What's at the Crux of Sudan and South Sudan's Oil Dispute?

By: Larisa Epatko

Market in Sudan's only oil-producing region South Kordofan. Photo by Ashraf Shazly/AFP/Getty Images.

When South Sudan gained its independence from Sudan in July, one of the major sticking points between the two countries was how to handle oil production. Now, more than seven months later, with accusations of "stealing" and "extortion" flying, the issue seems no closer to resolution.

South Sudan has most of the oil reserves, and Sudan to the north has most of the pipelines and processing facilities, along with the Red Sea port used to export the oil. It's a symbiotic relationship that was supposed to motivate the two countries toward a resolution.

But instead the two sides have failed to reach an agreement. The dispute came to a head in January when South Sudan shut down oil production after Sudan began taking oil from a connecting pipeline to compensate for what it called unpaid transit fees. South Sudan said the fees are too high.

Then last week, the latest round of African Union-led talks in Addis Ababa, Ethiopia, meant to settle the matter and restart oil production collapsed amid accusations of Sudan "stealing" southern crude, said Hannah McNeish, a GlobalPost reporter based in South Sudan's capital Juba.

South Sudan's President Salva Kiir said Sudan has taken $815 million worth of oil and that the southern crude is safer in the ground until Sudan can guarantee secure passage. But the Sudanese government has said South Sudan owes it fees for using northern infrastructure to export its crude and will take oil as "payment in kind" until the two sides strike a deal, said McNeish.

"South Sudan says oil will not flow again until the North has repaid all the oil taken at market value and drops proposals it deems 'extortionate' of $36 a barrel for transport and transit, while the South says it only needs to pay a transit fee and will not go above $1 a barrel," she explained.

The shutdown means South Sudan's income will take a major hit. Oil revenues reportedly make up 98 percent of its government budget, so South Sudan is preparing to slash its spending on everything but salaries.

Despite the anticipated blow to the budget, many South Sudanese say they are behind the shutdown in a show of unity against the Khartoum government, said McNeish. Many also say South Sudan, despite having the oil, did not benefit from its sale while it was part of Sudan and remained impoverished during decades of civil war.

Sudan, meanwhile, is still reeling from the loss of South Sudan that took 75 percent of the crude oil with it in July, leaving the northern country with a 40 percent hole in its budget, rising inflation and popular protests, she said.

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The tensions between Juba and Sudan's capital Khartoum are breeding violence elsewhere, some say. "The two nations have been accused of fighting a proxy war by funding rebel groups along one another's borders" said McNeish.

"There are widespread concerns that failure to pay salaries for a massive guerrilla force that now makes up an estimated 300,000-strong security force will cause a revolt, and the country could see a rise in new militia groups as tribal tensions are already flaring."

In Sudan, political and economic stability could further weaken President Omar al-Bashir's regime, and South Sudan is suspected of wanting to spark the "Sudan spring" by shutting down the oil to foment civil unrest, she said.

The next round of talks is due to start on Thursday. In addition to the oil dispute, South Sudan is demanding Sudan drop claims to contested territory, including the town of Abyei, along the oil-rich and largely undemarcated border, and withdraw its troops.

The longer these issues go unresolved, the more the two interdependent nations' stability and viability are at risk, McNeish said.

The NewsHour has a partnership with the international news website GlobalPost. View all of our World coverage and follow us on Twitter.