Oil risks fuelling flames of Sudan conflict Fri Feb 3, 2012 12:59pm EST Repeats with no changes to text By Hereward Holland and Ulf Laessing PALOUGE OIL FIELD, South Sudan/KHARTOUM, Feb 2 - South Sudan's oil minister was riled when he discovered production from one of his remote oil fields was out by 40,000 barrels per day, and immediately knew who to blame. Stephen Dheiu Dau said his old civil war foe in the north, the government of Khartoum, had stolen the crude, illustrating the depth of acrimony and mistrust over oil negotiations that some say risks tipping the two nations back into conflict. "We believe Khartoum is pumping more reserves from this concession to allow them to operate the Khartoum refinery," the minister told journalists on a visit to the well in the dusty Palouge Oil Field close to the restive border with Sudan. Old suspicions festering along the poorly defined boundary between Sudan and South Sudan, which split away as an independent country in July last year, came to a head recently. In an emotional speech, President Salva Kiir said he had no choice but to shut the oil fields to stop Sudanese President Omar Hassan al-Bashir from "stealing" oil, raising the question of how he will feed a country as big as France and pay his soldiers, who would be needed to quell any unrest. Having failed to reach a deal on transit fees, which must be agreed as part of the 2005 deal to equitably split revenues from the oil that is mostly located in South Sudan, Khartoum started seizing South Sudan's oil and sold one cargo. Talks are expected to resume next week but diplomats say it's hard to see a compromise acceptable to both sides, while meanwhile, some hear the drumbeat of war. Fee terms are far apart, Khartoum wants $1 billion in back payments and $36 for each barrel shipped through the pipeline. Juba wants to pay less than $1 in line with world norms, saying it refuses to shoulder a share of Sudan's external debt of $38 billion. Kiir says Sudan has "looted" $815 million from cargoes. China, the biggest buyer of oil from South Sudan and trusted by both sides, has the best chance of brokering a deal and sent an envoy to both nations in December to help bridge differences. The world's newest nation is landlocked and must pump its oil through Sudan's pipelines to the Red Sea port of Port Sudan. Industry analysts say the alternative of building a pipeline through Kenya will probably never happen. The discrepancy over the figures in the Palouge field -- more than one tenth of total daily output -- highlights the dangerously opaque nature of much of Sudan's oil industry. Before their independence, southerners regularly complained Khartoum was not giving them a true picture of the oil reserves in their own territory. Alongside Malaysian engineers in the control room, Dhieu Dau said: "They confess that the metering system is not working and no justification has been given." Dhieu Dau told Reuters his suspicions were already aroused after he found out that the Upper Nile area had 600 wells, 200 more than previously thought, while Unity, another oil-producing state, had almost 50 more wells, showing that Sudan underplayed oil output in negotiations. The oil industry in Sudan, with its data flows, mapping and contracts with refiners and oil field operators, was dominated by Khartoum until independence. Opportunities for wrangling over accounts and figures between Juba and Khartoum are legion. Oil is the lifeblood for both economies but South Sudan is much more vulnerable, a war-ravaged country that must be built almost from scratch. Oil revenues make up 98 percent of state income compared to more than 50 percent in former unified Sudan. Meanwhile Kiir's government - mostly former rebel commanders - is trying to assemble functioning ministries in a country which has no property or banking laws. The fertile Nile corridor splits the dry, desert north from the plains of grassland and forest in the south where about 85 percent of the people live off agriculture. The threat of famine is an unnerving fact of life and tribes have regular clashes over cattle and grazing rights. Western diplomats fear that the new African nation, where most follow Christian beliefs, could easily slide into instability as tensions escalate with the mainly Muslim north. The West also fears a return to radicalism, as Sudan once hosted Osama bin Laden. Most Western firms shun Sudan due to a U.S. trade embargo in place since 1997 over Khartoum's role in hosting past militants such as bin Laden and Carlos the Jackal. There is also unease over Sudan's President Bashir who is wanted by the International Criminal Court accused of war crimes committed in the unresolved rebellion in the Darfur