Robin Mills: Neutral Zone oil spat a division the GCC cannot afford

When the oil man John Paul Getty's geologist saw a small hill from his airplane in 1948, he knew it was the place to drill. Paul Walton was negotiating for the oil exploration rights to the Neutral Zone, a specially demarcated area between Saudi Arabia and Kuwait.

After five dry wells, Getty at last persuaded his partners to drill the hill Walton had spotted, discovering the giant Wafra field. It made Getty a billionaire and America’s richest man. The geologist received a US$1,200 bonus.

With a capacity of 500,000 barrels per day, the zone, about as big as the combined areas of Dubai and Sharjah, can today produce more oil than the whole of Australia.

But for its current owners, the Neutral Zone is more headache than bonanza, with production shut down since October 2014 in an escalating dispute.

This kerfuffle attracts little attention compared to other Middle East conflicts, but it is surprisingly important for energy markets.

Though Kuwait’s emir, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, said on January 21 that the argument would soon be resolved, there is not much sign on the ground of a solution.

The Neutral Zone has always been an anomaly. It was discovered and developed by smaller independent companies, not the majors such as BP and Exxon who found most Saudi and Kuwaiti oil.

After the discovery of Wafra in 1953, other large fields were located, including the giant Khafji offshore field.

The zone was formally partitioned between the two countries in 1970, but they continue to share its resources. After foreign interests were nationalised across the Middle East, the Neutral Zone was almost the only large producing asset to remain with an international company.

Texaco bought Getty Oil in 1984 in one of the classic takeover sagas, and itself merged with Chevron in 2001.

In 2009, Saudi Arabia angered the Kuwaitis by renewing Chevron’s concession without consulting them.

Chevron’s offices in the Neutral Zone are located on the land of the planned Ras Al Zour refinery, and Kuwait has sought to evict them.

With an escalating series of disputes, Saudi Arabia shut down Khafji in October 2014 on the pretext of environmental violations, and the rest of the Neutral Zone in May last year.

The dispute has also held up development of the badly needed gas from the offshore Dorra field, also part-claimed by Iran.

In July last year, Kuwait's Al Rai newspaper published a letter from the Kuwaiti oil minister at the time, Ali Al Omair, to his Saudi peer, Ali Al Naimi, accusing the Saudi government of forcing an illegal shutdown of Khafji and claiming compensation.

The closure will be particularly frustrating to Chevron, whose share of the Saudi part of the onshore zone is its only large Middle East upstream asset, and a source of low-cost barrels.

The US supermajor was implementing a pilot steam-injection project to recover some of billions of hitherto untapped heavy oil.

With oil prices driven to decadal lows by the imminent return of Iran, which could perhaps add half a million barrels per day, it is remarkable that the comparable shut-in capacity at the Neutral Zone has not attracted more attention. Chevron says it would take it six months to get back to full production.

However, the dispute has been convenient to the Saudis. They can make up the lost production by increasing output elsewhere, so they are effectively shifting the burden on to an Opec colleague.

Kuwait has partly compensated by ramping up its largest field, Burgan, but this may not be sustainable.

The unedifying squabble is more damaging to Kuwait, the weaker partner, which has little leverage.

At a time that GCC unity is required on the energy and diplomatic fronts, it is surprising that a scrap of desert still divides two of the Arabian Gulf’s closest allies.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.

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