The World Bank has called off its oil pipeline deal with Chad over a dispute with the government on its failure to channelise profits to tackle poverty in the country.

The bank had provided financial backing for the oil project in an effort to enable the African country to tackle poverty by channeling the proceeds on development projects including health and education.

The pipeline was widely regarded as a test case for chanelling Africa's oil wealth to benefit its poor and spur development in the fund-starved countries in the continent.

In December the government of President Idriss Deby fell out with the bank, when it changed a law on how oil revenues were to be spent, despite the World Bank urging it not to.

The bank retaliated by freezing all payments of oil revenues to the government.

The dispute was settled in July with Chad agreeing to spend 70 per cent of the oil revenues on development projects and allocate the remaining 30 per cenjt into its overall budget.

In the current dispute, it said that Chad had paid the outstanding balance of $65.7 million under a $140-million loan agreement, while scrapping the financing for the pipeline project, which  Chad hopes to earn is expected to earn $1.4 billiion in oil revenues this year.

Chad says the scrapping of the bank's funding for the project was practically "consensual" and that their relations would continue in non-oil sectors.

The bank said future cooperation was possible if the government focused its energies on a programme to support inclusive development to overcome poverty, assist displaced people and improve governance.

At the end of August President Deby had ordered two major foreign oil firms, ChevronTexaco and Malaysia's Petronas, responsible for 60 per cent of the country's oil production to wind up over tax disputes, saying the government would take control of the remaining reserves.

This leaves only Exxon Mobil, which handles the country's oil production, in the oil consortium, which reports say the government had been wanting to join.

Observers feel that with China having launce\hed a major diplomatic offensive in the continent, the decision to pack-off two oil firms was aimed at facilitating the entry of Chinese oil firms. 

Chad and China had resumed diplomatic relations last month.