To Omar al-Bashir: Go Away Or We'll Take Away Your Oil

Nicholas Kristof's excellent eight point plan for throttling Omar al-Bashir's criminally inhumane regime in Khartoum should include two further points. The tenth point has been articulated by Mark Helprin, who argues that that it would be relatively easy for American and allied air power to crush al-Bashir’s army, and starve the militias he has enlisted to do his work in Darfur, Abyei and the south. Helprin says, “Violating sovereignty is a matter of immense consequence and gravity. Then again, so is genocide.”

However, there is a ninth point that should be tried before Helprin's tenth: an international coalition should take control of Sudan's oil industry. Keeping Sudan's oil off the market will cripple the al-Bashir regime's ability to terrorize its people, and deprive it of the oxygen it needs to stay in power. When al-Bashir is gone, control of Sudan's oil industry will give the international community tools to oversee Sudanese national reconciliation that are lacking if the policy is simply to rain destruction on al-Bashir's military infrastructure from the air. As we learned in Iraq, after shock and awe, then what? 

Oil and Money in Sudan

Control of Sudan's oil wealth is of course an end in itself for al-Bashir’s regime. But second, the oil industry provides the regime with the means to fund the payroll for the military and para-military forces (Janjaweed, etc.) who carry out operations against its citizens, and to purchase the sophisticated military hardware (from China) to support these operations. Third, because the Khartoum government and the international oil companies who produce Sudan's oil have no intention of sharing the wealth with the indigenous population where it is produced, security of production can only be assured by deporting the indigenous population, a policy which al-Bashir has forcibly implemented on a large scale.  And fourth, although oil has not yet been discovered in Darfur, exploration licenses have been awarded in Janub Darfur, and the industry is optimistic about Darfur's potential. Khartoum and Janjaweed are not slaughtering people in Darfur for  reasons of ideology. 

Sudan's oil industry is truly the root of all of the nation's evils. 

Between 1999 and today, Sudan’s oil production has risen from zero to over 600 thousand barrels per day.  The market value of this at current prices is around $20 billion annually, of which $11-12 billion pours into the coffers of the state under production-sharing agreements with China's CNPC, India's ONGC and Malaysia's Petronas. Over 90% of these revenues derive from oil exports, which account for over 95% of the country's export revenue. The remaining $8-9 billion of market value annually, net of costs (operating, transportation, and recovery of acquisition costs and capital expenditure), is profit whch the four owners of the producing fields divide up according to their ownership shares: CNPC (46%), Petronas (32%), ONGC (25%), and the Sudanese state oil company Sudapet (6%).  

Under the 2005 Comprehensive Peace Agreement that ended the 21-year civil war between the Khartoum government and Sudan's southern provinces, now represented by the Government of South Sudan (GoSS) based in Juba, a revenue-sharing agreement was reached whereby the Khartoum government would receive 50% of revenues from production in the southern states, and retain 100% of revenues from production in the northern states.  Between 60 and 80% of Sudan's oil production is in areas under the jurisdiction of GoSS (depending on whether the disputed region of Abyei is counted as falling under the jurisdiction of GoSS or Khartoum), which would entitle GoSS to 30-40% of the state's oil revenue.

Taking Control of Sudan's Oil Industry

The terminal at Port Sudan on the Red Sea is the only means by which Sudanese oil can be exported. A naval blockade of the port would therefore be a fairly easy way for the international community to shut down Sudanese exports. The hard problems for implementing a strategy of taking control of Sudan's oil are diplomatic, economic, commercial and humanitarian. Fortunately there are reasonably good (but not perfect) solutions for all of these problems. And before we balk at the imperfections, we should bear in mind that a regime that slaughters its own people is a perfect problem.

The diplomatic and commercial problems are closely linked, since the state-owned oil companies of China, India and Malaysia own 94% of Sudan's oil industry. To achieve a diplomatic consensus behind the takeover strategy, it will be necessary to protect the commercial interests of CNPC, ONGC and Petronas. The economic problem is that  removing 500,000 barrels per day of Sudanese exports from the world market overnight could have seriously negative price consequences in the chronically tight world oil market. 

There is a way to address these problems:

1. A coalition of willing and able governments (for obvious reasons, the UN Security Council is probably not the most appropriate forum in which to try to organize this) would issue a formal request to CNPC, ONGC, Petronas and all other oil off-takers at Port Sudan to suspend exports until the government in Khartoum accepts terms laid down by the coalition (see below) or is replaced by one that will.

2. At the same time, OECD member governments would offer a time swap (oil today for oil tomorrow) to the Sudanese exporters, who would agree not to lift oil at Port Sudan, but instead to take delivery of equivalent amounts from OECD member countries' government-owned stockpiles.  Strategic stocks controlled by the governments of OECD member countries currently hold a little over 1.5 billion barrels of crude oil and products, enough to replace Sudan oil produciton for over eight years. The exporters would have the obligation to re-supply this oil to the OECD strategic stockpiles once Sudanese production is resumed, on terms that would include compensation for the exporters' lost time-value-of money.

3. Coalition governments would provide enforceable guarantees to CNPC, ONGC and Petronas that once Sudanese production is resumed, the companies' current license and commercial positions in Sudan would be preserved or, if not, the companies would be fully indemnified for losses by the coalition governments.

4. If less than 100% of Sudanese oil exporters accept these terms, coalition governments will impose a naval blockade on Port Sudan to ensure complete cessation of oil exports from the country.

The Bad Reason Why This is a Not a Good Idea

Critics of this proposal will argue that government-owned strategic stocks should only be used for the purpose for which they were acquired: to mitigate the consequences of a major world oil supply disruption. In the most likely (but highly unlikely) disruption event -- the shut-down of the Strait of Hormuz -- these 1.5 billion barrels would replace the lost production for around 90 days.  

Some would say that , as protection against the economic consequences of a shut-down of the Strait of Hormuz, a 90-day strategic stock would be about as effective as a sand castle against a tsunami. But whatever protection the strategic stocks offer against the consequences of such a highly unlikely event, why not give up some of this protection temporarily in order to degrade the al-Bashir regime's ability to terrorize its people? If governments were to use strategic stocks to replace Sudan's 500,000/day of exports for two years, and the Strait of Hormuz were then shut down, the remaining strategic stocks would last for 60 days rather than 90. The sand castle would only be two-thirds as tall.

Terms for the Post-Bashir Government

During the period of export suspension, coalition governments should compensate the GoSS for the lost revenue-sharing receipts under the Comprehensive Peace Agreement.  Once al-Bashir or a successor Khartoum government has agreed to the terms specified below, alliance governments would lift the blockade and allow exports to resume. These terms would include the following:

• Alliance governments would establish an interim Oil, Boundary and Budgetary Commission ("OBBC") whose members would be appointed by the alliance governments.

• The Khartoum government would accept the North/South demarcation line specified by the OBBC.

• The GoSS 50% share of revenue from oil production in the South would accrue directly to the GoSS. The Khartoum government's share of revenues from production in both North and South  be paid into a fund controlled and managed by the OBBC.  

• The Khartoum government budget would have to be approved by the OBBC before any funds are released. The OBBC would have sweeping powers to audit all expenditures, and to suspend funding to any ministry found to be using funds other than in accordance with the approved budget. Funding suspended for this reason could be spent by the OBBC as it saw fit.

• The Khartoum government would not alter any of the oil production licensing or other commercial arrangements in place prior to the suspension of production, except with the consent of the OBBC. 

• The terms and conditions of all new licenses for oil exploration or production would have to be approved by the OBBC except in the provinces governed by GoSS.

These terms would give the OBBC powers both to protect the interests of foreign investors in the Sudanese oil industry, and to force the Khartoum government to spend its share of the pie for the benefit of the Sudanese people.

And if it doesn't work? Then by all means, let's proceed to point ten.

Dan Badger

London

April 28, 2008