SUDAN: Divestment Movement Gains Steam

Publisher Name: 
Ethical Corporation Newsletter


The announcement that Barclays is planning to regain a substantial
presence in South Africa after being virtually absent for 18 years
serves as a timely reminder of the last time a divestment campaign
succeeded in bringing about major political change. Could something
similar be on the cards for Sudan?

Even
as negotiations advance towards a peace deal with rebel groups in the
south of the country following 21 years of civil war, pressure mounts
on the Sudanese government to bring to an end the killing campaign
waged by government-controlled militia against the people of Darfur
province. Observers estimate some 50,000 have been killed and 1.4
million forced from their homes. The UN has sent in a team to
investigate whether the actions amount to genocide.

The focus of
attention for those seeking to pressure Khartoum is Sudan's oil sector.
Kick-started from a low production base five years ago by Canada's
Talisman Energy, the sector is now a significant producer of
high-quality crude oil. Oil revenues help the regime to stay in power.
Sudan is carrying more than $1 billion of debt. Cut off the oil
revenues, the argument goes, and the government will soon do something
about Darfur.

Talisman itself in March last year bowed to the
"Sudan discount" on its share price and divested its Sudan operation
following a vociferous divestment campaign mounted by a coalition of
organisations including unions, human rights and religious groups. The
Swedish company Lundin and Austrian firm OMV followed suit.

Of
the major western oil companies, only France's TotalFinaElf retains a
presence in Sudan. It has a concession in the Bor Basin in the south of
Sudan on which it suspended exploration in 1983 when civil war looked
likely. Total, whose continued presence in Burma has revealed a company
impervious to criticism, was said by a Sudanese government minister
earlier this year to be on the verge of a deal with the government with
a view to resuming exploration. Total denies the rumour, but it has
been fuelled by the Sudanese energy minister's announcement last month
that the government is in talks with western, as well as eastern, oil
companies regarding exploration deals.

With Total, as with
Talisman and the others, divestment campaigners may yet get their wish.
But in gaining tactical successes of divestment they risk a strategic
failure. Even with all the main European and North American oil
companies no longer active in Sudan, the oil continues to flow through
the hands of the state-owned oil companies of China, India and
Malaysia. In contrast to their Western counterparts, these companies
appear protected from stakeholder pressure. It is impossible to
separate the Chinese National Petroleum Company from the Chinese state,
which threatens to veto any move towards UN sanctions against Sudanese
oil. Some argue the divestment campaign is thus a busted flush.

Asia, Inc.

Perhaps
not. Oil companies need money whether they are private or state-owned.
In 2001 China wanted to raise money for CNPC through a public offering
in New York and Hong Kong. Even by creating a new subsidiary company,
PetroChina, and placing only domestic oil assets in that entity, the
divestment campaign and market sentiment succeeded in damping market
enthusiasm for the issue to such an extent that it raised just $3.1
billion instead of the planned $10 billion. It would have died
completely had not BP, Liberty Mutual and a collection of five Hong
Kong businesses done Beijing a favour by buying a total of 60% of the
issue.

An oil analyst in London expressed doubts that an oil
company would come to the capital markets now while oil prices remain
so high. That said, rumours have surfaced that China wants to raise
more capital for PetroChina through an 'A' share listing on the
Shanghai and Shenzhen stock exchanges. CNPC has quashed such
speculation, but a new issue would provide a further soft oil target
for divestment campaigners. If this issue matters to China, Khartoum
may yet start to feel some heat blowing in from the east.

Divest terror

The
divestment campaign itself is now experiencing something of a rebirth,
driven by institutions including the Center for Religious Freedom at
Freedom House, and the Center for Security Policy. The muscle is
provided by membership organisations such as the Southern Baptist
Convention. The focus of the campaign has broadened to all companies
with New York listings and economic ties to countries deemed sponsors
of terrorism by the US, although it is the tragedy in Darfur that
appears to have provided new impetus and Sudan remains central.

As
US companies are forbidden by sanctions from conducting business in
Sudan, the companies on which campaigners focus feature big European
names including Germany's Siemens, Switzerland's ABB and France's
Alcatel.

Baring all

The goal of divestment is to
force such companies to suspend all commercial activities pending the
end of the genocide in Darfur and completion of a peace accord with the
peoples in the south. The campaign's argument is part moral and part
national foreign policy and it concerns also the investment risks
associated with investment in countries believed to support terrorism
and human rights abuses. Disclosure of details about operations in
these countries and of the attendant risks is thus on the agenda in
order to enable investors to table resolutions or divest.

The
charge has been led in the US Congress by Frank Wolf, a Virginia
Republican. Wolf happens to chair the House committee that approves the
budget for the Securities and Exchange Commission, and he takes the
opportunity each year to grill the SEC chairman on the need for risk
disclosure associated with companies active in states such as Sudan.
This year he secured an undertaking by the SEC to establish an Office
of Global Security Risk to examine company disclosures regarding their
operations in countries that might support terrorism and improve the
information on these "asymmetric" risks to investors.

Companies
are worried. They are already obliged by law to disclose accurately all
material risks, but many have taken a restricted view of materiality in
this context. They are aware that once information about their
operations in countries such as Sudan become widely known, they will
fall prey to all manner of activists waging individual campaigns.

There
is concern on Wall Street also that tighter disclosure will result in a
flight of companies to other capital markets such as London. London,
however, is also no stranger to shareholder activism. As for farther
afield, companies are likely to be put off by the lack of liquidity.
Even the rumour of a new PetroChina A-share issue was sufficient to
depress the value of mainland stock markets in recent weeks.

At
the same time, the materiality of risks associated with such
investments is hard to refute. When India's ONGC Videsh took over
Talisman's stake in the Greater Nile Project Company in Sudan, it
sought insurance in view of the political situation in the country and
despite having already secured project insurance through HSBC Insurance
Brokers in London. The insurance premium of $32.12 million quoted was
so expensive relative to the project cost of $200 million that it would
have reduced the project return to 10% from 12.12%, according to a
company release. In the end the Indian government accepted the
company's request to exempt it from the insurance requirement.

Political capital

All
institutional investors are being targeted in the campaign, but it is
the public pension funds that represent the softest target. These are
the pension funds that invest on behalf of the state's police officers
and firefighters, teachers and public employees, many of whom will feel
solidarity for the public servants who lost their lives at the World
Trade Center on 11 September 2001. According to a report produced by
the Center for Security Policy, the top 100 US pension funds hold about
$200 billion in stock of companies with business ties to the terrorist
states. The California Public Employees' Retirement System, known as a
shareholder activist, is this time one of the institutions on the
receiving end of the pressure to move its investments elsewhere.

Auditors,
treasurers and state retirement administrators across the US reacted
angrily to the report, arguing that a company with a business tie to a
country on the State Department's terrorism list could not
automatically be said to be "aiding and abetting our enemies". There
will be companies there, argued the Council of Institutional Investors,
that sell food or medicine in such places rather than arm terrorists.
They acknowledge, however, the benefit of having better information on
which to act, and Nina Shea of the Center for Religious Freedom
maintains that behind closed doors pension funds have been happy to
engage.

If the strategic aim is to bring economic pressure to
bear on Khartoum, however, rather than simply to secure divestment of
New York listed companies with Sudan ties, the "disinvestments"
campaign may be too narrow to succeed. Oil remains the lynchpin, and
although PetroChina may be vulnerable to investment pressure, the other
two major state-owned oil companies with major operations in Sudan -
ONGC Videsh and Malaysia's Petronas - have exhibited no such desire to
tap capital markets. They might, on the other hand, be vulnerable to
secondary boycotts targeting those who do business with them such as
insurers and plant manufacturers.

Force also remains in legal
routes, particularly liability under the US Alien Tort Claims Act. ONGC
Videsh recognised this. When it bought Talisman's stake it sold its 10%
stake in a US oil and gas block. The Press Trust of India cited sources
as saying the sale was prompted by the fear of human rights court cases
in the US stemming from the Sudan purchase. As ATCA is currently
interpreted, however, this move is insufficient to escape the reach of
ATCA, says Elliot Schrage of the Council for Foreign Relations.

The
grassroots pressure for an end to the horrors of Darfur is palpable,
but if it is to be effectively channelled, campaign organisers need to
keep their sights on Khartoum, not just Wall Street.
AMP Section Name:Energy