LOOKING AHEAD: Neutral Zone oil dispute turns political
| Date | 01 September 2015 |
| DOI | http://doi.org/10.1111/oet.12317 |
| Published date | 01 September 2015 |
LOOKING AHEAD
Neutral Zone oil dispute turns political
A dispute between Saudi Arabia and Kuwait over the
eldstheyproducejointlyintheNeutralZonethat
lies along their borders has shut down production
and shows little sign of being resolved. e argument
between the two countries is ostensibly over techni-
cal issues. e larger of the Neutral Zone’s two main
oilelds– Khai–was shut down by Saudi Arabia in late
2014 on what were described at the time as “environ-
mental grounds”, then in May this year, the other eld–
Wafra–was shut following an argument with Kuwait
over disagreements over the import of equipment for
the eld and the issuing of visas for foreign oi l workers.
e whole dispute has become more heated and now
threatens political relations between the two Gulf allies.
Shared responsibility
e two countries share responsibility for the opera-
tion of the Neutral Z one’s oilelds. Oil is produced
both onshore and oshore. e onsh ore eld-complex is
known as Wafra and has a production capacit y of about
220,000 bpd. e larger oshore eld-complex is called
Khai and can produce 300,000 bpd.
e Neutral Zone itself dates back to 1922, when the
British decided to resolve a dispute between the Amir
of Kuwait and the Arabian territories of Ibn Saud by
designating the area in question as a “neutral zone” to
be jointly administered by the two rulers. is state of
aairs continues today under their successor countries
of Kuwaitand Saudi Arabia. e administrative arrange-
ments originally covered the free access of Bedouin to
graze their animals; but this changed in 1947 when
Kuwait opened up the area to oil exploration, followed
by Saudi Arabia in 1948. Althoughthe two countries had
oered concessionsindep endently, the arrangements for
governing the Neutral Zone meant that each country
should have half of the tot al production of the Zone
regardless of where it was produced. e result of this
arrangement is that a dec ision on production by one
country directlyaects the revenues ofthe other, and this
is the basis of the current dispute.
In October 2014, Saudi Arabiaunilaterally ordered the
300,000 bpd Khai eld to be shut down on what were
called “technical” and “environmental” grounds. Khai
is the larger of the two main Neutral Zone elds and lies
oshore from the southern half of the Z one, bordering
waters o Saudi Arabia. Its closure deprived Kuwait of
up to 150,000 bpd of oil export revenues. e Kuwaitis
were angered by Riyadh’s failure to consult them over
the shutdown since, under the terms of the NeutralZone
arrangements they havea 50% interest in the Khai elds
just as the Saudis have a 50% share of the onshore Wafra
eld in the northern half of the Neutral Zone.
e Saudis have a 30-year operating agreement with
the US oil company, Chevron covering the Wafra eld
that lasts until 2039 (see Box 1). Kuwait is not happy
about this because it wants to use land presently owned
by Chevron in the northern half of the Neutral Zone to
build a large new renery. e 615,000bpd rener y is to
be built at al-Zour, and Kuwait wants to see it on-stream
by 2019.
Box 1
Production in the Neutral Zone
Oil production in t he Neutral Zone ce ntres on two
main eld-complexes: the oshore Khai eld and
the onshore Wafra eld. eir approximate capaci-
ties are, shown below :
(bpd)
Khafji 300,000
Wafra 220,000
e combined product ion of the oshore and
onshore elds is split 50-50 between Kuwait and
Saudi Arabia and costs are shared on a simi-
lar basis. Kuwaiti interests in the Neutral Zone
are represented by the state-owned Kuwait Gulf
Oil Company (KGOC) and Saudi Arabia’s by its
national oil company, Saudi Aramco, in the case of
the oshore sector and, for the onshore elds, by
Chevron, operating under a 30-year agreement with
the US company that began in 2009.
ere is also a gas- and condensate-eld oshore
known as Dorra, which is not yet in production.
Both countries want to develop the eld, but it lies
in waters disputed with Iran, whichalso wants to see
the eld brought on-stream. KGOC suggested the
eld would be capable of producing 800mn cfd.
In retaliation for the Saudi closure of Khai, the
Kuwaitis began earlier this year to refuse visas for some
of Chevron’s employees in the Wafra eld and blocked
the import of equipment for the eld. In May, Wafra was
closed down for maintenance, and Chevron announced
that it would remain o-line until the dispute between
Kuwait and Saudi Arabia was resolved.
Long-term threat
e stand-o between the two countriesis more damag-
ing to the Kuwaitis than the Saudis, who have a much
larger total production, which reached 10.6 mn bpd in
© 2015 John Wiley& Sons Ltd
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