January 2020 /// Vol 205 No. 1

Columns

Oil and gas in the capitals

The Partitioned Neutral Zone: Geology, economics and politics

Dr. Anas Alhajji, Contributing Editor

The Partitioned Neutral Zone (PNZ) is one of the best examples of the nexus among geology, economics and politics. The offshore oil production of the Neutral Zone has been offline since 2014, and the onshore output has been shut down since 2015. However, on Dec. 24, Saudi Arabia signed an agreement with Kuwait, regarding the demarcation of borders in the waters of the Neutral Zone, which was not included in previous agreements.  The countries also signed a memorandum of understanding on procedures to restart production.

A brief history. The collapse of the Ottoman Empire after World War I created new facts on the ground, especially after the British controlled the Gulf region. To keep the peace, British officials needed to draw lines in the sand. They decided to set the borders among Iraq, Kuwait and Saudi Arabia.

After six days of negotiations in Uqair (in the eastern province of Saudi Arabia), representatives of the Sheikh of Kuwait, Kingdom of Iraq, Great Britain, and Sultanate of Najd (later expanded and named Saudi Arabia) signed, on Dec. 2, the Uqair Protocol of 1922.

One of the highly contested issues was the areas that are frequented by various Bedouin tribes, as they move seasonally. As a result, negotiators left two shared areas, in the hope that future negotiations would specify the boundaries for the current PNZ between Saudi Arabia and Kuwait, and another between Saudi Arabia and Iraq.  Saudi Arabia and Iraq reached an agreement in 1981 that abolished their Neutral Zone and established new borders.

Meanwhile, the PNZ was ignored until 1938, when Burgan field in Kuwait was discovered. A consortium of American oil companies represented by the firm, American Independent Oil (AMIN OIL), signed a concession with the Sheikh of Kuwait to explore in the Neutral Zone.  Later, Getty Oil signed a concession agreement with the Saudis. Both companies joined forces in an official agreement, and Wafra field was discovered in 1954.

Japan acquired a concession from Saudi Arabia in 1957, and from Kuwait in 1958, to explore for oil in the waters off the PNZ.  Japan’s Arabian Oil Company discovered Khafji field in the offshore PNZ during 1960. These discoveries, with a push from the joint operations of Getty Oil and AMIN OIL, forced both parties to renegotiate their borders.  As the Japanese discovered more offshore fields in the region during the first half of the 1960s, both parties reached an agreement in 1965 that divided the surface of the PNZ and identified the official boundaries between the two countries. This was done while sharing the resources of the whole region, as agreed upon in the Uqair Protocol of 1922. The agreement, which gave each country full sovereignty over its half, became official in 1970.

Chevron’s role. Chevron is the operator of the Wafra onshore oil field. The company found itself at Wafra by default: Texaco bought Getty Oil in 1984, and Chevron acquired Texaco in 2001. Earlier, in 1977, the Kuwaitis bought/nationalized AMIN Oil.

Chevron decided to shut down operations at Wafra field in 2015.  While details are unknown, the story circulating in the public press is that Saudi Arabia extended Chevron’s concession without consulting with Kuwait. But the Kuwaitis believed that extending the concession unilaterally doesn’t automatically extend Chevron’s contracts in Kuwait, including ports, rental properties and land. Thus, Kuwait asked Chevron to move its facilities to another location in order to build a refinery, which would utilize Wafra crude, instead of exporting it.  When Chevron refused, the Kuwaiti government stopped issuing work permits and other needed licenses. The 1965 agreement came home to roost: Kuwait has complete sovereignty over its half, and all Kuwaiti laws apply!

Khafji’s geology. The Arabian Oil Company, Japan’s largest oil producer, lost its concession in 2000. It was replaced by a joint operation between Aramco Gulf Operations Company and Kuwait Gulf Oil Company.

Saudi Arabia shut down Khafji operations in October 2014, reportedly for environmental and technical reasons. However, Kuwaiti media claimed that oil was migrating from Khafji to a Saudi offshore oil field, Safaniya. Therefore, Saudi Arabia would have no interest in restarting Khafji.  But the Saudis said that they shut down Khafji, because oil was migrating from Safniyah to Khafji. They needed to do some work to stabilize the field before restarting Khafji. Gas flaring might be another factor

Despite the above serious disputes, no one can deny the role of politics, especially when it comes to Qatar and Iran. One of the legitimate concerns is the offshore fields that are shared among Saudi Arabia, Kuwait and Iran. It is possible that the recent agreement on demarcation in PNZ waters is related to these shared fields.

Impact of an agreement. What has been signed is an MOU on procedures to restart production. There will be no immediate impact on the oil market. It will take time for first oil to appear on the market. Full capacity will not be reached until 2021 or even 2022.  Even then, the impact is limited to increased capacity on one hand, and crude quality on the other. The deal brings badly-needed medium and sour crudes to the market. Oil from Wafra is heavy sour (18-21o API, with some 24o API reported). Oil from Khafji is medium-sour (28.5o API). Therefore, the impact of the return of production in the PNZ is limited, except for crude quality.  It is worth noting that an agreement on restarting production doesn’t end the grievances of both the Saudis and Kuwaitis. It is the best that they can get under current circumstances.  

The Authors ///

Dr. Anas Alhajji is an independent energy economist and the former chief economist at NGP Energy Capital management. He is a well-known researcher, author, speaker and an award-wining academician and wood worker.

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