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      • Sudan's oil transforms from curse into blessing

Sudan's oil transforms from curse into blessing

KHARTOUM (Reuters) - Oil inflamed Sudan's civil war for decades but

could now help seal the peace as the south becomes independent and

needs the north to refine its crude.

Rhetoric and tensions are rising between the former north- south foes

as Sudan hurtles towards the January 9 southern referendum on

secession -- the culmination of a 2005 peace deal which shared wealth

and power and promised democracy.

In Africa's largest country almost 75 percent of the current 500,000

barrels per day of crude output comes from wells in the south, but is

exploited, refined and transported by the north.

But that very equation, along with the fact that both governments in

the north and south are heavily dependent on crude revenues, could

draw a line which neither side is willing to cross and stop them short

of resuming full hostilities.

"Oil has a bad image -- corruption, fuelling war. But in the case of

Sudan, it's helped push for peace," said al-Sir Sidahmed, an energy

expert advising Sudan's petroleum ministry. "They simply can't afford

to have oil to stop even for one day."

The semi-autonomous southern government, formed in 2005, derives some

98 percent of its revenues from crude. Some 45 percent of Khartoum's

budget comes from oil, which makes up around 90 percent of its

exports.

Neither economy has moved to diversify away from oil dependency since

2005 and it will take years for either economy to do so in any

significant way.

This leaves no option but to continue -- in a form still open to

negotiations -- the sharing of oil wealth even in a likely

post-secession scenario.

The 2005 accord shared oil from the south roughly 50:50. The southern

ruling party, the SPLM, may well use its oil leverage to gain

political concessions from Khartoum's government -- likely in the

disputed central Abyei region.

Continued sharing of the landlocked south's oil with the north may

well be difficult to sell to a southern population bent on full

independence from the north they see as having oppressed them for so

long.

So a likely solution would be to rename the oil sharing as "rent" or

"fees" for the use of the pipelines, refineries and port in the north.

"As much as 40 percent of oil revenues could end up going back to the

north," deputy finance minister Marial Awour -- and a southerner --

told a news conference.

Southern officials have raised the possibility of building refineries

in the south and a pipeline to neighbouring Kenya's ports to be

independent from the north. But this would be a political solution,

rather than the most economically viable one, analysts say.

"It's techincally possible but they will simply spend so much," said

the deputy foreign minister Espen Barth Eide of Norway, which is

advising Sudan on its oil management. "The cost of a pipeline to Kenya

would be too high to warrant it... and you'd have to build a very

specialised refinery," he added, because of the low quality crude in

Sudan.

There is also a lack of technical oil expertise in the south which

would leave them dependent on foreign experts for extraction, an added

cost.

And time is a constraint given Sudan's oilfields are running low with

new discoveries over the years being less promising than hoped.

"If you look at the projection of oil revenues, the production is

peaking now - they know that it's decreasing," said William Battaile,

a senior economist from the World Bank.

Oil giants such as Total SA with the expertise and a contract to drill

in the south's massive swamps have been reluctant to begin work

because of the political uncertainty.

Others have been too prudent to enter Sudan at all despite the 2005

peace deal, worried that contracts signed with Khartoum might be

voided after the south secedes and that conflict with the north or

within the south could hinder work.

"If war starts and oil stops flowing - who's going to benefit from

that?" said Sidahmed.

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