Kuwait pauses before taking plunge in Neutral Zone

OREANDA-NEWS. Kuwait's government and state-owned oil firm KPC have paused to take stock before implementing provisions to to take full control of the Wafra oil field that it jointly operates with Saudi Arabia in the Neutral Zone. A spat with Riyadh has escalated since last October, with production shutting completely at Wafra in early May. But the Kuwaiti side is weighing the implications of further deepening the rift with Riyadh and, potentially, seeing Chevron exit Kuwait.

KPC submitted plans to the Kuwaiti courts last week to clear the legal pathway and give KPC subsidiary KGOC, which handles Kuwait's operations in the Neutral Zone, authority to take control of Chevron's operations. Chevron operates Saudi Arabia's share of Wafra.

KPC said it could produce 100,000 b/d at Wafra immediately and raise output quickly to 150,000 b/d, with plans to compensate Riyadh for lost production at a later date. But Riyadh has strongly suggested it does not support Kuwait's plan.

But a senior KPC official told Argus, "Politically, we might not have the guts to do it right now. Technically, we can take over operations at the field immediately".

Relations between Saudi Arabia and Kuwait have long been tight. Both are core members of the Gulf Cooperation Council. Kuwait generally follows Riyadh's line during Opec negotiations and Kuwait is also a member of the Saudi-led coalition against the Shiite Houthis and forces loyal to the former president Ali Abdullah Saleh in Yemen. But their relationship in the Neutral Zone has always been more charged and while the latest squabble is arguably the two countries' worst, it is unlikely to be the last.

The shutdown at Wafra comes after Kuwait responded to a Saudi-instigated shut-in at the 300,000 b/d Khafji field on 20 October by refusing to resume issuing work visas for staff at Chevron. Staff shortages triggered maintenance issues, and production at the Wafra field fell from 225,000 b/d in October to a maximum of 180,000 b/d in March, declining continually thereafter, before shutting entirely.

The double shutdown has hit Kuwait particularly hard as it has nearly no spare capacity, unlike Saudi Arabia. Kuwait is also already battling to hit its production capacity target of 4mn b/d by 2020, with a chunk of that production due from the Neutral Zone.

Talk of KPC's plans has increased tension in its relationship with Chevron, with some officials expecting the US major to exit Kuwait completely if KGOC attempts to take full control of Wafra. KPC officials said that many of the company's staff left their offices and accommodation in Kuwait last week and that it is unlikely Chevron will stay involved with KPC's upstream arm KOC's plans to introduce new enhanced technical service agreements (Etsas) this year.

A full departure would not have a significant economic short-term impact on Kuwait's treasury, but it would add delays to what is currently a Chevron-led investment to generate 100,000 b/d of heavy crude from Wafra by 2020. Chevron declined to comment on its plans in Kuwait.

The spat over the Neutral Zone will not have any bearing on positions taken at next week's Opec meeting, both countries being committed to a policy of defending market share.