Thursday, March 16, 2006

Divesting from Sudan--a Moral or Investment issue?

On November 3, 1997, President Clinton issued Executive Order No. 13067, which imposed a trade embargo prohibiting American businesses from operating in Sudan and placed a total asset freeze against the Government of Sudan. The Khartoum regime had been implicated in exporting terrorism and in the prevalence of human rights violations, including slavery and the denial of religious freedom to the non-Islamic minority in the South of Sudan.

Ergo, because of comprehensive US sanctions against Khartoum, imposed in 1997, no American companies could directly operate in Sudan (these sanctions were renewed by President Bush on November 1, 2005).

Lao Tzu, a sixth century B.C. philosopher and the Father of Taoism, is quoted as having said: “there is no greater disaster than greed.” The 10Q Detective would like to add this corollary: the greater the disaster, the greater the greed!”

Significant petroleum finds were made in the Upper Nile region and commercial quantities of oil began to be exported in October 2000, reducing Sudan’s outflow of foreign exchange for imported petroleum products. Sudan's proven oil reserves are estimated at about 700 million barrels, and the country is now estimated to be self-sufficient in oil. At 60 dollars per barrel, the value of the oil would come to 42 billion dollars. Actual oil reserves range from 300 million to 3 billion barrels, however, depending on definition and opinion.

Sudan currently produces between 312,000 barrels and 500,00 per day (b/d) of oil, which brought in about $1.9 billion in 2003 and provides 70% of the country’s total export earnings. Although final figures are not yet available, these earnings may have risen to an estimated $2 billion as of the end of 2004.
There are indications of significant potential reserves of oil and natural gas in southern Sudan, the Kordofan region and the Red Sea province.
Soon after U.S. firms were ordered out of Sudan in the late 1990s by then-President Bill Clinton, foreign oil companies rushed in and began producing and exporting the African nation's vast reserves of crude oil. Other firms entered Sudan to build roadways, pipelines and dams. [ed note. China-that bastion of human rights & personal liberties—and its state-owned firms have made billions developing the infrastructure of Sudan—in the Northern part of the country].

The ongoing civil war has displaced more than 4 million southerners.

In 2003, after decades of economic and political marginalization, the war exploded in the Darfur region, which is located in the western part of the Sudan. Exiled Sudanese rights activists and Human Rights Watch allege [with a fair amount of evidence to back up their claims] that the ongoing conflict in Western Sudan's Darfur region is not the result of escalating ethnic polarization at the local tribal level—as claimed by the Government—but deliberate ethnic cleansing—read genocide. The Khartoum government allegedly supports Arab militias in their massacre of Fur and other indigenous people termed "slaves".

The 10Q Detective recommends that its readers check out the writings of a domestic, grass-roots organization, called South Sudanese Friends International (SSFI), for a primer on the role that oil and energy-related companies have played in the chaos and murder playing out in the Sudan: “To the extent that the oil has actually generated revenue, that revenue has been used up in the war, along with many lives of both northern and southerners. The South has lost the schools it once had and gained nothing but the roads and pipeline needed to remove the oil. If the oil suddenly disappeared, Sudan would be a far happier country.”

On the first day of oil export shipments in 1999, an import shipment of 20 Polish T-55 tanks arrived in Port Sudan.

The 10Q Detective—in addition to our moral outrage—feels it appropriate to spotlight the Sudan because there are investment considerations for readers to consider, too. We are not going to get involved in a “slippery slope” discussion—why talk only about corporate culpability and malfeasance in Khartoum? Why not China or Iraq?

Organizations of all stripes and colors have launched divestment campaigns that target the European and Asian multinational corporations that provide critical economic, commercial, and financial support to Khartoum Investors ought to be aware that they might hold positions in companies that could face divestment-related selling pressures in the coming months:

“The Sudan divestment campaign, which included the consideration of divestment bills in one-fifth of U.S. state legislatures in 2005, shows no signs of tiring in 2006…. In the past four weeks alone, Yale and Brown have agreed to divest of some of their assets in Sudan, with Brown pledging total divestment....”