region where Janjaweed Arab nomads have been blamed for mass killings. Apart from oil, Sudan and South Sudan have also failed to solve a long list of disputes from marking the violent border where the deadly cattle raids flare and sharing debt to finding a solution for the disputed region of Abyei. South Sudanese rallied outside the assembly while Kiir was speaking to support the shutdown in oil output as a strategy to try to force Sudan's hand. They said the row was yet another chapter in their long struggle to win freedom from the north. "Given our history with the administration of President Bashir, we realize that unfortunately we must prepare for a disruption of revenue that could last many months," Kiir said. Sudan was "playing a game of looting our oil in broad daylight so we are supporting the shutdown," Ajang Ajang Lino, head of the Student Union at Juba University, told Reuters. "Only since the signing of the CPA (2005 Comprehensive Peace Agreement) has South Sudan started to receive oil," he said. We will continue to live without oil as we had been doing 100 or so years ago. The government will struggle to pay salaries and cover daily expenditures longer than a few months without new oil revenues and it is not clear whether impoverished South Sudan is ready for such a sacrifice. South Sudan's stability rests in large part on the morale of its sprawling army, estimated by U.N. officials to comprise up to 200,000 soldiers, and which functions like a welfare system, helping villagers and maintaining infrastructure. Should salary payments to these troops end or the patronage network of bureaucrats and high officials crumble, the army and its allies, already disaffected by old tribal rivalries, could easily slip into mutiny or rebellion, some observers say. "Over the medium term, a sustained shutdown of oil output would have dramatic consequences for the domestic stability of the country and could lead to a collapse of central authority," said Jean-Baptiste Gallopin, a Control Risks analyst. Just across the border from the savannah of the Palouge oil field lie the northern states of South Kordofan and Blue Nile where the Sudanese army has been fighting insurgents of the northern wing of the Sudanese People's Liberation Movement (SPLM), which is the ruling party in Juba. The Khartoum government has restricted access of U.N. agencies in both states, a decision that U.S. officials say could lead to large-scale famine. Some foreign observers say Sudan could be using famine as a weapon to flood the southern borderland with refugees to destabilize South Sudan, a theory that Khartoum denies. "Some SPLM officials fear that Sudan hopes for instability in the borderland which could give it an excuse to seize the southern oil fields," said a foreign observer with ties to Juba. Almost three million South Sudanese - a third of the population - are expected by the United Nations to need food assistance this year after tribal violence and bad weather. Anxious to reassure his people, Kiir said the government will find cash to cope with the oil shutdown but foreign experts say this will be impossible as no other industries exist. Juba said it had contracted oil sales worth around $3 billion before the shutdown. It's very hard to say how much money they have. I think much of the oil revenues has been spent so they need the oil flows," said a senior banking executive. The shutdown by South Sudan cut off crude supplies to China National Petroleum Corp, Malaysia's Petronas and India's Oil & Natural Gas Corp. China and Japan scrambled to find alternative supplies after South Sudan closed down its 350,000 bpd. Its heavy sweet grades - Nile and Dar Blend - are liked in Asia. The oil shutdown and the drying up of revenues could have alarming consequences on South Sudan's economy. The central bank in Juba was unlikely to have dollar reserves lasting more than three to five months, diplomats say. South Sudan hopes to borrow funds from international markets using oil reserves as collateral, but bankers are skeptical while the oil cannot be sold. Western aid cannot replace oil. To end dependency on Khartoum, South Sudan wants to build an alternative pipeline to the Kenyan port of Lamu, but most analysts do not expect the project to see the light of day. "Costs are very high, the terrain is very difficult, and security is a major issue," said Harry Verhoeven, a Sudan expert and researcher at Oxford University. Sudan heavily pumped the oil fields while it was in charge. Oil output is now expected to fall to 200,000 bpd by 2016, to 160,000 bpd by 2018 and further after that, according to a study by the European Coalition on Oil in Sudan. To cut the umbilical cord with the north, Juba