BENTIU, South Sudan, (Reuters) – Despite a dozen years of oil extraction in South Sudan’s Unity state, the capital Bentiu has little to show for it.

Donkeys drag carts bearing oil drums filled with water around the dusty, litter-strewn streets and evenings hum with private electricity generators and occasional gunfire.

“There’s no benefit to Bentiu. We’re still drinking water from the river,” said David Biphal, sitting at tea stand near a scratched out picture of Sudanese President Omar al-Bashir.

A dusty town some 80 km (50 miles) from the contested Sudanese border, Bentiu has, like much of South Sudan, never seen any development. Instead, nine months after South Sudan separated from the rest of Sudan to form a new country, the area is now seeing air strikes from Sudanese planes.

At least two people were killed on Monday when a bomb was dropped on a large market near Bentiu, and 10 people have been killed by other air strikes in the Bentiu area since April 14, South Sudan officials say.

Residents here say they have seen no benefit from oil because it all flows north through Sudan.

“The North is taking all the petrol through the pipeline. We’re still poor and have no roads,” said Biphal.

Since South Sudan split away from Sudan last July, the two have been at loggerheads over how much Juba should pay to export its crude through pipelines in Sudan. Oil talks have fallen apart and fighting erupted at the disputed border three weeks ago, raising concern the conflict could spill into all-out war.

For people in Bentiu, even before the latest flare-up, the prized resource has not provided the most basic of necessities.

“I have never seen any benefits from the oil field,” said Ruach Rueth, straddling his donkey-drawn water cart.

Some critics of South Sudan’s authorities blame corruption in the newly independent capital Juba for the failure to develop towns like Bentiu. They point out that the South Sudan regional government received tens of billions of dollars in oil money under a pre-independence deal in place from 2006-11.

It is not a sentiment you will hear often here, where most people blame Khartoum for their woes.

Some three-quarters of the two countries’ combined oil reserves are located in South Sudan, but the only ports are to the north. In January, after Sudan seized a portion of the South’s oil to compensate for what it called unpaid transit fees, the Juba government shut down its 350,000-barrel per day production.

“Oil is a good thing, but our neighbor wants to grab everything. They don’t have oil in their country but they want to benefit from this oil,” explains John Jal who runs a market where sunlight through coke bottles filled with petrol casts an amber glow.

OIL NOT AN INCENTIVE FOR PEACE

During the peace negotiations that ended their two-decade civil war, a 50-50 split of oil revenues provided an incentive for both Sudans to reach a peace deal. Talks continued after southern secession, but the oil production shutdown since January has left little cash to grease the wheels of peace.

“The structural interdependence of southern-based oil fields and northern-based pipelines no longer binds the two into pragmatic compromises,” political risk firm Eurasia group said.

Without oil revenues to prop up their leadership, the two countries’ border war and diplomatic spat is an economic race to the bottom. Both currencies are rapidly losing value, pushing up food and fuel prices.

Earlier this month South Sudan briefly captured the contested Heglig oil field that provided nearly half of Sudan’s 110,000 barrel-per-day oil production.

The hard black earth around South Sudan’s Unity oil fields, half an hour’s drive north of Bentiu, is pocked by half a dozen meter-wide bomb-craters from Sudanese Antonov bombers.

To try and circumvent the transit fee impasse, the Juba government has mooted plans to build an alternative pipeline through Kenya or Djibouti.

But Sudan’s comparative military strength, including unchallenged aerial firepower, means it will remain a threat to the South’s oil fields, making the prospect of serious investment dubious without first finding peace.

“The idea of building and securing a pipeline while they are still engaged in conflict is impractical,” said Jonah Leff, Sudan project coordinator for the Small Arms Survey.

“South Sudan’s army doesn’t have the air defense capabilities, such as anti-aircraft guns and surface to air missiles to defend itself against aerial attacks from the north,” he said.

Even if a deal is found and the oil spigots turn back on, people in Bentiu are skeptical whether their life will improve.

“This oil is a blessing from God,” Jal said but added: “We don’t benefit from the oil fields in Unity state because the pipeline is going towards Khartoum.”