Much of Sudan is being explored for oil, including the Upper Nile and the Suakin region near the Red Sea. The problem in correctly identifying divestiture candidates is that business organizations ‘officially’ registered in Sudan can be hard to identify. It is a complicated and interlinked web that is weaved. There are both private and government-owned companies, and many of them have subsidiaries or joint ventures with different names.

As a service to our readers, the 10Q Detective has culled a listing [though not complete] of possible U.S. exchange and O-T-C-traded stocks being targeted for divestment:


  • In May 2004, ABB Ltd. (ABB-$12.37) announced a $16 million project to strengthen Sudan’s national power grid at the Merowe hydroelectric power station, according to Genocide Intervention Network. The company has signed contracts totaling more than $36 million in the country.

    Alcatel SA (ALL$14.52), the French telecommunications giant, offers commercial telecommunications support that benefits Khartoum, and the immediate environs of Khartoum; yet [allegedly] has no plans to rollout supporting infrastructure in the rest of Africa’s largest country.

    Alcatel SA said it's been urged by some U.S. investors to stop activities in Sudan, though the French telecommunications equipment maker plans to continue to do business in the war-torn African nation. “A divestiture would be counterproductive to helping the Sudanese population, said the Company. “We sincerely hold the view that our limited operations in Sudan help foster the dissemination of communication services to the population as a whole and as such, our activities help promote democracy and economic development.” [GAG!]
  • .
    BP AMOCO (BP-69.92) invested $1 billion to take a 2% stake in PetroChina (the biggest oil exploration concern in the Sudan). [ed. note. Talk about an end-run!]. The Company also has more than US$4 billion in commercial projects in China, and has recently signed a deal with a major Sudanese investor, China-based Sinopec, for a petrochemical deal worth at least $68.5 million.
  • .
  • BNP Paribas (BNPQY.PK-$45.40), Merrill Lynch (MER-$78.72), Citigroup, Inc. (C-$47.18), Goldman Sachs Group (GS-$149.42), and UBS AG (UBS-$109.60)—are among a legion of global banks alleged to have underwritten [either directly or indirectly] loans for companies needing monies to do business in Sudan.

    Eni SPa (E-$57.04), Italy’s largest energy exploration company is engaged in the exploration and production of hydrocarbons in North and West Africa.

    Hyundai Motor Company Ltd. (HYMLF.PK-$57)

    Lundin Petroleum AB (LNDNF.PK-$11.25), and its partners, Austrian OMV and Malaysian Petronas, have never made—according to Human Rights Watch—public statements condemning the displacement, destruction, or other abuses brought about by oil development in their issued energy exploration parcels (blocks). Lundin claimed, however that [local] people were grateful for the road(s) the Company built in its block 5A.

    PetroChina Ltd. (PTR-98.85), the renamed subsidiary of China National Petroleum (CNPC), went public in April 2000. Goldman Sachs was the lead underwriter in the deal. PetroChina is believed by most activists to essentially be a capital market surrogate for China National Petroleum Corporation (CNPC)—also considered by the divestment activists to be the dominant and most ruthless international player in Sudan’s oil sector.
  • .
  • [Goldman Sachs failed in 2000 to secure a $10 billion Initial Public Offering for CNPC, so the Wall Street firm created a so-called financial “cut-out,” which became the new entity “PetroChina”: it is PetroChina, wholly controlled and 90%-owned by CNPC.
  • .
    Royal Dutch Petrol (RDS.B-$65.27) owns a refinery in Port Sudan. The newest refinery is at El-Geili, 44 miles north of Khartoum.
  • .
    Schlumberger Ltd. (SLB-$120.54) is the world's leading oilfield services company supplying technology, project management, and information solutions that optimize performance in the oil and gas industry. In 2005, Schlumberger’s operating revenue was $14.31 billion. The company employs more than 60,000 people of over 140 nationalities operating in more than 80 countries. And if you read the Company’s 10-K, you will not find any corporate-owned property in Sudan. The 10Q Detective, did, however, find Schlumberger Overseas SA Branch registered in Khartoum, Sudan. As the Company employs a plethora of attorneys with I-Qs in the high triple-digits, we doubt that SLB is violating any trade sanction regulations.

