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Southern Sudan: Oil Investor Banking on Secession?

At Glopac’s Africa Petroleum Frontiers day, Jarch Capital’s Phillipe Heilberg banked on Southern Sudan’s quick independence to capitalise on his newly acquired assets.

 

Bullish on Secession 
It was a presentation that raised a few eyebrows in an audience well accustomed to doing business in difficult environments: Phillipe Heilberg had been invited to speak about investment opportunities in Southern Sudan at the African Petroleum Frontiers event held by Global Pacific and Partners on 27 May 2009 in London. Jarch Capital is, Philippe Heilberg explained, a holding company focused on natural resources – and investments in countries where he anticipates ‘sovereignty changes’. He expects Southern Sudan to become independent in the next five years at the latest, possibly already in the next two years, either as a result of voting to secede in the referendum scheduled for 2011, or through a unilateral declaration of independence. His prediction is that international recognition, led by the US, will follow quickly. 

By then, presumably his company’s assets in this region would rapidly gain in value: According to Heilberg, Jarch has already taken out a 50-year lease for 400,000 hectares in Unity State – a deal that made headlines earlier in 2009. Jarch had also acquired a 70% stake in LEAC, a company owned by Gabriel Matip, the eldest son of General Paulino Matip Nhial, now the Deputy Commander-in-Chief of the Sudan People's Liberation Army (SPLA) and former head of the South Sudan Defence Force (SSDF). The latter is also a member of the Jarch local advisory board. Before joining the SPLA, Matip had fought against the SPLA and the current regime. 

Tried and Tested Model? 
High food prices have triggered a renewed interest in the investment opportunities in commercial agriculture, and for all its infrastructural and political challenges, Southern Sudan does have potential for large-scale agricultural production. However, Heilberg did not go into the specifics of these plans for agricultural investments, merely adding that his firm was looking at mineral prospects as well. Agriculture is unlikely to be the final – or even intermediate interest of Jarch (and it would be an odd topic for a petroleum conference indeed). Heilberg mentioned that in a second phase, Jarch would focus on hydrocarbons, but this will be his true motivation. The south has managed to obtain exemptions from US sanctions against Sudan for sectors like agriculture and mining, but not for hydrocarbons, so claiming a stake in the hydrocarbons sector may require a few acrobatics. In addition, while Jarch Capital is a US company, its subsidiary, Jarch Management, is registered outside the US, making it easier to circumvent such restrictions. 

Jarch’s approach evokes that of White Nile, an oil exploration company that appeared to have a firm foothold in the block B originally licensed to Total, thanks to the company’s relationship with former SPLA leader and first president of Southern Sudan, John Garang. Under the CPA, existing licenses could be reviewed, but not just removed. The south’s government had argued that Total had forfeited their rights due to inactivity, whereas Total had claimed force majeure. In fact, Jarch had earlier laid claim to the same block, only to be then nudged out by White Nile – who subsequently also lost their stake in it. Shortly after the Comprehensive Peace Agreement (CPA), White-Nile backer John Garang had died in a helicopter crash, and today, after lengthy wrangles, the block is operated by a new consortium that readmits Total and includes both the north’s and the south’s oil company, plus other foreign investors. Minister of State of Energy and Mining Angelina Jany Teny herself regretted how White Nile’s case had developed since it throws doubt on the enforceability of contracts. White Nile’s example shows how fragile such investments backed by relationships with key local figures can be in an environment like Southern Sudan. In Heilberg’s case, a business partner like Matip may turn out to be a gamble, given his history of fighting with the SPLA. 

Perspectives 
Angelina Teny’s presentation had preceded Heilberg’s, and speaking in a coffee break, she regretted that she did not have the opportunity for a reply: She brushed off Heilberg’s claims to the land, arguing that Southern Sudan does not have any kind of land legislation that would allow such a deal, as land was held communally. The absence of clear land rights is, indeed, an obstacle for most prospective investors.  

Both Heilberg’s and Teny’s statements are a reminder of Southern Sudan’s vulnerability. At the African Petroleum Frontiers event, Teny’s emphasis was on suggesting stability, irrespective of whether the South decides to secede or not, whereas Heilberg clearly banks on the latter. A key concern for most investors will be whether any transition to an independent state as, in principle, allowed for by the referendum on secession, would be peaceful. Teny emphasised that even though most of Sudan’s oil infrastructure, i.e. pipelines and refining capacity, were located in the north, the southern government was in talks with the northern government to find a mutually beneficial arrangement in case the south should vote in favour of seceding. Despite her confidence, this is by far not a given – to date, the north has not fully disclosed nor remitted the south’s share of oil revenues, and it is unlikely that this relationship should become any more reliable or trustworthy under a secession scenario. 

There are indications of instability that can undermine a peaceful transition of a united south: The census – carried out in a brief period of time, in an often extremely challenging environment – has not been released in full. The aggregate figures published have been disputed by the south who claim that a third of the population, not 21% as claimed in the official results, live in the south. Sudan’s Vice President and the head of the semi-autonomous southern government, Salva Kiir, had rejected the results as ‘inacceptable’. 

The shipment of arms allegedly destined for Kenya that was hijacked by Somali pirates is widely believed to have been intended for Southern Sudan as part of a wider rearming and military training programme. Merely a move to professionalise and unify the different groups of former rebel fighters, or a preparation for a renewed outbreak of conflict with the north? In the meantime, a spate of interethnic fighting is said to be exacerbated by cash-flow problems in the south, resulting in late payments for civil servants and military. Some ministries have entirely spent their budget, and customs payments due to the north have not been remitted, leading to retaliations in the remittance of oil revenues. 

Heilberg merely expects ‘skirmishes’ in his confidently pronounced independence scenario, but the reality is likely to be far messier, not the least because the south has a history of intra-southern conflict, often stoked by covert northern interference to undermine any unity in a fragmented south. For the oil industry in particular, a secession and any hostilities with the north would mean reviving infrastructure plans through and with Kenya, mainly a railway line and a pipeline for access to Kenya’s seaport in Mombasa and, possibly, the proposed new Lamu. All these infrastructure plans have been beset by long delays in planning, so their implementation, even if the finances can be raised, and the implementation proceeds without major hitches, will take years, leaving the south without alternatives for an extended period of time.  

But even if a secession – or unilateral declaration of independence – can be achieved under relatively peaceful, clearcut circumstances, this may resolve some of the insecurities in the political outlook, but it is no guarantee for a transition to growth and prosperity: Oil revenues, at least during the time when the south depends on the north’s infrastructure, are unlikely to rise, and the institutional and infrastructural weaknesses, lack of qualified human resources, and intra-southern tensions will be no easier to resolve see also Southern Sudan: Investment Snapshot.

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