Kuwait and Saudi Arabia agree to restart neutral zone oil production

Sunday 18/12/2016
A photo released by the Emir of Diwan shows the Emir of Kuwait Sheikh Sabah al-Ahmad al-Sabah (R) welcoming Saudi King Salman bin Abdulaziz Al Saud following his arrival in Kuwait City
on December 8th. (AFP)

Washington - Kuwait and Saudi Arabia are in the final stages of resolving a two-year dispute and resuming production of 500,000 barrels per day (bpd) of shared oil production from an area known as the neutral zone.

The restoration of output in land between the two countries left un­defined when the borders were es­tablished in 1922 was discussed by Saudi King Salman bin Abdulaziz Al Saud and Kuwaiti Emir Sheikh Sabah Ahmad al-Jaber al-Sabah during the Saudi monarch’s recent visit to Kuwait.

The meeting was part of the Sau­di king’s week-long tour of Gulf Co­operation Council (GCC) countries that included attending the GCC state summit in Bahrain.

After months of intense negotia­tions, which included an early No­vember meeting between the two countries’ Oil ministers, the Gulf neighbours are expected to soon fi­nalise matters on the neutral zone dispute but resumption of oil pro­duction from two shared neutral zone oil fields — the offshore Khafji field and the onshore Wafra field — reportedly will not begin imme­diately and, when it does, output will be raised gradually.

The settlement comes at an in­convenient time, as the Organisa­tion of the Petroleum Exporting Countries (OPEC) recently agreed to cut the group’s overall oil pro­duction by 1.2 million bpd begin­ning January 1st. That may help explain why pumping from the neutral zone will be renewed slow­ly. As part of the OPEC deal, Kuwait is to shave its output by 131,000 bpd and Saudi Arabia by 486,000 bpd.

The resumption of neutral zone production is more significant for Kuwait than for Saudi Arabia, as Kuwait has minimal spare capac­ity to compensate for the loss of output compared to Saudi Arabia’s estimated 2 million bpd of spare capacity. Though Kuwait has lit­tle debt and a nearly $600 billion sovereign wealth fund, low inter­national oil prices since 2014 have been a blow to state coffers, so much so that for the first time in 16 years, Kuwait recorded a budget deficit — $15.3 billion — for the fis­cal year that ended last March 31st, based on a 46% drop in oil income.

The disruption in neutral zone production began in October 2014, when Saudi Arabia abruptly shut down the Khafji field, citing envi­ronmental reasons and cutting off the field’s 280,000-300,000 bpd of shared output. The Khafji field is operated by Al-Khafji Joint Op­erations Company, a joint venture between state oil firm Saudi Ara­mco’s subsidiary Aramco Gulf Op­erations Company and Kuwait Gulf Oil Company.

The Kuwaitis retaliated by deny­ing employees of US oil firm Chev­ron visas and refusing customs clearance for equipment needed to help run onshore oil fields in the neutral zone. Chevron operates the Wafra field on behalf of Saudi Arabia along with Kuwaiti state oil partners.

Kuwait was angered by Saudi Arabia’s 2009 decision to renew Chevron’s operating concession for Wafra for 30 years without it being consulted and tensions had been simmering since. Production at the Wafra field was halted in May 2015 following Chevron’s demand that the two sides resolve the conflict, saying it would otherwise be un­able to safely operate the field.

The restoration of neutral zone production will help Kuwait deal with parliamentary dissent over energy subsidy cuts that have in­cluded a large rise in petrol prices. In October, Sheikh Ahmad dis­solved parliament partly because members of parliament were poised to question members of the government over austerity meas­ures and the reduction of subsidies to raise revenues.

Elections in late November re­sulted in a parliament in which just less than half of the members are from the opposition and its allies, so the Kuwaiti leadership should expect no let-up on criticism of its austerity moves. The Kuwaiti gov­ernment raised the price of petrol 40-80% on September 1st and for­eigners continue to pay the full higher prices.

Facing push back from the pub­lic and MPs, the Kuwaiti govern­ment sought to defuse the petrol fracas by announcing in October that Kuwaiti citizens would receive a quantity of free petrol monthly and that the cost of the petrol would be adjusted monthly based on international oil prices. Those moves did not prove satisfactory for many MPs.

With a projected budget deficit of $28.9 billion in the fiscal year that ends March 31st, 2017, Kuwaiti Finance Minister Anas Khalid al- Saleh indicated in July that his gov­ernment planned to sell as much as $10 billion of US dollar-dominated conventional and Islamic bonds in international markets.

Though the bond issue was scheduled for September or Oc­tober, the Kuwaiti government appeared to rethink the timing of the issue given Saudi Arabia’s an­ticipated first sovereign bond sale in mid-October, which raised $17.5 billion. Kuwait is expected to go ahead with its sovereign bond is­sue in the first quarter of 2017.