JUBA, 14 February 2012 (IRIN) - South Sudan, one of the poorest countries in the world, reliant on oil for 98 percent of its revenues, in January took the drastic step of halting crude production, as a row with former civil war foe Sudan over transit fees hit a deadlock.

Even with oil revenue, the challenges facing world's youngest country are monumental: more than two decades of conflict prevented any significant infrastructural development; agricultural output falls far short of needs and with food aid funding insufficient to make up the difference there is a real danger of a major food crisis; the state security services have been unable to quell inter-communal conflict, notably in Jonglei, South Sudan's largest and most populous state; tens of thousands of Sudanese civilians have sought refuge in South Sudan from borderland clashes between the Sudanese army and rebels with strong historical ties to South Sudan's leadership; and hundreds of thousands of people of Southern origin living in Sudan may have to leave for lack of residency rights.

As Sudan and South Sudan meet for another round of African Union-brokered talks in Ethiopia, IRIN offers this briefing on the oil situation:

How much oil production has been stopped?

The South's secession in July 2011 deprived Sudan of three-quarters of its output, about 350,000 barrels a day. Between July and December 2011 production was worth US$3.2 billion. The oil is piped northwards to marine terminals in Sudan, making an as-yet elusive agreement on how to share revenue and costs crucial to post-war relations between the two states.

This production was halted after South Sudan complained that Sudan was levying fees considerably higher than international norms and the $1 per barrel South Sudan is willing to pay, and that Khartoum had "stolen" $815 million of crude. South Sudan says it will only resume production after this sum is paid back.

Sudan says it confiscated the oil as "payment in kind" for unpaid transit fees. The two nations signed a non-aggression pact on the first day of fresh talks in the Ethiopian capital Addis Ababa on 10 February, after leaders of both countries warned of a real prospect of a return to war. South Sudan has since accused its neighbour of bombing a disputed border town just two days after that deal was signed.

How quickly could output be resumed?

The two-week process of halting production involved flushing viscous crude from pipelines with water. Resuming flow would take no more than "two or three days", according to Hago Bakheed Mahmoud, field operations manager for Petrodar, a Chinese-Malaysian consortium working in Upper Nile state.

Independent industry analysts said fully resuming exports could take up to a month or more. "Any decision on restarting production rests with the North. The main processing plants are not in South Sudan, so you'd have to start all that up as well," said Egbert Wesselink, director of the European Coalition on Oil in Sudan.

Aside from oil, relations between the neighbours remain strained over border demarcation, the alleged use of proxy forces in armed conflicts on both sides of the frontier, and on the future status of the Abyei region.

South Sudan has inked agreements with Kenya to build a 2,000km pipeline to the future port of Lamu, and to build another through Ethiopia to Djibouti's Red Sea port, in a bid to gain "economic independence" from its northern neighbour.

The Kenyan pipeline would take at least 18 months – some analysts say three years - and $3 billion to construct.

How will the government adjust to the loss of oil revenue?

South Sudan's government, by far the country's biggest employer, depends on oil money to pay its public sector workers and its vast and growing army (SPLA), which consumes an estimated 40 percent of the national budget. South Sudan's defence budget is estimated by security analysts at 2.1 billion South Sudanese pounds ($600m), 80 percent of which is spent on salaries.

The finance ministry has announced plans to increase, within six months, non-customs fiscal revenue from the current 13m South Sudanese pounds ($3.7m) a month to 40m pounds ($11.4m) through more stringent implementation of tax legislation and clamping down on widespread illegal taxation and tax dodging.

"That's still only 5 percent or less of pre-shutdown monthly expenditures by the government, but it's enough for some essential services", said Finance Minister Kosti Manibe.

Exactly what these "essential services" are remains unclear. The government has said the SPLA, which won significant pay rises in April 2011, will not be affected by any cuts.

In addition, the migrants who make up the bulk of traders in South Sudan's urban centres have been banned from sending home money in dollars and instructions to this effect have been given to companies such as Western Union.

The government has also announced it would implement a series of "austerity measures," but few details of any specific cuts have emerged.

How will the shutdown affect the population?

There are fears that some of the 300,000 people now thought to work in the army, police and wildlife service could present a considerable security risk to civilians if their salaries dry up, and that internal divisions along ethnic lines, and between veteran troops and former rebels newly recruited as part of peace deals, could degenerate into fresh revolts. Unpaid soldiers would also be even less effective than they are now at intervening in inter-communal clashes such as those in Jonglei.
Outside the capital, Juba, and other major urban centres, there is little, if any, sign of oil money improving living conditions or basic services.

But humanitarians worry that withdrawal of this revenue could still make things considerably worse for the population.

Without oil revenue, "many people will feel the effects. Humanitarian needs will inevitably increase and the combined efforts of the government, the aid community and the donors will not be sufficient. The scope of this crisis cannot be ignored," UN Emergency Relief Coordinator Valerie Amos said during a recent visit to Juba.

"The situation in the country as a whole is extremely precarious, and the risk of a dangerous decline is very real," she warned.

The UN and its partners have appealed for $763m for South Sudan in 2012. Amos warned of "dire consequences" if the capacity of both the government and the humanitarian community was not boosted, and if supplies were not in place before the rainy season.

Because of conflict, falling production, rising demand and soaring prices, some 4.7 million people in South Sudan are now food insecure, up from 3.3 million in 2011, according to an assessment carried out by the World Food Programme and the Food and Agricultural Organization.

The assessment warned that the number now considered "severely" food insecure could double to two million if conflict continued to displace people in large numbers.

Demand will increase considerably if hundreds of thousands of people of southern origin now living in Sudan are made to return after an April deadline imposed by Khartoum and if conflict in the Sudanese states of Blue Nile and South Kordofan leads to a sharp rise in refugees crossing the border.

The cereal deficit for 2012 is estimated at more than 470,000MT – almost half the country's total consumption requirements for the year.

In addition to the poor harvest, food supplies have been constrained by the closure of the border with Sudan, the bad roads, rising fuel prices and currency depreciation.

The rising cost of living has already sparked protests and riots by students.

Aid agencies' already heavy caseloads may increase once government cuts kick in, and uncertainty also surrounds some programmes, such as education, where donor funding depends on government contributions. But any decisions about how to adapt to the new situation will have to wait until the specifics of the austerity measures are announced.

Source:  Integrated Regional Information Networks (http://www.irinnews.org )