Oil to Flow Again from Saudi-Kuwait Neutral Zone

(Bloomberg) -- Kuwait and Saudi Arabia will resume oil production from their shared fields this month, more than five years after a dispute halted supply.

The Khafji field in the so-called neutral zone will start output by the end of February, while operations will resume at Wafra from Sunday with exports likely flowing within three months, said Hashem Hashem, chief executive officer of Kuwait Petroleum Corp. The restart comes at a critical time as the projects will bring additional production capacity to an oil market that’s already dealing with excess supply as the deadly coronavirus hits demand.

The onshore Wafra and offshore Khafji are also important because U.S. sanctions on Iran and Venezuela have tightened the supply of heavy, high-sulfur crude, precisely the kind of oil that the fields produce. U.S. diplomats had been pressing both sides to reach an agreement. But Saudi Arabia and Kuwait, both important OPEC members, have said they are unlikely to add significant amounts of crude within the duration of the group’s current deal to curb output, which runs until the end of March.

The neutral zone’s oil fields can pump about 500,000 barrels a day -- more than the production of each of the three smallest members of the Organization of Petroleum Exporting Countries last month. The two fields could reach their full capacity by the end of this year, Hashem said.

Saudi Arabia and Kuwait reached an agreement in December to resume output in the barren strip of desert straddling their nations -- a relic of the time when European powers drew implausible ruler-straight borders across the Middle East.

Khafji was shut down in 2014 after a spat between the countries. The disagreement escalated over to the Wafra field, when Saudi Arabia extended the project’s original 60-year concession, giving a unit of California-based Chevron Corp. rights there until 2039. Kuwait was unhappy over the announcement and claims Riyadh never consulted it about the extension.

Chevron, through its subsidiary Saudi Arabian Chevron Inc., “has now embarked on a series of pre-startup activity, which includes efforts to ensure its workforce is ready to safely restart operations and then production,” Sally Jones, a company spokeswoman, said in a statement Thursday in response to the resumption of the Wafra field.

The neutral zone, spanning more than 5,700 square kilometers (2,200 square miles), was created by a 1922 treaty between Kuwait and the fledgling Kingdom of Saudi Arabia. In the 1970s, the two Gulf Arab monarchies agreed to divide the area and incorporate each half into their respective territory while still sharing and jointly managing the zone’s petroleum wealth.

--With assistance from Matthew Martin and Bruce Stanley.

To contact the reporter on this story: Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net

To contact the editors responsible for this story: Nayla Razzouk at nrazzouk2@bloomberg.net, Rakteem Katakey, Amanda Jordan

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