* Looming famine, ceasefires fail to end fighting
* Conflict cuts oil production by a third
* Monitoring oil wealth could help heal rifts
* South Sudan holds some of Africa's biggest oil reserves
By Drazen Jorgic and Edmund Blair
NAIROBI, Aug 1 South Sudan's oil fields have
become a battleground in the struggle for power in Africa's
newest nation, encouraging Western nations and regional
mediators to consider international monitoring of crude revenues
as a way to remove a major bone of contention from such
South Sudan sits on Sub-Saharan Africa's third-biggest crude
reserves, and its oil fields were early targets in fighting that
erupted in December and has rumbled on despite two ceasefire
deals and U.N. warnings that a man-made famine looms.
It marks an alarming slide into dysfunction by a nation
whose creation three years ago the United States hailed as a
foreign policy success. Instead of lifting the nation out of
grinding poverty, oil is blamed for stoking a war.
"If there is a clearer control of oil revenue, that may
remove from the table one of the incentives over which people
are divided or will fight," said one senior Western diplomat,
close to peace talks being held in the Ethiopian capital.
"How do you turn the resource question into a confidence
builder as opposed to a conflict creator? That's the challenge
in negotiation," he told Reuters.
Monitoring could range from putting oil earnings into an
independently managed escrow account, which South Sudan rebel
leader Riek Machar called for, to less intrusive mechanisms
where allocations of revenues were checked.
Diplomats and regional mediators said monitoring revenues
was gaining traction as an idea for discussion, though the
mechanics of such a system and how the warring sides would be
pushed towards a deal have not been determined.
"Monitoring of oil revenue is being discussed," said another
Western diplomat. "But the detail would need to be worked
South Sudan's oil output has tumbled by about a third to
160,000 barrels a day since the fighting began in December, but
it remains the main source of cash for President Salva Kiir's
government both by selling crude and by borrowing against future
earnings, digging the nation deeper into debt.
As of June 25, South Sudan owed $256 million to China's
National Petroleum Corp, which has 40 percent of a
venture developing South Sudan's oil fields, and a further $78
million to oil trader Trafigura.
It plans to borrow about $1 billion from oil firms in fiscal
year 2014/15, equal to about a quarter of forecast revenues.
VIOLATION OF SOVEREIGNTY
Rebel leader Machar, who was fired as deputy president last
year, said oil sites would be a "legitimate target" unless funds
were put into a neutral escrow account pending any deal.
But President Salva Kiir's government says such outside
intervention would violate its sovereignty and insists it has
not bought arms since fighting began.
"We are not the protectorate of anyone," presidential
spokesman Ateny Wek Ateny said. "We have the right to buy arms,
but we haven't bought anything since December," he said, despite
rebel claims of weapon shipments arriving in recent months.
Kiir and Machar come from rival ethnic groups, and the
conflict has re-opened deep ethnic divisions in the country.
Monitoring revenues is on the table for talks sponsored by
the regional African grouping IGAD, though diplomats acknowledge
it can only be part of a broader deal on how to share wealth and
power in the divided nation.
"This is one of the points of the agenda that has been put
forward by IGAD negotiators, that is the management of national
revenue and national resources," Smail Chergui, the African
Union's Commissioner for Peace and Security, said on July 25.
"When the two parties will achieve that level of advancement
in the negotiations, this (agreement) might come. It has the
support of the international community," he said in the
Ethiopian capital, where peace talks are to resume on Monday.
South Sudan has already lost billions of petrodollars in its
young life. Kiir wrote to 75 former and serving officials in
2012 seeking the return of $4 billion that disappeared since
2005. No significant amounts were repaid, diplomats said.
Though the country - the size of France - has almost no
roads and only a third of its 11 million people can read, South
Sudanese now watch more wealth frittered away on fighting than
on building roads or paying for schools.
GAMBLING THE FUTURE
"Are we going to buy weapons or are we going to ... put it
into development infrastructure," said Henry Odwar, a lawmaker
who chaired parliament's energy commission until June.
"As long as we don't have the answers to that, we are just
gambling our future now," he said.
Talks in Addis Ababa to end fighting have made glacial
progress since January. Two ceasefire deals have crumbled and a
deadline of Aug. 10 for a deal on a transitional government is
fast approaching with little sign of an agreement.
Fighting has killed at least 10,000 people, displaced 1.5
million and left a third of the population facing the prospect
of famine as they have not planted crops.
"Famine is a real possibility," said the second Western
diplomat. "The leaders are not putting the needs of the people
of South Sudan first. That must change."
The United States and European Union have imposed sanctions
on military commanders on both sides.
But Western diplomats say pressure for a deal on oil
monitoring needs to come from the region, led by heavyweight
neighbours such as Kenya and Ethiopia.
China, with its oil interests, would need to support the
move, though diplomats said it had worked with the West during
the crisis. Alongside China, other oil investors are India's
ONGC Videsh and Malaysia's Petronas.
"If they can get the oil sector right, share the oil
revenues in a much more inclusive manner, then that will dictate
the country's future," said Luke Patey, author of a book on
Sudan and South Sudan's oil industry.
(Additional reporting by Aaron Maasho in Addis Ababa; Writing
by Edmund Blair; Editing by Will Waterman)