Sudan has warned nascent South Sudan it would not allow what it described as widened aggression along the border. A state of emergency is already in effect after several weeks of clashes and fears are growing of an escalation into a full-blown war.
World powers are watching the warring sides closely. The United States drafted a UN Security Council(UNSC) resolution to make it legally binding that Sudan and South Sudan end hostilities and return to the negotiating table.
Meanwhile, China has urged for restraint on both sides, but together with Russia is seen as unlikely to support additional measures, such as economic sanctions, in any new UNSC resolution.
Since celebrating independence in July last year, South Sudan has been locked in a dispute with its counterpart in the North over the oil-rich border area dividing the two countries. The International Energy Agency(IEA) said in its report on April 12 that the turmoil in Sudan, and the resulting drop in output of its highly-prized light-sweet crude , was as a factor in triggering higher prices.
It estimated output from South Sudan would remain below 100,000 barrels per day (bpd) in the second half of this year, noting “downside risks”.
Oil facilities in Heglig have been damaged during the recent fighting, satellite images and videos appeared to indicate, although the exact extent remains unclear. Last week, South Sudan also expelled more than one hundred Sudanese oil workers.
Among the major consortia operating in the region is the Greater Nile Petroleum Operating Company (GNPOC) and Petrodar. The shareholders of the latter include CNPC, Malaysia’s Petronas, Sudan Petroleum Company (SPC), Sinopec and Tri-Ocean Energy.
Existing capacity remains largely unused, after South Sudan shut down its production of roughly 350,000 bpd following disputes over transit fees to tap into Sudan’s infrastructure and a key export terminal along the Red Sea, Port Sudan. The EIA estimates that combined crude oil production in Sudan and South Sudan averaged about 425,000 bpd in 2011, two-thirds bound for China. Neither is a member of OPEC.
Over the weekend, Chinese authorities announced an $8 billion loan to the government of South Sudan, reaffirming its commitment to its ambitious investment drive in Africa. The world’s second-largest economy already has substantial stakes on both sides of the border, particularly in the oil industry. It is influence that may prove strategic to any lasting solution.
“I expect half of the total output, 0.24 million bpd, to resume in three, six months' time and full output in Q1 2013 because of Chinese leverage with both Sudans,” Irfan Chaudhry, investment strategist for Commodities and Equities Research at Emirates NBD, told CNBC.
With the new loan for South Sudan, Chinese companies will be tasked to develop projects covering hydropower, agriculture and infrastructure over a period of two years.
The discord between the two countries weighs substantially on output, as most of the oil fields are in South Sudan, while refineries, pipelines and the export terminal are located in the territory of its northern neighbor. In a bid to shake off dependence, South Sudan has been seeking support from China for the construction of an alternative pipeline through Kenya, so far with little success.
Reduced oil exports have dramatic consequences for the government of South Sudan, which depends on them for 98 percent of its revenue.
Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel’s flagship shows, as well as analysis for CNBC.com.
Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv