PALOUGE OIL FIELD, South Sudan/LONDON (Reuters) -

South Sudan is in talks with top oil trader Vitol to build a small refinery which would start producing in 2013, as it seeks to end dependency on Sudan, its oil minister said on Tuesday.

South Sudan took three-quarters of Sudan's oil production when it became independent in July but has no refineries and needs to import petrol from Sudan or East African neighbours.

The landlocked country is in a dispute with Sudan over oil payments, as it needs to export its crude through northern export facilities. It has shut down its entire output of 350,000 barrels a day after Sudan started seizing southern oil for what it calls unpaid transit fees.

"We are expecting the first product in 2013," Oil Minister Stephen Dhieu Dau told Reuters during a visit to Palouge oil field when asked about refinery talks with Vitol.

"They will use 10,000 barrels per day and the output will be 35-40 percent of the total so it will be 3,500 barrels per day initially and then we will develop it gradually," he said.

South Sudan planned two more small refineries, he said without giving details.

Vitol's Chief Executive Ian Taylor told Reuters talks have been held with Juba.

"The South Sudanese are interested themselves in creating some finished products which they don't have much of. They have talked to us and not just us," he said.

"They have got a problem with refining products on how to bring them in. What they've got is crude oil, sadly stuck in the ground," he said.