would need to build new processing plants in Upper Nile and Unity state to halt reliance on those on the northern side of the border. "Many Western donors tell Kiir that the Kenyan pipeline won't work," said a foreign expert with close ties to Western donors. They tried talking him out of the oil shutdown. Emboldened by Western criticism of Bashir following his indictment by the war crimes court, South Sudan officials feel they can be tough in the deadlocked oil talks, which are sponsored by the African Union. Kiir and Bashir met on the sidelines of an AU summit in Addis Ababa to discuss an interim deal that "would have frozen the situation and reversed the unilateral actions that had been taken by both," a source close to the talks said. But, the source said, talks broke down when Kiir pulled out. "The Arab Spring has reinjected life into that old idea that Khartoum is about to fall," Verhoeven said, adding that some in Kiir's SPLM believed "the likelihood of a revolution in Khartoum has increased and therefore they are more intransigent." A Western diplomat agreed: "There is a belief in the SPLM that Bashir might be gone soon so they can sit him out with an oil deal. But Bashir might actually stay. You never know. Bashir is facing an economic crisis and high food inflation after losing the southern oil fields. The north's remaining output of 115,000 bpd serves only domestic consumption. Sudan is also taking a hard line with Juba and demanding not just concessions on the pipeline fee but also on the issues of sharing debt and giving financial aid, diplomats say. Setting up a fledgling state in South Sudan and disentangling the two oil industries was a big enough headache, but corruption and cronyism has also severely hindered development, particularly in rural areas. Juba bustles with gleaming Toyota Land Cruisers and Hummers parked in front of ministries or expensive restaurants on the banks of the Nile, ostentatious signs of status and power. Kiir's cabinet is mainly made up of ex-guerilla commanders and senior SPLM members, who led the civil war with the dominant Dinka tribe holding the key levers of power. "They don't use the potential of many South Sudanese who studied abroad and are well-educated," a foreign executive said. "If you don't have ties to the SPLM you struggle to get a senior job," he said in Juba. Some even look down on people who stayed abroad during the war as traitors. Euphoria that erupted across the south over independence also masked deep tribal and ethnic splits that grew in the vast Jonglei state where the government hopes for big oil finds. The Lou Nuer tribe marched on rival Murle settlements in December killing hundreds of people and sparking bloody revenge attacks. Tribal violence started out as revenge for cattle raiding, but critics say years of administrative neglect in Jonglei, the same size as England, are also to blame. They never used to kill women and children. Something has gone very wrong. Maybe our politicians are to blame," said Mary Buyoi, a famous singer and peace ambassador for the Murle tribe. With the money expected to be exhausted within the next few months, Juba will have no choice but to restart oil production to maintain cohesion even if no deal is reached with Khartoum. Flexing their muscle, Sudan's officials say they will carry on helping themselves to oil from South Sudan that arrives at Port Sudan as long as the dispute is unresolved. The shutdown is their decision. But as long as they don't sign, we will continue lifting what we think is our right," Sudan's Foreign Minister Ali Ahmed Karti said. Sudan and South Sudan have broadened the oil talks by linking them to a bigger deal to end violence in the border area and find a solution for the disputed border region of Abyei. Abyei was meant to have a referendum like South Sudan, as agreed under the 2005 peace deal. But the prospect of a vote was dashed after Khartoum took Abyei in May just before Juba's independence, forcing tens of thousands to flee to South Sudan. Shops and homes were looted, and residents said that their huts were burned down, raising fears of a fresh north-south conflict. Kiir condemned the seizure of the border region but at the time refused to be drawn into war. But with both sides daggers drawn over the crucial oil revenue-sharing, several Africa watchers see another war as a distinct possibility. Verhoeven, at Oxford University, said both would try to reach a deal but he saw a 20 percent chance that the tensions would lead to conflict. "I think there's a real chance this could go too far and there could be a border war," he said. additional reporting by Alexander Dziadosz; Writing by Ulf Laessing, editing by Peter Millership