Saudi, Kuwait expected to soon resume oil production in the Neutral Zone

Saudi Arabia and Kuwait are expected to agree this month to resume oil production from the jointly operated oilfields in the Neutral Zone that lies between both countries, industry sources told Reuters on Sunday.

The closure of the Neutral Zone’s fields, mainly Khafji and Wafra, has become a political sticking point between the two Gulf OPEC allies and senior officials have been trying to resolve the issue for months.

Khafji was shut in October 2014 for environmental reasons and Wafra has been shut since May 2015 due to operating difficulties.

The restart would come at a sensitive time for the oil markets after OPEC agreed last week to reduce output by around 1.2 million barrels per day (bpd) from January in a bid to reduce global oversupply and prop up prices.

A resumption of production from the joint oilfields would not be immediate and would be gradual, industry sources said.

“It will take some time,” said one industry source, adding that the decision to restart the fields was likely to be made in December.

“The Saudis are telling Kuwait they can restart the Neutral Zone, so potentially another 300,000 bpd of crude come on in late Q1 of 2017, or early Q2 2017. Al-Khafji Joint Operations has been told to prepare a startup readiness report,” said another industry source.

The Khafji field had been producing 280,000 to 300,000 barrels per day (bpd) until its closure.

It is operated by Al-Khafji Joint Operations Co, a joint venture between Kuwait Gulf Oil Company and AGOC, a subsidiary of state oil firm Saudi Aramco.

The Wafra field has an output capacity of about 220,000 bpd of Arabian Heavy crude. U.S. oil major Chevron operates the field on behalf of the Saudi government.

Saudi Arabia’s Energy Minister Khalid al-Falih was in Kuwait in early November for talks over the issue with his Kuwaiti counterpart, sources familiar with the matter said.

King Salman was expected to visit Kuwait later this week, and the Neutral Zone issue was likely to be discussed during that visit, the sources said.

Kuwait has limited spare production capacity and has therefore been hit harder than Saudi Arabia by the closures. Kuwait’s production capacity is estimated at 3.2 million bpd, compared to Saudi Arabia’s 12 million bpd.

The Neutral Zone is the only place in Saudi Arabia and Kuwait where foreign oil firms have equity in fields, which are otherwise owned and operated by state oil companies. Crude output is divided equally between the two countries.