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SUDAN: Divestment Movement Gains Steam

by EC deskEthical Corporation Newsletter
October 20th, 2004

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.

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