Time to resume output from the neutral zone?

Time to resume output from the neutral zone?

Saudi Aramco and Kuwait Petroleum Corporation (KPC) have both started the development of offshore and onshore assets in the neutral zone through the joint venture of Al-Khafji Joint Operations (KJO). (Reuters)

When will oil production resume in the “neutral zone?” It is a recurring question since drilling was suspended along Kuwait’s southern border with Saudi Arabia in October 2014 due to environmental and technical reasons. 

It came to a halt mainly because the joint operations were burning large amounts of gas that is associated with oil output. 

However in the intervening years modern plants have been constructed to benefit from the gas and take advantage of it through pipelines to the two countries.

At the same time, some of it is compressed and pumped into reservoirs to increase pressure underground so that even more oil can be squeezed out.

Saudi Aramco and Kuwait Petroleum Corporation (KPC) have both started the development of offshore and onshore assets in the neutral zone through the joint venture of Al-Khafji Joint Operations (KJO).

This is a partnership between Aramco Gulf Operations Company (AGOC), and Kuwait Gulf Oil Company (KGOC) — both units of Saudi Aramco and KPC, respectively. 

This joint venture started in 2000 and handles oil output of about 500,000 bpd through onshore and offshore fields. 

The offshore Al-Khafji field produces around 300,000 bpd, while the Al-Wafra field has a production capacity of about 200,000 bpd. 

Since Saudi Arabia and Kuwait are OPEC members who are currently undergoing output cuts, once production resumes in these fields, oil output from elsewhere will come under pressure.

Faisal Mrza

Both produce the medium crude grade that are required by the most sophisticated refineries.

It is worth noting that such medium and heavy grades are in tight supply currently.

That shortage demands that output from these fields should resume as quickly as possible because the world is thirsty for the type of oil these two fields produce.

Since Saudi Arabia and Kuwait are OPEC members who are currently undergoing output cuts, once production resumes in these fields, oil output from elsewhere will come under pressure.

Some have mistakenly argued that the halt of oil output from the neutral zone is due to political reasons or because of disagreement over its management. 

However, the historical relationship between Saudi Arabia and Kuwait remains strong. So the factors that have affected production are technical rather than political in nature.

And when production does resume, it must be properly managed and support the broader strategy of OPEC as it seeks to keep the market in balance.

  • Faisal Mrza is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalmrza.
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