Global Insight Perspective | |
Significance | Chevron has received a 30-year extension to its old 60-year concession for onshore oil production from the jointly managed Neutral Zone between Saudi Arabia and Kuwait, allowing it to continue work on its groundbreaking steam flood project to boost the area's onshore heavy crude production past 270,000 b/d. |
Implications | The concession is a remainder from the era before oil production was nationalised in the Gulf, and Chevron's success in securing an extension is testament to the technical benefits it can bring Saudi and Kuwaiti NOCs, demonstrating the role IOCs can play in being hothouses for new technologies and thereby creating a relevance for themselves vis-à-vis NOCs. |
Outlook | Chevron can now continue to book reserves and rake in a net production share of 110,000 b/d from the concession, representing around 5% of its worldwide production. Meanwhile Saudi Aramco and Kuwait Petroleum Corp. (KPC)—both with vast heavy oil reserves—will follow the new production technologies applied with great interest. |
A Historic Stroke of Luck
Chevron has scored a large victory in managing to secure a 30-year extension to a concession that has widely has been regarded as nothing more than a relic, an anomaly surviving only because of its location in a Neutral Zone between two countries. Indeed the era of oil nationalisation that swept the region—culminating during the 1970s—resulted in complete nationalisation of all oil production in both Kuwait and Saudi Arabia, yet passed the Neutral Zone by, simply because of the geographical entity's anomalous character. Being shared by two states, the nationalisation wave was not immediately applicable in the Zone, as the two NOCs—Saudi Aramco and Kuwait Petroleum Corp. (KPC), through its upstream subsidiary Kuwait Oil Company (KOC)—both represented national legislations not fully applicable in an area defined by national compromise. The pragmatic decision was to leave things as they were to avoid a clash of national sovereignty assertions, a choice made easier by the fact that the area in general was relatively obscure for most of the two states' populations, creating little political stir.
The concession for onshore Neutral Zone production was initially secured by legendary oil tycoon J. P. Getty in 1949 and passed to Texaco on its acquisition of Getty Oil in 1984. Chevron became the holder of the lucrative contract following its merger with Texaco in 2001 and today the company's net production share from the Zone still makes up around 5% of its overall oil production.
Not Automatic
Chevron's extension comes after lengthy negotiations and wrangling, although the results it has been able to show from enhanced oil recovery (EOR) technology tests over the past years had made a renewal very likely (see Saudi Arabia: 15 July 2008: Chevron's Neutral Zone Concession Renewed by Saudi Cabinet).
The extension has not been granted routinely, however, as the form of contract—with a production share as high as 40% over a 30-year period—is generous and atypical even on a wider global scale. One reason is of course that the extension allowed Saudi Arabia and Kuwait to avoid complex political and legal negotiations that would have been needed to settle on a new way of dividing the Zone's riches. Another reason—and indeed the most important—concerns Chevron's timely and successful development and experiments with new EOR techniques to produce heavy oil. Knowing that both Saudi Aramco and KOC are in need of more advanced technologies to be able to monetise more of their vast heavy oil reserves elsewhere, Chevron has undertaken studies on new techniques, tactically starting them a few years before the concession's expiry, and promising to implement them as soon as a long-term extension is given and they can see their investments being recouped.
A similar concession for Neutral Zone offshore production was once held by a Japanese consortium, the Arabia Oil Company (AOC), on a 40-year basis. This expired in 2002, however, and was only partly renewed as a five-year technical service contract (TSC) for the Kuwaiti part of the offshore sector, with the Saudis fully absorbing the AOC operations in their operational part of the sector (see Kuwait: 27 March 2002: AOC Signs 20-Year Crude Purchase Agreement and Kuwait: 31 December 2002: Kuwait and Japan Reach Agreement on Neutral Zone).
Chevron's concession could well have received similar treatment, with the company having to convert its contract to an oil purchase deal as a potential sweetener, while having to give up control of all facilities and operations to just be allowed to apply new technologies on a contractor basis. The reason this has not happened stems from its development of technologies of extreme strategic value to both countries' NOCs, who are struggling to raise recovery rates from low levels at their vast heavy oil reserves—or in Kuwait's case, even bring much of them onstream.
Technological Edge
Chevron has been developing its steam flood technologies on the company's U.S. heavy oil reserves in its San Joaquin Valley assets in California, utilising ultra-heated steam injections to drive heavy petroleum reserves out of the rock, raising recovery rates up to around 50% of the reserves. Tests with the technology on the Neutral Zone fields have been undertaken in recent years, showing very promising signs of similar success despite the large geological differences between the two heavy oil plays (see Saudi Arabia: 10 July 2006: Aramco and Chevron Run Successful Steam Injection Tests; Claim Repercussions for Saudi Reserves).
If successful, the technology could add as much as 50,000 b/d of production in the onshore Neutral Zone by next year according to Chevron, although the big prize involved for KOC and especially for Saudi Aramco would be to study the technology and manage to transfer it to other heavy oilfields in the two countries (see Kuwait - Saudi Arabia: 5 February 2009: Output Boost to Add 50,000 b/d in Saudi Arabia's and Kuwait's Neutral Zone in 2009). While both NOCs likely are viewing technology transfers with interest in order to build up in-house capacity, it is very likely that Chevron would be awarded several TSCs in both Saudi Arabia and Kuwait in the coming years, before the companies learn to master the advanced EOR techniques themselves. Current recovery rates in the countries are, according to varying sources, often as low as 5% of the reserves. With Chevron's initial Neutral Zone tests and pilot projects having demonstrated a possibility to raise them to around 40% and higher, both countries involved stand to gain multi-billion-dollar revenues should the Chevron methods prove capable of raising recovery rates anywhere near those levels at their other heavy oilfields.
Outlook and Implications
In securing the extension of this record-paying, ultra-long-term concession, using its technological edge in a strategic area that could add significant production capacity over the long term, Chevron has demonstrated a path for continued relevance to be taken by IOCs in their relations with NOCs, which otherwise have become increasingly active on many traditional venues of IOC domination in the past years. Chevron is not alone among IOCs in its attempt to excel in technologically advanced challenges. ConocoPhillips is pursuing potentially path-breaking sour gas production methods in Abu Dhabi, while BP is hoping to become a leading producer of gas from tight geological formation—both examples of IOCs making themselves indispensable to NOCs and potentially unlocking vast new reserves or production capacities for them.
Using their access to challenging production areas and their superior in-house research and development (R&D) departments to develop a technological edge over the NOCs, which generally have been spoilt by monopolistic positions giving them access to easy production areas and little incentive to excel technologically, IOCs can continue to strike lucrative deals. Chevron has managed to continue being well paid in the Neutral Zone, with Saudi Aramco and KOC hoping that the technologies it applies will one day be transferred, to revolutionise their own vast heavy oil reserves.