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Saudi-Kuwait Neutral Zone oil fields seen offline for a while on talks setback

Talks between Saudi Arabia and Kuwait over two shared oil fields have broken down after months of promise, shutting in about 500,000 barrels per day of anticipated oil production for the foreseeable future, sources close to the projects told S&P Global Platts.

Workers involved in the Neutral Zone fields' restart are no longer optimistic that any resolution will occur as a recent meeting between Saudi Crown Prince Mohammed bin Salman and Kuwaiti Emir Sabah al-Ahmad failed to resolve issues of sovereignty over the long-contested area, the sources said.

"Dead as a doornail," a source said of prospects for the fields' return, adding that the only hope may be through international arbitration.

"It will not be easily fixed," another source said of the dispute.

The standoff looks set to cut off a source of crude that many market watchers were counting on to offset a looming supply squeeze as U.S. sanctions hit Iran early next month.

The offshore Khafji field, owned by Saudi Arabian Oil Co. and Kuwait Gulf Oil Co., was shut down in October 2014 by Saudi Aramco, who cited new government emissions standards for gas flaring.

The onshore Wafra field is operated by Kuwait Gulf Oil and Chevron Corp.'s Saudi Arabian Chevron Inc. It was shuttered in May 2015, with Chevron saying it had encountered difficulties in securing work and equipment permits.

Crude output in the two fields is shared equally between Saudi Arabia and Kuwait, and the two sides have been negotiating over their restart since early summer.

As recently as Sept. 23, Kuwaiti Oil Minister Bakheet al-Rashidi told reporters at an OPEC/non-OPEC monitoring committee meeting in Algiers that Neutral Zone production could resume as soon as January, eventually adding up to 400,000 bbl/d in supplies at full ramp-up.

Saudi counterpart Khalid al-Falih said at the same meeting that the dispute over the fields, which he said had a combined capacity of 500,000 bbl/d, could be resolved "in the very near future."

But a Sept. 30 meeting between the Saudi crown prince and Kuwait's Sheik Sabah did not go well, sources said, with the Kuwaiti side insisting that Chevron, the only international oil company with a concession in the Neutral Zone, no longer operate the Wafra field.

"They want to hold to the sovereignty issues before we move any further," the crown prince said in an Oct. 5 interview with Bloomberg News, though he added, "I believe it's a matter of time until it's solved."

Motivations for talks

No further talks are imminent, though Rashidi and Falih are scheduled to attend another OPEC/non-OPEC monitoring committee Nov. 11 in Abu Dhabi.

Officials in the Kuwaiti and Saudi energy ministries did not respond to messages, while Saudi Aramco declined to comment. Chevron said in a statement that it stands ready to resume operations at Wafra if and when a political resolution is reached.

"We continue to monitor the situation," the company said. "Saudi Arabian Chevron remains committed to the region and is focused on supporting operational activities to maintain readiness for a production restart when that time comes."

Matt Reed, an analyst with Middle East consultancy Foreign Reports, said Saudi Arabia is keen to keep Chevron on due to its technical capabilities, including in steam flooding, to enhance recovery from Wafra.

"According to [the crown prince], restoring the Neutral Zone will depend on Kuwait's willingness to defer an immediate end to the Chevron concession and to put on hold their obsession with imposing their own, singular views on the sovereignty issue while they proceed," Reed said in a recent note to clients.

With OPEC's own analysis arm forecasting a more bearish oil market in 2019 due to tepid demand growth and rising supplies from outside OPEC, the impetus to restart the Neutral Zones may subside if the conflict continues to fester. If the projection is wrong, a supply squeeze from U.S. sanctions on Iran that causes a price spike may prompt Saudi Arabia and Kuwait to go back to the negotiating table.

For now, officials on both sides have said the oil market is balanced, with no need for any dramatic surge in production.

"It's not impossible to fix the Neutral Zone, but now would not be the time to signal that extra supply," an analyst said.

Herman Wang and Miriam Malek are reporters for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc. To see more commodities-focused news and analysis, visit Platts.com.