  • Siemens AG (SI-$92.55), Germany’s electronic conglomerate, is presently building outside Khartoum the world’s largest diesel-powered electrical generating plan. The Company has signed contracts totaling more than $180 million in Sudan.

    Sinopec Shanghai Petrochemical Co. Ltd (SHI-$60.00) also known as, Sinopec, is another subsidiary of China’s biggest oil refiner, China Petroleum and Chemical Corp. Sinopec is the major contractor in a $65.5 million pipeline that will carry oil from the Melut Basin in Eastern Upper Nile (southern Sudan) to Port Sudan on the Red Sea, allowing the Khartoum regime to boost its petroleum exports substantially.

    Norway’s oil & gas exploration company, Statoil ASA (STO-$26.77).

    Stolt Nielsen SA (SNSA-$33.82), is one of the world's leading providers of transportation services for bulk liquid chemicals, edible oils, acids, and other specialty liquids. The Company, through the parcel tanker, tank container, terminal, rail and barge services of its wholly owned subsidiary, Stolt-Nielsen Transportation Group, provides integrated transportation services for its customers. The Company just announced that it is building a petrochemical terminal in Tianjin, China.

    Talisman Energy (TLM-$53.47), the Canadian oil & gas company owns a 25% stake in the biggest oil Company operating in Sudan, (GNPC) Great Nile Petroleum and Oil Company. GNPC is a consortium of energy characters that include the China National Petroleum Company, Petronas (owned by the Malaysian government), and Sudanese-owned Sudapet.

    Talisman justified its presence in Sudan—and argued even that its withdrawal would be “immoral”—on the grounds that it undertook community development programs for the dwindling population, and because of the unsubstantiated claim that “development” would be beneficial and would bring peace.

    TAFNET (TNT-$107.10), a Russian oil & gas exploration company that also has a history of allegedly trading Russian firearms for oil!

    France’s energy concern, Total SA (TOT-$129.30).

Social and moral issues aside, the 10Q Detective wanted to find out—strictly from an investment perspective—what might be the wealth effect to investors from divesting in companies that do business in Sudan?

Perhaps the history of growing public protestations and scaling up of divestments from South Africa in the apartheid era of the late 1970s to 1985 could provide a model to our readers:

In 1992, Christopher Ngassam, at the University of Delaware, wrote, “An Examination of Stock Market Reactions to U.S. Corporate Divestitures in South Africa.”

Mr. Ngassam’s conclusions: The findings of this study indicate that divestment of South African assets have a negative effect on stockholder wealth for the firms involved. However, we also find that when the sample is restricted to firms that withdrew after 1985 during the period of mounting divestment pressures, the negative wealth effects are more pronounced. When the sample is divided into large versus small divestitures, we find that shareholders of large divestitures experienced significant negative annualized returns while shareholders of small divestitures did not.

The 10Q Detectives read:

  1. If an investor believes that the divestment debate will become more pronounced, the investor might look to re-align their portfolio sooner--rather than wait.
  2. If monies invested in Sudan do not have material impact on aggregate assets on the company's balance sheet, then an eventual divestment of these assets from the Sudan probably will carry an insignificant intrinsic risk to the Company's stock price. For example, most of the oil companies mentioned by name in our report have proven oil and gas reserves worth billions of dollars. Ergo, independent of when and if they choose to divest of any reserves found in the Sudan will not impact the companies' stock prices [i.e. insignificant wealth effect]. Now if we were talking about a small-cap company that was "betting the farm" on creating shareholder riches by discovering oil in Sudan--divesting would most certainly have an adverse wealth effect.
Divesting,therefore, becomes a moral debate--not an investing issue.

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