To attract international investors to its petroleum sector, Sudan may need to improve its hydrocarbon legal and fiscal framework, which dates back to the late 1990s. Various elements are likely to require clarification, such as the award procedure and "how" royalty is applied to the exploration and production sharing agreements (EPSAs) from 2012. Moreover, after the past years' frequent institutional changes—the country is in a period of political transition following the April 2019 Sudanese revolution—the government needs to better define what the institutions overseeing the oil and gas sector are.

Constitutional Changes
Sudan is transitioning away from the autocratic presidency of President Omar al-Bashir and plans to hold general elections in late 2022 and draft a constitution. The Constitutional Charter for the Transitional Period of 2019 (Aug. 2019) stated that the transition period would last for 39 months. However, in late 2020, the transition period was extended to 2023. The Sovereignty Council, now composed of 14 members, including civilian and military representatives, is the collective head of state. The Transitional Cabinet plays the role of government, in which the Minister of Energy and Oil oversees petroleum affairs.

Why Improving the Petroleum Framework?
In addition to dealing with the political transition, if Sudan's petroleum sector wants to attract foreign IOCs and NOCs, it may want to consider updating its petroleum framework, which is based on the Petroleum Wealth Act of 1998 (1988 PWA). The petroleum industry in the country has had some recent setbacks, including that there have been no licenses awarded for various years, its production is in decline (56,000 b/d in December 2020), and, with the cancellation of the PSA for Block 6 with CNPC in December 2020, there is now absence of foreign companies operating hydrocarbon licenses. The difficult relationships of Sudan's previous regime with the international community (e.g., US sanctions against Sudan from 1997 to 2020) and an unclear petroleum framework were evident over the previous two decades when most of the foreign companies working in Sudan (until 2011, including South Sudan) were Asian NOCs interested more in accessing oil reserves than in executing petroleum investments based on profitability.

Areas Possibly Needing Attention

The chart above shows how Sudan's attractiveness of E&P legal and contractual terms compares on a world scale. IHS Markit ranks the attractiveness on a scale from 10 (best ranking) to 1 (worst ranking) on the basis of six main legal and contractual categories.

• Process to Award Petroleum Licenses

The process for awarding petroleum licenses is highly discretionary as there are no stated parameters for basing the selection on. Under the 1998 PWA, the awards of petroleum rights are made by the minister overseeing petroleum affairs considering the policies laid down by the Petroleum Affairs Council and adherence to the procedures of the Oil Exploration and Production Authority. However, there are no other provisions relating to the procedures. The 1998 PWA stipulates that awards are made to applicants meeting certain general criteria (technical ability and sufficient experience, financial ability to execute the contractual obligation, and abidance by Sudan's petroleum general policies), but no other details are provided. Concerning direct negotiations with a company—in 2020 Sudan offered 17 blocks on direct negotiation—the problem is less pronounced as there is a direct relationship between prospective contractors and Sudan's authorities. Instead, concerning a licensing round—Sudan over the past three years has repeatedly affirmed that it wants to hold a licensing round, though not providing any planned dates—there is an immediate issue of transparency and fairness for prospective contractors.

• Mechanism for the Payment of the Royalties

"How" the royalty is applied needs clarification. A November 2015 presentation by the ministry overseeing petroleum affairs stated that, since 2012, the royalty payment was up to 10% of gross production. The 2011 Model EPSA, the latest model we have access to, provides that the government may receive royalty, but the liability to pay it is discharged by the state from its own share of production. Therefore, under the 2011 Model EPSA, the royalty is not an off-the-top payment to the government. Instead, after deducting "cost oil" from petroleum revenue, the remaining production, "profit oil," is split between the contractor and the government under negotiable sliding thresholds, often allocating in general a minimum 70% production to the government. This government's high percentage compensates its royalty payment out of its own share of production. Evidently, if the government immediately takes the royalty off-the-top from gross petroleum revenue, the picture changes, and the government should accept a lower profit oil share.

• The Institutions

Governmental institutions' frequent reshuffles create interface issues for contractors. A case in point is the vicissitudes of the environmental authorities, which must approve an environmental impact assessment before greenlighting petroleum operations. Just by focusing on the last three years, in September 2018 Sudan abolished the Ministry of Environment, Natural Resources, and Physical Development, which was replaced by the National Council for the Environment (NCE). Between September 2018 and April 2020, the NCE and the Higher Council for Environment and Natural Resources (HCENR), the latter was previously the technical arm of the ministry, inherited the ministry's role. Finally, in April 2020, the Transitional Supreme Council (amending the Environment Protection Act of 2001) established a new HCENR, in which the NCE was merged.

Conclusion
Because of the political transition, the modification of Sudan's petroleum framework may take longer, but, as the petroleum sector has been a key source of revenue for Sudan, if the country wants to attract foreign upstream investors soon, it might want to start improving some weak areas of its petroleum framework.

This report was produced via analysis from the Petroleum Economics and Policy Solutions (PEPS) team. For more E&P Terms and Above-Ground risk insight and analysis, visit ihsmarkit.com/PEPS

Posted 30 March 2021 by Alessandro Bacci, Senior Petroleum Legal Analyst, PEPS, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.