Saudi Arabia, Kuwait agree to restore shared oil production

The agreements reached by the Gulf neighbours set the stage for a resumption of around 500,000 barrels per day (bpd) of crude output.
Sunday 05/01/2020
Kuwaiti Foreign Minister Ahmed Nasser al-Mohamed (L) and Saudi Oil Minister Prince Abdulaziz bin Salman Al Saud during an official ceremony in Kuwait City, December 24.             (KUNA)
Consensus. Kuwaiti Foreign Minister Ahmed Nasser al-Mohamed (L) and Saudi Oil Minister Prince Abdulaziz bin Salman Al Saud during an official ceremony in Kuwait City, December 24. (KUNA)

Kuwait and Saudi Arabia put to rest a political dispute involving shut-in oil production from shared Neutral Zone fields, ending a 5-year impasse that included thorny sovereignty and border issues.

The agreements reached by the Gulf neighbours set the stage for a resumption of around 500,000 barrels per day (bpd) of crude output.

Riyadh and Kuwait will take a measured approach to restoring output, however, because they are committed to restraining production as part of the collaboration between OPEC and independent producers in support of higher oil prices.

The Kuwaiti and Saudi governments agreed on December 24 to restore shared oil production from the offshore Khafji field and onshore Wafra field in the Neutral Zone, following a production shutdown at Khafji in October 2014 and output halted at Wafra in May 2015.

Negotiations between the two countries over the disputed operations had been on and off since 2015, with expectations raised for a deal to be reached as far back as 2016 and more recently in early 2019.

The Kuwaiti and Saudi governments had been eager to resolve the dispute as part of wider efforts to end energy conflicts among Gulf Cooperation Council (GCC) neighbours.

Saudi Oil Minister Prince Abdulaziz bin Salman Al Saud prioritised settling the Neutral Zone conflict in his previous capacity as Minister of State for Energy Affairs with a breakthrough in talks reportedly occurring in July. Following his appointment as oil minister in September, that priority took on greater precedence. Kuwaiti Emir Sabah al-Ahmad al-Jaber al-Sabah heavily lobbied for a final resolution during the GCC heads of state meeting in December.

The Neutral Zone covers approximately 5,770 sq.km and is subject to treaties dating to the 1920s. The zone was formally partitioned between Saudi Arabia and Kuwait in 1970, with the two countries agreeing to divide the area and incorporate each half into their respective territories while sharing and jointly managing the crude produced from the oil fields. Together, the Wafra and Khafji fields produce around 500,000 bpd.

Citing environmental reasons, Saudi Arabia abruptly shut down the Khafji field in October 2014. The Khafji field is operated by Al-Khafji Joint Operations Company, a joint venture between Saudi state oil firm Saudi Aramco’s subsidiary Aramco Gulf Operations Company and Kuwait Gulf Oil Company, a subsidiary of Kuwaiti state oil firm Kuwait Petroleum Corporation.

In retaliation for the Khafji stoppage, the Kuwaitis denied visas for employees of US oil firm Chevron, the company that operates the Wafra field on behalf of Saudi Arabia along with Kuwaiti state oil partners, and refused customs clearance for field equipment.

Those moves resulted in the Wafra field’s output being curtailed in May 2015, following Chevron’s insistence that it was unable to safely operate the field. Chevron had been a source of tension between the Gulf neighbours since Saudi Arabia’s decision in 2009 to renew the US oil firm’s operating concession for Wafra for 30 years. Kuwait was miffed at what it believed was an arbitrary decision by the Saudis, contending it had not been appropriately consulted about the extension.

At a ceremony December 24 in Kuwait, Prince Abdulaziz and Kuwaiti Foreign Minister Sheikh Nasser Sabah Nasser al-Mohammed al-Sabah signed two agreements on the final demarcation of land and maritime borders in the Neutral Zone, appending previous border agreements.

Kuwaiti Assistant Foreign Minister for Legal Affairs Ghanem al-Ghanem said the appended border pacts are “more accurate and more definitive,” outlining a clear-cut officially recognised border between the two countries in accordance with previous agreements. The agreements spell out complete sovereignty for Kuwait in the northern portion of the zone and the same for Saudi Arabia in the southern portion, providing specific language not included in the earlier agreements.

Prince Abdulaziz and Kuwaiti Oil Minister Khaled al-Fadhel signed a memorandum of understanding “related to the procedures for resuming petroleum production on both sides,” a tweet by the Saudi Oil Ministry stated.

At a ceremony at the Khafji field on December 25, Prince Abdulaziz said production from the field would be recovered to 320,000 bpd by the end of 2020. Chevron said that it expected the Wafra field, which has a crude production capacity of 220,000 bpd, to return to full operation within 12 months.

While technical issues dictate a relatively gradual restoration of production from the two fields, the two OPEC members are mindful of the effect of returning some 500,000 bpd to saturated oil markets. Both Kuwait and Saudi Arabia have demonstrated output restraint as part of the coalition of 21 producers known as OPEC+. In December, the group agreed to deepen existing production cuts of 1.2 million bpd by an additional 500,000 bpd through March. Fully recovered Neutral Zone output, therefore, may receive a better welcome by the oil markets later in 2020 than earlier.

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