Saudi, Kuwait Tensions Basis for Oilfield Closure

Shutdown of joint field brings back old disputes; Kuwait is placing restrictions on Chevron (CVX)'s operations. Disagreements over right to operate delayed energy projects.

Saudi Arabia's closure of an offshore oilfield it shares with Kuwait has revived speculation of renewed tensions between the two, and put Chevron's role in the shared Neutral Zone in focus.

Crude output from their jointly-run offshore Khafji oilfield has been halted temporarily to comply with environmental rules.

"Little things lead to big things, it's an accumulation of the past. Each party says a different story," said Kamel al-Harami, an independent Kuwaiti analyst.

The loss of Khafji's 280,000 barrels per day of Arabian Heavy crude will be felt more in Kuwait, which has far less spare output than its neighbour, the world's top oil exporter. Oil prices rose briefly to over $86 a barrel on Monday on the news.

Any differences between the two OPEC allies are watched closely by oil majors getting ready to return to Kuwait after years of fruitless talks and fierce political opposition to foreign firms taking a role in production in the past.

Diplomatic and industry sources have told Reuters that Kuwait has been placing restrictions on the Saudi unit of U.S. oil major Chevron which operates another jointly run Neutral Zone field, Wafra, as a result of various disputes.

The curbs have affected oil output from the Neutral Zone, which dates back to 1920s treaties to establish regional borders. Output capacity from the Zone has been around 600,000 bpd until last year, according to the U.S. Department of Energy.

But industry sources say it has been in decline in recent months even before the Khafji shutdown.

A Chevron spokesman said the company complies with the laws and regulations of the countries where it operates, and does not comment on discussions it has with governments about its business operations.

The Saudi's 60-year concession with Chevron was first granted to the U.S. Getty Oil Company in 1949. Texaco acquired Getty Oil in 1984, and Chevron took over Texaco in 2001.

A senior Kuwaiti official dismissed any political implications and said the Kuwaiti side was informed of the Khafji shutdown.

Recently, Kuwait's oil marketers have been challenging their Saudi counterparts in an increasingly competitive battle for market share, selling oil to buyers in Asia at the widest discount to a comparable Saudi grade in 10 years.

KUWAIT'S OBJECTIONS

The sources say Kuwait was angry because it was not consulted when the Chevron concession to operate Wafra was renewed by Riyadh in 2009 until 2039.

But the row goes back even further, to 2007, when a land dispute between Kuwait and Saudi led to a delay in Kuwait's plans to build an oil refinery. Chevron has had a lease on some of the land on Kuwait's side which was earmarked for the new refinery.

In recent months, Kuwait has been making it more difficult for Chevron to acquire work permits to operate in the Zone, because of legal misinterpretation of the agreement, the sources said.

"Kuwait has been giving Chevron a hard time," one diplomatic source said.

Chevron is leading a full-field steam injection project in the onshore Wafra field to boost output of heavy oil there by more than 80,000 bpd.

Last year, Saudi Arabia and Kuwait shelved a project to develop another venture in the Neutral Zone, the Dorra offshore gas field, after disagreeing over how to share the gas back on land.

Kuwait blames Riyadh for ending that project despite its desperate need for gas for power generation.

"These issues between the two countries have started several years ago. Relations soured when Saudi stopped the Dorra project from proceeding," said another Kuwaiti official.

He added there have been also disagreements over the distribution of investments costs with the Saudi side.

Dorra has long been a bone of contention between Kuwait and Iran, which also lays claim to part of the field.

Kuwait agreed with Riyadh in 2000 to jointly develop the field they desperately need to satisfy their growing gas need.

More than a decade on, little progress has been made and it has now been shelved indefinitely.

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.

It survived the nationalisation of the Saudi oil industry in the 1970s. Since then, Saudi reserves of 264 billion barrels - around a fifth of the world's proven oil reserves - have been off limits to international oil companies.

By Rania El Gamal and Reem Shamseddine