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Khafji supposedly offline for environmental reasons

The curious case of the Khafji oilfield and the disagreement by Saudi Arabia and Kuwait

Khafji, the 300,000 barrel a day (b/d) oilfield in the offshore sector of the Neutral Zone shared by Saudi Arabia and Kuwait, was taken offline in October 2014, ostensibly for environmental reasons.

Those that know the real reasons for the shut-in aren’t saying. One theory is that Saudi Arabia, tired of Kuwait’s aggressive discounting of crude supplies to Asia and its reluctance to shoulder any Opec cuts to prop up prices, took the field offline to teach its smaller neighbour a lesson. In theory, Neutral Zone decisions are taken by both parties. In practice, Saudi Arabia holds the whip hand.

Unilaterally shutting in the field doesn’t tally, though, with Saudi Arabia’s apparent conversion since the November Opec meeting to a laissez-faire market strategy. If the kingdom really wants prices to shrink to levels that would punish costly non-Opec suppliers, then the more oil reaching the market the better. 

The dispute may have pettier origins than that. Kuwait plans to build the 615,000 b/d greenfield Al-Zour refinery on the Neutral Zone’s coastline. Local media reports say the state firm behind the project, Kuwait National Petroleum Company (KNPC), didn’t consult Riyadh first. KNPC also asked Chevron, which operates the Khafji field, to move its offices from the Al-Zour port, to make way for the project. Neither move endeared Kuwait to its partners.

The problem for Kuwait is that Khafji is crucial to its oil sector – but dispensable to Saudi Arabia’s. Indeed, while Kuwaiti output from the Neutral Zone would account for about 350,000 b/d of Kuwait’s 4 million b/d production target for 2020 (and Khafji at least 150,000 b/d of that), it makes up a far smaller share of Saudi Arabia’s 9.6m b/d output. Saudi Arabia also has another 3m b/d of spare capacity to draw on. Some analysts also point out that Khafji is a geological extension of Saudi Arabia’s 1.5m b/d Safaniya field, a far bigger asset and one that the kingdom has worried could be damaged by further exploitation of the Neutral Zone.

Whatever the reasons, the shut-in has caused frictions between two countries that often cooperate at the Opec level. Kuwaiti officials are reluctant to criticise Riyadh in public, stressing fraternal affection for their bigger brother. In private, they are scathing. For Saudi Arabia, the shut-in offers a convenient way to remind Kuwait who is boss – and that if cuts are needed in future, Riyadh can prune its neighbour’s output whether Kuwait agrees or not.

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