South Sudan said on Friday it planned to halt oil production within two weeks after northeast African neighbour Sudan had started seizing southern crude to compensate for what Khartoum called unpaid transit fees.
South Sudan - which officials have said pumps around 350,000 barrels of oil per day - seceded last July under a 2005 peace deal that ended decades of civil war between north and south. The two countries have remained at loggerheads over oil, the disputed Abyei region and even the location of the border.
North and south are locked in a row over sharing oil revenues after South Sudan took two-thirds of output when it became independent. Oil is the lifeline of both economies.
The landlocked new nation needs to use a northern pipeline and the port of Port Sudan to export the crude but has failed to reach an agreement with Khartoum over a transit fee, prompting Sudan to seize part of its oil as compensation.
"The ministry of petroleum and mining will sit down to start a technical process that will lead to a decision that will lead to a complete shutdown. That will be in a week or two weeks," South Sudan government spokesman Barnaba Marial Benjamin told Reuters.
"We have taken this decision because South Sudan is not benefiting from oil. It is being taken by force by the Republic of Sudan, and the oil that is going through the pipeline is being looted," he said.
He said Sudan had seized oil worth $350 million in Port Sudan and prevented the sale of oil worth more than $400 million by restricting vessels from entering or leaving the port.
South Sudan's oil minister Stephen Dhieu Dau said the government could run without oil, which makes up 98 per cent of state revenues, for 18 months.
In Khartoum, the foreign ministry said Sudan wanted to cooperate with Juba but had the right to seize southern oil as long as Juba was not serious about discussing a usage fee, state news agency SUNA reported.
"If South Sudan stops exporting oil through Sudan there will be a negative impact on both sides but the damage will be bigger for South Sudan than Sudan," the statement said.
Khartoum has said Sudan is seizing some oil and diverting part of that to its two refineries. It has not said whether Sudan would try selling any seized oil.
Sudan is demanding $1 billion for unpaid transit fees since July plus $36 a barrel in the future as a transit payment, roughly a third of the export value of southern oil. Khartoum also wants Juba to share Sudan's external debt of $38 billion.
Sudan produces 115,000 bpd but needs that for domestic consumption.
Dhieu Dau said the government wanted to push ahead with plans for the construction of an alternative pipeline to end dependency on northern export facilities.
"We are planning that building an alternative pipeline will be a national duty for all South Sudanese," he told reporters.
South Sudan has held talks with foreign firms to build a pipeline to Kenya but oil industry insiders are sceptical because it would have to cross through rough and violent terrain.
In addition, oil production will halve within a decade without significant new finds, according to the International Monetary Fund.
South Sudan hopes to find oil in Jonglei state, where France's Total holds a largely unused oil licence but tribal violence has escalated in past weeks.
Sudan's government itself is under pressure to overcome a severe economic crisis after losing the southern oil, which made up 90 per cent of the country's exports. It generated $5 billion in oil revenues in 2010.
Juba has offered Sudan the sale of discounted oil and other financial help, but neither side shows any sign of shifting its position.