TCS Daily

Is Disengagement the Wisest Choice?

By Roger Bate - September 27, 2004 12:00 AM

The softening of a US-backed, UN security council resolution aimed at prodding the Sudanese government into improving conditions in Darfur came as no surprise to those familiar with the ugly realities of international oil interests in Sudan. China, who increasingly relies on Sudanese oil imports to fuel its growing economy and whose national oil company continues to play a key role in developing those oil resources, has long hinted that it would use its veto power to reject sanctions that might jeopardize the oil flow. So while peace talks flounder, violence persists, refugee numbers mount and the death toll climbs, the Security Council's tough response is that it "shall consider" action against a government responsible for the worst humanitarian crisis in the world.

Undoubtedly, the situation looks bleak. Militias, allegedly backed by the Khartoum government, continue to do battle with rebel groups by displacing and killing thousands of civilians. But the crucial role of oil -- and oil companies -- in this tragedy deserves further scrutiny, and draws attention to the broader issue of foreign companies operating in countries with brutal, corrupt regimes. Businesses, especially oil companies, are routinely criticized for 'profiteering' in such countries, but is disengagement always the wisest choice? It's a tough and important question, with no easy answer. But examining the legacy left in Sudan by Canadian oil giant, Talisman Energy Inc., provides a few lessons.

Though Sudan has, for good reason, featured quite prominently in the news recently, Talisman's name is rarely mentioned. That's because the company is approaching the two year anniversary of its divestment from the country where it operated for nearly five years, beginning in 1998. But while it no longer physically operates in Sudan, the impact of its time there continues to be felt today.

Talisman entered Sudan under heavy criticism from human rights groups by acquiring a 25% interest in the Greater Nile Oil Project. It stepped into a country that had been wracked by civil war since the discovery of oil there in 1983. Separate from the conflict occurring now in Darfur, that war -- nearing a conclusion, but not yet over -- pitted the Islamist government in Khartoum against southern black African factions dominated by the Sudanese People Liberation Movement/Army (SPLM/A), and was fueled in no small part by the existence of oil fields. The Khartoum government, which by the mid-1980s had been accused of virtually every atrocity a government can be accused of, used oil revenues to purchase arms, while the southern rebels claimed the fields as their own. In fact, the first Western foray into the Sudanese oil business ended abruptly in 1985 when Chevron left the country after a rebel attack on a company facility left three employees dead.

Talisman, therefore, knew what it was getting into, but it calculated that the profits to be made in Sudan outweighed both the material risk to company assets, as well as the public relations risk associated with doing business with a militaristic government ostracized by the international community. Noted Dennis Bennett, a risk analyst and investment banker, back in 1999: "Talisman did not go in blind. It was told what would happen and discounted it all."

With its ample injection of capital and technical know-how, Talisman jumpstarted Sudan's moribund oil industry. Sudan became a net exporter of the resource for the first time in 1999 by virtue of Talisman's unique talent for finding oil. "The Malaysians and Chinese just aren't good at finding oil, so Talisman led the charge exploration-wise," noted FirstEnergy Capital analyst Martin Molyneux back in 1999. But while business was good, Talisman's self-avowed dedication to building health and educational infrastructure, as well as promoting peace, was not enough to dampen criticism from Western governments, church groups, human rights agencies and others. In October of 2002, after amplified pressure from institutional shareholders to divest -- and with a lawsuit for complicity in genocide looming -- Talisman sold its stake in Sudan to an Indian oil company for over $1 billion. From the time of its entry in 1998, to its exit four years later, Sudanese crude oil production had increased from virtually nothing to nearly 250,000 barrels per day.

Unlike other companies doing business in Africa -- like Shell, whose roots in Nigeria extend back to Colonial rule -- Talisman entered Sudan with full knowledge of the human rights ramifications of its investment. Though it certainly made an effort to enact benevolent projects, like clinics and schools, its crucial role in building oil generating capacity could not realistically hope to promote peace in any way. As The Economist stated in a fall 2000 report, "The dirty bottom line is that Talisman is helping the Sudan government finance its war."

Though difficult to imagine a few years ago, the situation in Sudan has gone from awful to inconceivably worse. Which begs the question, 'Should Talisman have left?'

Certainly, it was the right move for Talisman's shareholders. The 2002 sale turned a profit, new investments in the North Sea and Southeast Asia have increased revenues and production, and following a recent 3-to-1 stock split and some cheery quarterly reports, the company's outlook has never been brighter. But after spearheading the development of the country's oil exporting infrastructure, Talisman effectively abandoned the Sudanese people to Chinese and Indian firms virtually immune to human rights pressures. Talisman not only entered into a situation where its actions effectively supported a repressive government, but also exacerbated the conflict by ensuring that oil revenues would continue to flow to Khartoum long after its exit. Talisman's story reads like a sad version of an old saying: 'steal a man a fish, he eats for a day; teach a man to steal, he eats for a lifetime.'

Talisman's legacy in Sudan raises some important lessons for how we should approach the complex, but important issue of Western companies operating in the developing world. While Talisman made a dubious decision, to say the least, to enter Sudan in the first place, its departure has facilitated Chinese efforts to hijack meaningful international action on behalf of the Sudanese people. The knee-jerk reaction to boycott every foreign company operating under an oppressive regime may appear a commendable principle, but it does not always yield the desired result. In countries beginning to turn the corner to more democratic regimes, divestment by Western companies -- such as the pressure on Shell in Nigeria -- carries the potential for more harm than good. And, as we're seeing now in Sudan, the alternatives can be far worse.

Dr Roger Bate is a visiting fellow and Benjamin Schwab a research assistant at the American Enterprise Institute.


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