Russia’s Risky Venture Into The Sudans

Sudan, be it the northern Republic of Sudan or South Sudan, is one of the most dangerous places to drill for oil, as we have already established. Yet somehow interest in entering both countries' oil sector does not wane despite the omnipresent risk of a new conflict, either locally or on a national level. Now Russia is lining up to get into both Sudans at the same time, although at varying rates of intensity and interest - after a relatively calm 2018 externally, the new year might bring about a seemingly unexpected breakthrough for Russian companies. What is more, it is not small-to-mid-size companies that are appraising both countries, but oil majors that can advantageously turn government backing to useful account.

The main pillar of Russia's Sudan offensive is the construction of a refinery in Port Sudan, first alleged to be Africa's largest (surpassing the 350kbpd Skikda refinery in Algeria) and then revamped into a 222kbpd project. Interestingly, African media report that two companies have so far issued letters of interest to the Sudanese authorities - the U.S.-based Energy Link International and the Russian TK Ural Trade. Neither of them boasts any expertise in the materialization of large projects, the first seems to be an Asia-oriented energy consultancy company whilst the latter's activity or street credibility is largely untraceable. Given that the U.S. company proposed to build a smaller 100kbpd refinery, Sudanese authorities might prefer a Russian investment. Yet there could be more below the surface.

According to Russian media reports, Gazprombank might become an investor in the Port Sudan refinery project, based on a preliminary agreement. The inclusion of any Gazprom-related entity makes it a much more interesting matter, all the more so as there have been rumours circulating for several years already that Gazprom Neft (the branch of Gazprom responsible for oil production and refining) is interested in tapping into Sudan's offshore oil. Sudanese authorities are wooing the Russian side as good as they can, hoping for a late 2019 start of construction. Interestingly Sudan might not be the ultimate market outlet for the goods produced - on the back of an average 10 percent GDP growth Ethiopia witnessed over the past seven years product demand growth has risen accordingly, by some 9.5 percent every year.

Oil product demand is expected to double in 20 years, reaching 190-200kbpd (jet fuel should be of particular interest as kerosene demand is expected to triple from the current 15kbpd). This looks like an interesting market, right? Yet there is one thing that makes it even sweeter for investors - Ethiopia lost its only refinery, Assab, when Eritrea broke away in 1993 and now fully relies on product imports. The Assab refinery was decommissioned in 1997 yet even if it were still onstream, it would not be of great help - its 18kbpd processing capacity is simply insufficient. The only potential problem is that Ethiopia itself has plans to construct a refinery to cater for its needs, but very few details have been made public.

Sudan itself houses two refineries, yet only one is currently operational - the 21kbpd Port of Sudan refinery was decommissioned in 2017. The 100kbpd Chinese-operated Khartoum refinery operates at a palatable (certainly compared to an average African refinery) level of 75 percent, however, cannot meet the country's needs. It has to be said that compared to neighboring Ethiopia, Sudan is an altogether different story domestically - product demand there has stagnated throughout the last decade. Still, Sudan turned into a net importer of products. Previously it imported only diesel, from 2016 onwards it started to import gasoline as well. The causes thereof mostly lie in a fuel crisis that is crippling Sudan, with massive amounts of gasoline being siphoned off into the black market and sold for 5-6 USD per gallon (roughly five-sixfold the official selling price) in the countryside.

Against such a difficult background, why would Russia want to move into Sudan? If we are to look at the official statistics, one can observe that the oil reserves of South Sudan amount to 3.5 billion barrels, whilst Sudan possesses 1.5 billion barrels. Thus, the south is much more promising in terms of oil prolificacy, however, much more dangerous due to a blazing (and underreported) conflict. Yet geopolitically, Russia's energy initiatives in Sudan fit well into the overall bilateral canvas of their relations. Russia is a leading exporter of grain to Sudan and intends to start building the nation's first-ever nuclear plant as soon as 2019 (all in all, four reactors are expected to be built). Extending the energy cooperation into the oil sphere might seem a logical continuation of the process.

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Yet even if it manages to get a good deal from the Sudanese partners, Russia will take all the necessary precautions before it proceeds. Even though Gazprom Neft was rumoured to be interested in Sudan's offshore, it will most likely not do anything before it conducts some sort of prospecting. This will happen in concurrence with Rosgeologia, the state-owned prospecting company, that is expected to carry out seismic surveying on Block 15 (45 802 km2) in 2019. Gazprom Neft, according to media reports, has already signed up to appraise Block 13 in the Red Sea (spread out across 25 974 km2 it is quite the license right). Thus, all of Sudan's offshore (there's only Block 13 and 15 with access to sea), conceivably the safest place to produce crude in Sudan, seems to be taken up in one way or another, by Russian companies. Note that the new refinery is expected to be built in Port Sudan, i.e. on the seacoast and the Sudanese authorities explicitly do not want to limit the refinery owner's sourcing options.

As for South Sudan, it is unlikely to receive any attention from Russian majors, apart from the state-owned Zarubezhneft which specializes in exploring difficult oil frontiers. Zarubezhneft signed up to explore four oil blocks in November 2018, breaking into a market that was previously split up between Chinese, Indian and Malaysian companies (CNPC, ONGC Videsh and Petronas). This does not mean that there is no Russian activity taking place - for instance, the refinery in Bentiu is co-owned and operated by a Russian entity, yet these are high-risk bets that might fall apart as a house of cards if hostilities break out again in the state of Northern Liech. Strange as it may sound, Sudan is a safer bet.

This remains true despite South Sudan restarting its oil production on January 1, 2019 from oil fields in the state of Unity. The fields have been idle for 5 years, as the civil war made it impossible to drill - as a consequence, much of South Sudan's pre-independence oil output (attaining some 300-350kbpd before 2011) was shut in and aggregate production numbers never surpassed 200kbpd afterwards. The South Sudanese government now expects to add an additional 40kbpd by February and swing firmly into the 200-250kbpd production interval. All of South Sudan's oil is transported via Sudanese territory and officials from Khartoum played a vital role in bringing back Unity volumes. Yet even Sudanese assistance, to be celebrated during the January 21 bilateral celebration of the production restart, cannot save South Sudan from the ever-lingering specter of brutal infighting.