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Oil output from Saudi, Kuwait shared zone on hold as ties sour

Saudi Arabia and Kuwait struggle to resume oil production from joint fields amid souring ties over Turkey, Qatar.

Saudi Arabia and Kuwait will struggle to resume oil production from jointly operated fields any time soon due to operational differences and souring political ties between the previously close Gulf OPEC allies, sources familiar with the matter said.

The two countries halted output from the jointly run oilfields - Khafji and Wafra - in the so-called Neutral Zone more than three years ago, cutting some 500,000 barrels per day, or 0.5 percent of global oil supply.

As oil prices rose to a four-year high above $85 per barrel this year, Washington has been pressing its top Gulf ally Riyadh to reduce crude prices by increasing production.

Saudi Crown Prince Mohammed bin Salman visited Kuwait last month to discuss a resumption of oil output from the zone.

But the sources, who asked not to be identified as they are prohibited from discussing the issue publicly, said the talks failed to move the two countries closer to a deal as Kuwait resisted Riyadh's push for greater control of the fields.

"It did not go well because Kuwaiti sovereignty is non-negotiable," one source told Reuters news agency.

Riyadh does not want Kuwaiti laws to apply to US oil major Chevron, which operates the Wafra onshore field on behalf of the Saudi government, the source added.

Another source said Saudi Arabia wanted a bigger say and more control in running oil operations in the zone.

Bin Salman met Kuwaiti Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah and Crown Prince Nawaf al-Ahmad al-Jaber al-Sabah but the visit was cut short from the originally planned two days to just a few hours on the night of September 30, the sources said.

Political tensions

In a move that may complicate relations with Riyadh, Kuwait this month signed a defence cooperation plan with Turkey a  move it said was meant to strengthen bilateral ties.

Signed in Kuwait City by top military officials from both countries, the arrangement calls for the exchange of experience and know-how aimed at enhancing military coordination.

Turkey and Saudi Arabia are currently locked in major diplomatic crisis over the disappearance of Saudi journalist Jamal Khashoggi in Istanbul. 

Adding to the friction were tensions between Saudi Arabia and Kuwait over the embargo against neighbouring Qatar and diverging views on relations with Saudi Arabia's regional rival Iran.

Kuwait is trying to mediate the embargo, which is being led by Saudi Arabia and the United Arab Emirates.

Saudi Arabia, Bahrain, the UAE and Egypt cut diplomatic, transport and trade ties with Doha last year, accusing it of financing terrorism. Qatar rejects the charges.

Kuwait has sought to maintain neutrality, although the Emir's efforts to mediate the rift have had little success so far.

Kuwait, which has a sizeable Shia Muslim minority, has also maintained dialogue with Shia Iran. Saudi Arabia and Iran back opposing sides in civil wars in Syria and Yemen.

"The (regional) situation is not stable, so every country should think how to protect itself," Saleh Ashour, a member of the Kuwaiti parliament, said.

Costly idle wells

Oil output in the Neutral Zone, which dates back to 1920s treaties establishing regional borders, is divided equally between Saudi Arabia and Kuwait.

The Wafra field is operated by state-run Kuwait Gulf Oil Co and Chevron on behalf of Saudi Arabia. The Khafji field is operated by state oil giant Saudi Aramco and Kuwait Gulf Oil.

Tensions have been simmering since the last decade when Kuwait was angered by a Saudi decision to prolong Chevron's Wafra concession until 2039 without consulting Kuwait.

In 2014, Saudi Arabia closed Khafji, citing environmental issues. In 2015, Chevron shut Wafra, citing difficulties in securing work permits and materials.

"Saudi Arabian Chevron is focused on supporting operational activities to maintain readiness for production restart when that time comes," a Chevron spokeswoman said.

"Obviously a restart depends on the discussions between the two countries. But we’re ready. We are maintaining the equipment, we have put a lot of effort into keeping the pipelines in shape and keeping the key wells in shape."

Shutting off output is expensive because it requires investments of tens of millions of dollars a year for maintenance, sources familiar with field operations said.

The Neutral Zone "is the single biggest asset in the world, which was deliberately stopped and hasn't been producing for three years", one of the sources said.

"The more the restart is postponed the more it will cost to maintain it. And the more problematic it might be to restart the fields quickly and fully," he added.

Industry sources from both countries say that though Khafji and Wafra are not linked geographically, an agreement to bring one field back online would be tied to the other.


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