By: Carol Jean Gallo on July 08, 2011 On the eve of independence for the new Republic of South Sudan, negotiations between north and south on a number of outstanding issues are still ongoing. Chief among these are the future of the border region of Abyei, citizenship, the national debt, and how the two countries will cooperate on the exploitation of oil. Oil in Sudan has been a problematic issue ever since it was discovered in the south in the 1970s. Characteristic of the way in which the government generally steered resources away from the periphery and into the center, Khartoum built the infrastructure with which to refine the oil in the north rather than the south. This meant that the jobs and the economic benefits of oil production remained concentrated in the north, with the south seeing very little in return or reinvestment. Oil revenue now accounts for about 98% of South Sudan’s economy, and 90% of hard currency in the north. The Comprehensive Peace Agreement in 2005 stipulated that the north and south were to share the income from oil production 50/50 from July 2005 to July 2011. About two thirds of Sudan’s oil fields are in what will become South Sudan on Saturday. The Juba government is currently reviewing oil contracts with international companies that had been signed with Khartoum before the 2005 agreement and has said they will not terminate contracts where there are no concerns; but some contracts may need to be renegotiated under a new policy. Chinese companies are a critical force in the exploitation of oil on both sides of the border, and new investors from South Korea, Japan, China, UAE, US, and Spain have already started knocking on South Sudan’s door with proposals for infrastructure and energy projects, including hydropower plants. The day before official independence, the north and south negotiating teams still have not come up with an agreement on oil; the negotiations have been going on for almost a year. Both economies are highly dependent on oil revenue, and would all but collapse if oil production stopped. Cooperation is critical, but both sides are upping the ante— practically literally, as the US consul general in Juba described the oil negotiations as “like a poker game.” According to the Financial Times, the north has threatened to block exports and the south has threatened to “go back to the bush.” Southern officials have said that the government is considering connecting to an East African pipeline and exporting through Kenya, but constructing the necessary infrastructure would take at least a year and an arrangement would have to be made for the interim. So far, the only agreement that has been reached on oil is that north and south will continue to negotiate as two independent countries. The Chinese company CNPC said it was discussing with Juba the possibility of a pipeline to Kenya, but that it was also concerned about what arrangements would be made with regard to the current north-south operations. Diversification of the economy is going to be essential for both north and south. For its part, South Sudan has spent the years since the 2005 peace agreement working hard on its regulatory framework and trying to create a business-friendly environment. In a recent World Bank survey, Juba scores relatively high on the ease of starting a business, enforcing contracts, and paying taxes. But credit facilities and investor protection are weak, and infrastructure and energy challenges pose enormous operational problems. How the negotiations over oil unfold between north and south is of great concern with respect to peace and security between the two countries. As Dana Wilkins of Global Witness has pointed out, a revenue sharing agreement like the one in place under the CPA could continue until a more long-term solution is found, but keeping it up in the air for too long could prove to be very dangerous. She also noted the possibility, evidenced in Juba’s courting of Nairobi over a pipeline, of the south wanting to exercise full sovereignty over its oil without having to rely on the north for refining and export. The fact that neither side has ruled out a return to war is very worrisome in this context. In many ways these negotiations over oil are about much more than oil, and much more than oil revenue is at stake. At least for an interim period before any pipeline through Kenya can be built, the only options are economic collapse for both north and south, and/or a return to war— or a negotiated agreement. And then there is the possibility of one or both sides reneging on the agreement. How these negotiations unfold are going to have implications for trust, reconciliation, peacebuilding, and the economy. At the same time, a pipeline to Kenya is not going to ease any of these transitions. Even if South Sudan could be oil independent tomorrow, it will not change the fact that the two neighbors must find a way to live peacefully with each other. The outcome of the negotiations will be an indicator of how the two governments will, or will not, cooperate for the foreseeable future.