SUDAN - Controversy - E&P Background.

Exploration and development of Sudan's oil resources has been controversial. International human rights organisations have accused the Sudanese government of financing human rights abuses with oil revenues, including the mass displacement of civilians near the oilfields. Factional fighting in the south and rebel attacks on oil infrastructure have kept oil production and exploration from reaching full potential to date.

In October 2004, for example, the Khartoum government prevented a militia attempt to sabotage the country's main crude oil export pipeline. However, the January 2005 CPA between and the GoSS was signed to end the North-South conflict. Now the danger of this conflict being revived is serious and is made more complicated by the Darfur war, in which the main rebel groups - including JEM - insist only regime change in Khartoum and a credible UN peace-keeping force would bring about peace in that vast province.

In January 2005, after the signing of the CPA, IOCs including Total, Marathon Oil of the US, and the state-owned Kuwait Foreign Petroleum Exploration Co. (KUFPEC) renewed their exploration rights to Block B in the south. But because of the US sanctions, Marathon is selling its stake in this venture. Total recently announced that intended to restart seismic and drilling work in this block either in late 2007 or in early 2008, with a view to starting oil production five to six years later.

Total is the first large non-state IOC to signal its return to Sudan, which holds one of Africa's largest proved oil reserves at 6.4 bn barrels. But the cautious strategy crafted by the French major, which has to engage with US pensions funds and help its partner Marathon sell its stake, underscores the complexity of producing oil in countries under US sanctions.

After Venezuela, Russia, Iran and other countries, Sudan is the latest example of how major IOCs are caught between rising global tensions and the need to supply the world's energy demand. The Total announcement, in September 2007, followed a Khartoum government decision in June confirming rights on Block B. A large part of the 118,000 sq km block, thought to contain significant oil reserves, had been claimed by tiny UK company White Nile Ltd.

White Nile in July said it was seeking clarifications over plans by the state to withdraw its licence. Total, which owns 32.5% in Block B, explored the area in the 1980s before war made operations impossible. A Total delegation went to Juba early in September and met GoSS officials there. The French major will now assess the possible presence of land mines and local humanitarian needs.

A spokesman for Marathon (MRO) has said it intends to sell its 32.5% stake in the block by end-2007 because of US sanctions prohibiting investments by American firms in Sudan. It was said in September that White Nile was barred by Khartoum to buy into the Marathon stake. A Total spokesman said the company and its partners were in talks with potential buyers, including a company from south Sudan, possibly Nile Petroleum Corp (NPC), which could take 10%. A new partner will be buying the remaining stake, he added. But as it prepares to return to southern Sudan, Total also has to talk to US pension funds, some of which may have to sell their Total stock as a result of its business in the country. Several US states have passed or are debating legislation requiring their pension funds to cut investments in companies doing energy-related work in Sudan, as alarm grows over atrocities committed in Darfur.

Some US pension funds are voluntarily barring investment in companies operating in Sudan when they are not satisfied with their impact on this country's human rights. That is what California Public Employees' Retirement System (CalPERS) did with nine companies in 2006 while deciding to retain shares with other groups operating in Sudan which are committed to human rights. Jean-Francois Lassalle, Vice President for Public Affairs at Total's E&P unit, in September said it was in discussions with US pension funds, including CalPERS, on the human rights aspects of the company's return to Sudan. CalPERS confirmed the discusions and in August said it owned 5.6m of Total shares then valued at $436.5m.

Lassalle said the company was particularly emphasising that its operations were in south Sudan. He said Total was explaining to funds its plans for economic development in the region, adding: "Investment is needed if one does not want south Sudan to find itself at risk of war. This is the only way to avoid a future war".

The GoSS on Sept. 19 said it planned to offer a new oil concession, to be called Block E, which will be formally delineated by the North-South NPC. The GoSS's Industry, Energy and Mining Minister Albino Akol Akol said several oil firms were interested in the concession but the NPC will have to approve the block first. He said: "The block has to be designated and then companies can apply". (The NPC is one of many co-ordination bodies mandated by the CPA).

Block E stretches over three states and runs next to other concessions already contracted out. All three states will have to be involved in talks before any companies are signed on, Akol said, adding: "It is stipulated in the...[CPA] that states have to choose people to negotiate with applying companies".

The NPC will meet within the next two months, and Akol said it was likely that Block E will be put on the table. He said that privately owned Spanish company H-Oil, which began negotiations for the block with the GoSS before the CPA was signed, remained interested. The south Sudan VP had previously said H-Oil had signed a memorandum of understanding with GoSS officials. Akol said: "But H-Oil is only one of the applicants, they attempted to sign an agreement but they cannot do it without people in the area agreeing and the NPC". Akol said other companies looking to the block include "a British firm" and Supiri, a southern Sudanese company based in Canada. He added that other firms had expressed interest through Khartoum. Most of the oil-rich areas of the south are tied up in contracts signed with Khartoum which are not re-negotiable, but there are areas close to the Ethiopian border which are still free as well as the land earmarked for Block E.

Dindir Petroleum Int'l (DPI), the largest oilfield services company in Sudan, in November 2006 signed an exploration and production sharing agreement (EPSA) with the Khartoum Ministry of Energy and Mining for a 200,000 sq km block in the north-west of the country. DPI then said it had 15% in the block and, along with five un-named partners, was to invest a minimum of $43m over six years, shoot 3,000 km of 2D seismic surveys and drill four wells.