Kuwait, Saudi Arabia and the United Arab Emirates together account for over 53 percent of the output by the 14-member Organization of Petroleum Exporting Countries (OPEC). These three countries are also among the handful of oil producers with the capacity to ramp up production in case of any shortfall in global productions.
Strategic significance of oil production from the region to sustaining global supplies and ensuring stable prices received a fillip last week with the announcement that Kuwait and Saudi Arabia are to resume oil production from their partitioned zone, where the hydrocarbon assets are jointly shared by the two countries. Full production capacity of the zone is expected to be restored by the end of 2020, by when oil output from the area is projected to reach over 500,000 barrels per day — more than the daily production of some members of OPEC, and many of its allies in the non-OPEC bloc.
On Tuesday, 24 December, negotiators from both sides expressed a collective sigh of relief, as representatives of Kuwait and Saudi Arabia finally inked a deal on sharing resources and resuming production in the partitioned zone that lies between the two countries. After nearly five years of on-again, off-again, negotiations, and near-deals, the agreement was signed for Kuwait by the Foreign Minister of Kuwait Sheikh Dr. Ahmad Nasser Al-Mohammad Al-Sabah, and for Saudi Arabia by Minister of Energy Prince Abdulaziz bin Salman Al-Saud.
Following the agreement, Kuwait’s Minister of Oil and Minister of Electricity and Water Dr. Khaled Al-Fadhel and his Saudi counterpart Prince Abdulaziz then signed the memo of understanding to resume joint oil production from the partitioned zone. Hailing the agreement as a “landmark achievement” that capped months of cooperation and coordination between the political, technical and legal teams on both sides, the ministers stressed that the move reflected distinguished fraternal relations between both brotherly countries under the leadership of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah and King Salman bin Abdualziz Al-Saud.
Speaking on the occasion, Prince Abdulaziz Al-Saud said that talks between his country and Kuwait on the neutral zone in the past few years were focused more on “harmony” rather than on striking a deal. He commended the brotherly relationship between His Highness the Amir of Kuwait Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah and the Saudi King Salman bin Abdulaziz, describing it as a basis of the Kuwaiti-Saudi partnership.
After a meeting with His Highness the Amir, the Saudi minister affirmed that what links the two countries was greater than borders, but history and brotherly ties. He also pointed out that the Saudi Crown Prince Mohammad bin Salman had a prominent role in reaching this agreement and the memorandum of understanding. Kuwait’s Deputy Foreign Minister Khaled Al-Jarallah and Saudi Ambassador to Kuwait Prince Sultan bin Saad Al-Saud also attended the signing ceremony.
The neutral zone, created through the Uqair Convention of 1922 between Saudi Arabia and Great Britain on behalf of Kuwait, spans an area of more than 5,700 square kilometers. However, the protocol signed on that occasion left the border between the two countries undefined. It was only after extended negotiations in the 1960s that Kuwait and Saudi Arabia eventually came to an agreement and ratified a demarcation agreement in January 1970. The agreement divided the area and incorporated each half into their respective territories, while leaving the Partitioned Neutral Zone’s (PNZ) hydrocarbon resources to be shared jointly by the two sides.
The region contains two main oil fields: the onshore Wafra field and the offshore Khafji field that are managed and operated for Kuwait by Kuwait Gulf Oil Company (KGOC), and for Saudi Arabia by Saudi Arabian Chevron (SAC) at Wafra, and by Aramco Gulf Operations Company (AGOC) at Khafji.
KGOC, a wholly owned subsidiary of Kuwait Petroleum Corporation (KPC), was established in 2002 to take charge of upstream oil and gas operations in the PNZ. On the other side,, SAC is a subsidiary of global oil giant Chevron that operates in Wafra on behalf of Saudi Arabia through a mutual agreement that ends in 2039. Meanwhile, AGOC is a wholly owned subsidiary of Saudi Arabia’s national oil company, Aramco.
The onshore operations at Wafra covers an area of approximately 5,000 square kilometers in the PZ and is managed by Wafra Joint Operations (WJO), which is staffed and funded equally by KGOC and SAC. The WJO is tasked with exploring, developing and producing oil and gas out of several fields and reservoirs in the area. The first discovery of oil in this area was made in 1954, and six major fields have been discovered in the area since then.
When operations at Wafra were suspended in May 2015, the output capacity was about 220,000 barrels per day of Arabian Heavy crude. This crude, with its high sulfur content, is currently in demand due to tight global supplies caused by US sanctions on Iran and Venezuela which previously produced this grade of crude.
The offshore operations at Khafji covers an area of approximately 700 square kilometers in the PZ and the operations are managed by Khafji Joint Operations (KJO), which is staffed and funded equally by KGOC and AGOC. Similar to Wafra, the KJO is mandated to explore, develop and produce oil and gas out of several fields and reservoirs in the area. The first offshore well in Khafji was drilled in 1960 and four more major fields have since been discovered in the area. Khafji operations were shut down in October 2014 amid environmental concerns, at a time when it was producing around 300,000 barrels per day.
Saudi Energy Minister Prince Abdulaziz bin Salman has stated that KJO will resume production in the PNZ oilfields gradually, projecting the production to reach 325,000 barrels per day by the end of 2020. Meanwhile, Saudi Chevron has also expressed its commitment to restoring full production to the Wafra field within twelve months of resuming operations.
Despite the optimism on all sides, the resumption of production is unlikely to add oil to the global market immediately, as both Saudi Arabia and Kuwait remain committed to adhering to the OPEC-mandated production cuts that have now been extended to March 2020. Speaking on the sidelines of the agreement signing process, Minister Al-Fadhel assured that Kuwait would adhere to its production quota as per the OPEC Plus agreement even after the resumption of production in the PNZ.
According to OPEC figures, Kuwait has proven crude oil reserves of 101.5 billion barrels, and proven natural gas reserves of 1.8 trillion cubic meters. Crude oil production, including from the PNZ is currently capped at 2.7 million barrels per day, of which two million barrels per day of crude are available for export. Any addition in production from PNZ will probably go into storage until the production-cuts called for by OPEC expire, which given the current price scenario looks unlikely any time soon.
Nonetheless, the fact that the two sides have signed a deal on resuming joint production from the PNZ could impact market sentiments. Given the sluggish growth in global demand and rising supply from the US and other producers, the extra production capacity from the PNZ also has the potential to subdue any rapid rise in oil prices.