget and Poverty Survey (NHBPS) states that only 5.7 percent and 2.6 percent of households, respectively, own motor vehicles and motor cycles in Sudan. More broadly, a World Bank study concludes that energy subsidies disproportionately benefit the rich, because the top 20 percent of households receive more than eight times the fuel subsidy received by the bottom 40 percent, and on average, fuel expense makes up only 1.5 percent of total household expense. Moreover, cheaper fuel prices have motivated smuggling of fuels to neighbor countries.
C. Removing Energy Subsidies and Reforming Oil Sector Governance
19. International experience shows that successful removal of energy subsidies has some common ingredients. Fuel price increases have often led to widespread public protests in part due to lack of confidence in the ability of government to shift the savings from removal of subsidies to programs that would compensate the poor and middle class for the higher energy prices. An IMF paper which identified 28 country reform episodes found that 12 countries have successfully reduced subsidies, 11 were partially successful—often because of reversals or incomplete implementation and 5 were unsuccessful. These country experiences suggest some ingredients are needed for a success reform as following:
A comprehensive energy sector reform plan with clear long-term objectives incorporating an analysis of the impact of reforms;
Transparent and extensive communication and consultation with stakeholders;
Phasing-in price increases over time;
Improving the efficiency of state-owned enterprises to reduce producer subsidies;
Measures to protect the poor through targeted cash or near-cash transfer, or, if this option is not feasible, a focus on existing targeted programs that can be expended quickly; and
Institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.
20. Some specifics need to be considered for Sudan’s energy subsidy reforms. Sudan has persistent large macroeconomic imbalances due to past mismanagement and lack of external investment and financing. The weak economic condition and the continued depreciation of the Sudanese currency would complicate energy subsidy reforms. On the other hand, the recent regime change has created a window of opportunity for fundamental reforms. Therefore, energy subsidy reform should be included in a comprehensive economic reform package which should also tackle exchange rate reforms. The rather high poverty ratio and large gaps between domestic fuel prices and break-even prices in Sudan also means that removal of subsidies should be conditional of other key policy actions. Notably, an expanded social safety net and an extensive information and communication campaign need to be in place prior to subsidy reforms.
21. The government should also reform the governance of the oil sector. This includes reforming SOEs to allow them to operate on commercial basis so that they would be incentivized to have a long-term development targets and investment strategy; streamlining the function of the MOEM and returning it to a genuine ministry in charge of regulating this sector and providing strategic views on the development of energy sector in Sudan; establishing clear lines of responsibility between MOFEP and MOEM with regard of energy sector’s regulation; and finally improving transparency and enhancing auditing in the oil sector to allow more public analysis and scrutiny.
References
Ndip A. E., 2019, “Fuel Subsidy Reform in Sudan: An Assessment of the Direct Welfare Impact on Households” (Washington: World Bank).
Clements, B., D. Coady, S. Fabrizio, S. Gupta, T. Alleyne, and C. Sdralevich, 2017 “Energy Subsidy Reform-Lessons and Implications” (Washington: International Monetary Fund).
U.S. Energy Information Administration, 2019, “Country Analysis Brief: Sudan and South Sudan” Luke Anthony Patey, 2007, “State Rules: Oil Companies and Armed Conflict in Sudan” Routledge Taylor and Francis Group, Third World Quarterly, Vol. 28, No. 5, 2007, pp 997–1016
U.S. Energy Information Administration 2010 “Crude Days Ahead? Oil and the Resource Curse in Sudan”, African Affairs, 2010 109/437,617–636
Fatal Transactions, 2008, “Sudan’ s Oil Industry: Facts and Analysis”
World Bank: 2019, “Sustainability of Sudan’s Electricity Sector” (Washington: World Bank)
Central Bureau of Statistics of Sudan, 2017, “Sudan National Household Budget and Poverty Survey 2014/15” CBS Report No. 11, 2017.
Prepared by Qiaoe Chen.
CNPC, Petronas and ONGC are the main foreign players in South Sudan’s oil market as well.
Both GNPOC and Petrodar are headquartered in Khartoum. GNPOC installed oil production and processing facilities for 5 oil fields in the Muglad Basin of South Sudan. Petrodar has facilities in the oil field of Melut Basin in South Sudan. According to the Oil Agreement, South Sudan would pay for use of these facilities.
Sudan implemented multiple exchange rates to serve different purposes. For example, government uses lower than the official exchange rate to import strategic goods, including fuel, medicine and wheat.
Daily prices are tracked by Globalpetrolprices.com at https://www.globalpetrolprices.com/. In Sudan, the last domestic fuel prices increase was in end-2016.
