South Sudan to shut down oil production by end of July

JUBA/KHARTOUM (Reuters) - South Sudan plans to sell 6.4 million barrels of oil worth $300 million before shutting down its entire production by the end of July due to a row over its alleged support for rebels in neighboring Sudan, its oil minister said on Saturday.

Sudan, the sole conduit for South Sudan’s oil exports, said a month ago it would close two cross-border oil pipelines within 60 days and insisted output be shut by August 7 unless South Sudan gave up support for the rebels. Juba denies backing insurgents.

The shutdown is bad news for both countries, which fought one of Africa’s longest civil wars before separating in 2011.

Diplomats worry South Sudan might collapse without oil, the main source for the budget apart from foreign grants. They point to recent looting of aid agencies by soldiers as a sign that Juba is struggling to pay salaries.

Closing the wells is also grave news for Sudan, which has been struggling with turmoil since losing most oil reserves with South Sudan’s secession. Oil fees from Juba are essential to bringing down soaring inflation, which stokes dissent.

South Sudan had only resumed oil production in April, after turning off wells pumping around 300,000 barrels per day in January 2012 when both sides failed to agree on pipeline fees.

Oil industry insiders say once the pipelines are closed it will take several months to restart production as they would have to be flushed of water and cleaned first.

South Sudan sold 1 million barrels of crude in June and had contracted further sales of 2.2 million for shipment in July and 3.2 million in August, Oil Minister Stephen Dhieu Dau told Reuters.

“There is enough crude in the pipeline to meet this,” he said. Sudan has said it would allow the sale of oil which has already reached pipelines on its territory or the export terminal on the Red Sea.

Dau repeated South Sudan was not backing any Sudanese rebels. “We are committed to the flow of the oil. It is in the interest of the two countries. We don’t see that this shutdown can bring any peace or stop internal rebellions in Sudan.”

“It will have a negative impact on Sudan and South Sudan. Our economies will suffer,” he said. Sudan will get pipeline fees of around $100 million until the shutdown, he added.

Khartoum accuses Juba of supporting the “Sudanese Revolutionary Front” (SRF), a rebel alliance, which complains of neglect at the hands of the wealthy Khartoum elites. The SRF in April staged an attack on central Sudan, embarrassing the army on whose support President Omar Hassan al-Bashir depends.

South Sudan in turn accuses Sudan of backing rebels in its eastern Jonglei state, where fighting is making it impossible to realize government plans to search for oil with the help of France's Total TOTF.PA and U.S. Exxon Mobil XOM.N.

Rahmatullah Osman, undersecretary in Sudan’s foreign ministry, told al-Akhbar newspaper Sudan would not allow any passage of South Sudanese oil unless Juba cut all ties with insurgents.

"There won't be any reversal," he said, adding that Sudan hoped like South Sudan that China would mediate. China dominates the oil industries in both countries, and state firm China National Petroleum Corp is most affected as it runs the oilfields in the South with Malaysia's Petronas PETR.KL and Indian firm ONGC Videsh ONGCVD.UL.

Reporting by Andrew Green in Juba and Khalid Abdelaziz in Khartoum; Writing by Ulf Laessing; Editing by Mark Potter