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Easing OPEC+ output cuts may unshackle Saudi-Kuwaiti Neutral Zone oil production

As OPEC and its allies prepare to roll back production quotas in May, the Neutral Zone shared between Kuwait and Saudi Arabia stands ready to provide a significant source of the two countries’ additional output.

The zone is capable of pumping near to its previous maximum levels of about 500,000 b/d, but has largely been curtailed by the OPEC+ agreement. That could change, though some lingering sovereignty and fiscal still needs to be resolved, sources told S&P Global Platts.

Saudi energy minister Prince Abdulaziz bin Salman told reporters April 1 that the kingdom’s share of Neutral Zone production was currently 135,000 b/d. Since the two countries split output from the area equally, that implies total production from the Neutral Zone is about 270,000 b/d.

“Everything is going smoothly there with our friends in Kuwait,” Prince Abdulaziz said after the recent OPEC+ meeting, in which the alliance agreed to gradually ease quotas by a collective 1.14 million b/d from May through July in monthly increments.

Saudi Arabia’s cap will rise by 376,000 b/d over those three months, while Kuwait, which has a production capacity about one-fourth of its neighbor’s, will see its quota increase 96,000 b/d.

Saudi Arabia also plans to unwind its voluntary extra 1 million b/d cut that it has implemented since February.

“The low rate of production [in the Neutral Zone] is due to the OPEC quotas,” said Kamal al-Harami, a Kuwait-based independent oil analyst. “If the OPEC agreement wasn’t in place, it could produce in the region of 500,000 b/d.”

S&P Global Platts Analytics forecasts production volumes from the shared fields could hit 400,000 b/d in May and gradually climb to 500,000 b/d by August.

Sovereignty complications

The fields contained in the Neutral Zone lie in onshore and offshore territory shared by the two nations at their border. The offshore Al-Khajfi is operated by Saudi Arabia’s Aramco Gulf Operations Co. and Kuwait Gulf Oil Co., a unit of state-run Kuwait Petroleum Corp., while the onshore Wafra is operated by KGOC and Saudi Arabian Chevron.

The countries agreed in 1970 to co-manage and share crude production from the zone equally. However, they were offline for more than four years until 2020, due to a political dispute that was resolved with the signing of an agreement in December 2019.

Since then, production has been on-again, off-again, and discussions between the two nations over managing the zone are ongoing.

Prince Abdulaziz and Kuwaiti oil minister Mohammed al-Fares most recently met in March to review “the signed agreements between both countries and a memo of understanding of resuming joint oil production along the border,” Kuwait’s Ministry of Oil said in a statement.

In Saudi Aramco’s March 22 earnings call, CEO Amin Nasser told analysts that Neutral Zone production was “ramping up over time,” as he pegged the company’s share of output around 50,000 to 60,000 b/d.

One source familiar with the developments said the OPEC+ cuts have allowed time for the fields and facilities to be rehabilitated after years of being idled. Much progress has been made on the subsurface, seismic and the geological technical issues, the source added, speaking on condition of anonymity.

“They are doing a lot of work on those to make sure the production is sustainable from Wafra and Khafji,” the source said. “They are doing the right foundations and bases for production, as well as infrastructure tie-ins, and investment plans being thrown around between Aramco and KGOC and Chevron. There is a three-way dance on paper that is very good.”

Chevron declined to comment on production at Wafra.

“Saudi Arabian Chevron and its partner Kuwait Gulf Oil Company remain focused on safely ramping up production at the Wafra Joint Operations,” a spokesperson told Platts.

Kuwait officials could not be reached for comment.

Dorra gas development

Sovereignty issues between the two sides are still delicate, however, even with both sides agreeing to detach hydrocarbons development in the Neutral Zone from political considerations.

“The surrounding area is like a pre-cold war Berlin situation where you’ve got a payzone in the middle of disputed territory,” the source said. “There are sovereignty issues that are not resolved, and fiscal issues that are not resolved.”

There is also the Dorra gas field in the Neutral Zone, which was shelved in 2013 but has been back under development, with both countries seeking to develop their gas sectors to meet rising electricity demand.

Harami said work on readying the field, which holds an estimated 10-11 Tcf of gas and around 300 million barrels of oil, is almost near completion, but “there is still a decision to be made whether a new gas control center should be in the Saudi or Kuwaiti part.”

For now, the Neutral Zone remains a ready but largely untapped resource for Saudi Arabia and Kuwait, but the easing OPEC+ production cuts could mean its quiet days are over soon.
Source: Platts

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