Thread on the return of #oil production in the #NeutralZone between #SaudiArabia and #Kuwait
The thread discusses the impact on the oil market with some historical perspective and some technical issues
1- "Neutral Zone" Was established in 1922 between Saudi Arabia and Kuwait
The thread discusses the impact on the oil market with some historical perspective and some technical issues
1- "Neutral Zone" Was established in 1922 between Saudi Arabia and Kuwait
2- In 1922, a border agreement was reached after 6 days of intense negotiation between Abdulaziz, Sultan of Najd (later king of KSA), a British representative of Kuwait, another British representing Britain in charge of Gulf region &a representative of King Faisal of the of Iraq
3-However, they could not agree on certain areas where Bedouin tribes move back and forth seasonally. Negotiators agreed to create two shared zones: one between Saudi Arabia and Kuwait and another between Saudi Arabia and Iraq, on the hope that issues will be resolved later.
4-No one paid attention to these areas until oil was discovered in Burgan field in Kuwait in 1938. Geologists thought there is more oil south of it. Getty Oil, along with Ameen Oil, discovered Wafra oil field south of Burgan in 1954.
5-The Japanese “Arabian Oil Company” signed a concession with Saudi Arabia in 1957 and with Kuwait in 1958. It discovered the offshore Khafji oil field in 1960. These new developments prompted leaders of both regions to renegotiate borders in 1960.
6-The Japanese discovered other fields next to Khafji, including Hout. An agreement was reached in 1965 to divide the surface of the Neutral Zone while sharing the resources of the whole region. It became official in 1970. This agreement led to current dispute
7-The division made it clear that the onshore Wafra field was mostly in the Kuwaiti half and the offshore Khafji and related fields in the Saudi half (in addition to some onshore fields). But probably the 1922 agreement prevented a separation.
8-The agreement gave each country full sovereignty over its half. That means each country’s regulations apply in its half. When the dispute erupted, for whatever reason, Kuwait denied work permits to Chevron’s workers.
9-How did Chevron get involved? Texaco bought Getty Oil in 1984 (The infamous story). Then Chevron merged with Texaco in 2001 and inherited Texaco’s Wafra field
10-The Arabian Oil Company, Japan’s largest oil producer, lost its concession in 2000. It was replaced by a jointly owned company. The Japanese lost because they were arrogant. They did not listen. The news of termination shocked Japan.
11-There are many stories in the press on the causes of the dispute. The most common is that Saudis extended Chevron’s concession without consulting with Kuwaitis. Chevron operated Wafra field, which is in the Kuwaiti half of the NZ. Kuwaitis were not happy.
12-Also, #Kuwait wants to build a refinery in a location that is occupied by Chevron’s offices. They asked Chevron to relocate. Chevron refused. The government stopped issuing work permits. Chevron shut down operations in 2015.
13- Saudi Arabia shut down the Khafji field in 2014 on environmental & technical ground. Kuwaitis said Saudis have no interest in restarting the Khafji because oil is migrating from it to nearby Saudi Safaniya field. Saudis said the opposite: Safaniya oil is migrating to Khafji
14-Saudis thought they need to fix problems at Safaniya before restarting Khafji. Meanwhile, some gas flaring issues might be of concern too and disputes over which ports to use to export the NZ oil.
15-While the economics of the dispute is clear, no one can deny that politics is involved too. However, experts disagree on the weight of each.
16-Anyway, oil from Wafra is heavy sour and needs a steam injection to be produced. It is expensive to produce relative to the cost of production of other fields in the region. (18-21 API, some 24 API reported). Oil from Khafji is medium sour (28.5 API)
17-It will take time to restart production & will take months to bring the fields of the NZ to full production of 500 kbd. There is no impact on current OPEC+ production cut agreement which will be reassessed in March. It has no impact on the oil market in the next three months
18-It will not increase the Saudi production. They will use it to compensate for production in other fields. It remains to be seen how will Kuwait act. In theory, it should increase Kuwait oil production. But Saudis might put a condition preventing such an increase.
19-The restart of the NZ will increase the production capacity of both countries by 500 kbd in few months and probably more by 2021. But may not increase production in the first half of 2020.
20-The most important impact of the return of the NZ is not the quantity of crude, but the quality. It brings the badly-needed medium and sour crudes. Politically, the loss of Venezuelan crude may not be a global problem after all.
21-To sum up: the impact of the return of Neutral Zone oil production on oil market is limited except for the economic and political impact of crude quality issues. The details of the agreement tomorrow will shed some light on the accuracy of some rumors.
a side note: The neutral zone between Saudi Arabia and Iraq was dissolved in 1981 by a border agreement. At that time, Saudi Arabia supported Iraq in its war with Iran.
Typo: AMIN, not Ameen. It stands for American Independent Oil (Aminoil). It was a consortium of American oil companies that obtained a concession from Kuwait in 1946. Getty got a concession from Saudis in 1949, then the two joined forces in a joint operating agreement.
