S.Sudan tracks oil sold by Sudan, warns Chinese firms

JUBA (Reuters) - South Sudan said on Friday it had started legal steps to track down oil it says was seized and sold by neighbouring Sudan in a row over oil payments and said the role of Chinese oil firms would be investigated.

South Sudan took three-quarters of Sudan's oil when it became independent in July under a 2005 peace deal with Khartoum that ended decades of civil war.

The landlocked African nation needs to export its crude through Sudan but both nations have failed to agree on a transit fee, prompting Khartoum to seize some southern oil. Sudan has sold at least one oil cargo, industry sources have told Reuters.

South Sudan, one of the world's least developed countries, has responded by shutting down its entire output of 350,000 barrels per day. It accuses neighbouring Sudan of seizing 6 million barrels since December.

"The ministry of petroleum has notified the ministry of justice and has issued a legal notice internationally through our legal international consultants to track down this oil and has reported that this is stolen oil," government spokesman Barnaba Marial Benjamin told reporters.

He also said the government was investigating whether Chinese oil firms operating in South Sudan have helped Khartoum seize any crude.

"Once it is proven through an investigation, definitely the government of the Republic of South Sudan will take steps," he said after a cabinet meeting, without elaborating.

This was the second such comment about Chinese firms within days by a top official in South Sudan and unusual criticism since China is the biggest buyer of southern oil.

State oil firms from China, India and Malaysia own majority shares in the three consortiums extracting oil in South Sudan. China has built the most oil facilities in both countries.

Oil talks between Sudan and South Sudan sponsored by the African Union in Ethiopia will resume on February 23, but Benjamin said Khartoum was undermining negotiations by having bombed a disputed border region this week. Sudan denies this.

He said South Sudan had withdrawn a financial offer worth $2.6 billion to Khartoum in exchange for resolving the status of the disputed border region of Abyei and other issues related to border security.

"The Republic of Sudan is not responding positively to this gesture so we would like to make it clear that this is no longer on offer," he said.

Apart from oil, the two former civil war foes need to sort out a long list of disputes including marking the joint border and sharing debt.

BUDGET CUTS

The cabinet agreed on "quite substantial" cuts in expenditures to make up for the loss of oil revenues due to the shutdown, he said.

Oil makes up 98 percent of state income in the war-torn country, causing diplomats to question whether the new nation can go more than a few months without new oil revenues.

Benjamin said the government would make cuts for all ministries except security, education, health and infrastructure.

The finance ministry could not be immediately reached to specify the expenditure cuts.

Benjamin said Sudan was trying to secure development loans on international markets using natural resources such as oil and its agricultural potential as guarantees.

"South Sudan is the only country that has no debt ... Even the United States, they borrow money, Britain borrows so why can't we borrow?" he said, without giving a timeframe or targeted volumes.