South Sudan starts shutting down oil production after accusing Sudan of stealing oil

South Sudan has ordered oil companies to shut down oil production within two weeks, a response to the new country's allegations that Sudan has stolen $815 million worth of the south's oil, government officials said Monday.

The shutdown could lead to a tightening of the world's oil supply and cause prices to rise.

Oil companies in South Sudan began shutting down operations on Sunday and have two weeks to complete the process, since oil production cannot be easily stopped, South Sudan Minister of Information Barnaba Marial Benjamin said.

South Sudan — which broke away from Sudan last July to form the world's newest country — must pump its oil through Sudan's pipelines. However, the two countries have never agreed on the transit fees that South Sudan should pay Khartoum.

Over the last several weeks South Sudan has made repeated accusations that Sudan is stealing massive amounts of its oil, which Benjamin cited as the reason the south has decided to halt production.

In an address Monday to the South Sudan's National Assembly, President Salva Kiir said Sudan has already taken $815 million worth of southern oil. He said the decision to stop oil production came only after his country approached Kenya, Uganda and Ethiopia for help in economic negotiations between Sudan and South Sudan.

"The presidents of those countries reached out to President Bashir asking him to stop taking unilateral decisions in regards to our oil. The response from President Bashir is that he will not stop taking oil until we pay what he says — $32.20 per barrel," Kiir said.

A research note from Commerzbank said South Sudan produces about 350,000 barrels of oil per day.

"Any prolonged discontinuation of South Sudan's oil production, in combination with the partial shortfall in Iranian oil exports, could lead to a tightening of supply on the oil market and cause prices to rise still further," Commerzbank said.

In December, Sudan began taking southern oil arriving at Port Sudan as an "in kind" payment. This month, a tie-in pipeline was built that South Sudanese officials say is diverting around 120,000 barrels of southern oil per day.

South Sudan originally offered 70 cents per barrel to use Sudan's pipelines. Oil Minister Stephen Dhieu Dau said on Friday that South Sudan was willing to pay up to $1 for the use of the pipelines.

Almost all of South Sudan's government revenue — 98 per cent of it — comes from the oil sector.

It is not immediately clear how South Sudan will manage during the shutdown. But Kiir said the shutdown was necessary to protect South Sudan's natural resources.

"At this time we have no guarantee that oil flowing through the Republic of Sudan will reach its intended destination," he said.

Kiir asked parliament to enact an austerity program in anticipation of the shortfall. He did not give specifics. In the short term, Kiir said the government would be able to function.

"On existing cash reserves, rest assured that the government can operate for the immediate future depending on which cuts are made," he said.

In a separate statement, South Sudan said it was beginning investigations into the stolen oil and put ship owners and potential buyers of stolen oil on notice. It said the stolen oil is undermining its economic development and its rights under international law and national security.

The owners of four vessels that the oil was loaded onto, the South Sudan government said, "are being treated as trafficking in stolen goods."

The oil negotiations taking place in Ethiopia are part of a host of unresolved issues left from the 2005 Comprehensive Peace Agreement, a deal that ended decades of civil war between the two countries. The talks have continued for over one year with little progress.