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MEOG Commentary MEOG

Production resumes at Khafji

Kuwait and Saudi Arabia have restarted output from their shared Khafji oilfield as the
neighbours seek to increase production capacity from the Partitioned Neutral Zone.

KUWait/saUdi OPErATiONS resumed at the offshore Al-Khafji, which is currently capable of 300,000
Al-Khafji oilfield shared between Kuwait and bpd. in January, Kuwait’s Oil Minister Khaled
Saudi Arabia last week in the latest of a seemingly al-Fadhel said that output from the PNZ would
W H at: perpetual string of about-face moves. not have an impact on Kuwait’s compliance with
Output from Al-Khafji The acting CEO of the Kuwait Gulf Oil Co. the ongoing OPEC+ production cuts.
was shut in last month, (KGOC) was quoted by Turkish media outlet
having only resumed in Anadolu Agency as saying: “Congratulations on Production push
December 2019 following the occasion of the resumption of production in Kuwait and Saudi Arabia have looked to the
a lengthy closure. joint abundance operations.” PNZ to expand output without significant cap-
The field, which is located in the 5,700-square ital expenditure ahead of the easing of OPEC+
W H y: km Partitioned Neutral Zone (PNZ) that sepa- restrictions on supply.
Years of disagreement rates the two countries, was taken offline on in June, the group agreed to extend produc-
between Kuwait and June 1 as part of the neighbours’ commitments tion cuts of 9.7mn bpd until the end of July. This
Saudi meant that to OPEC+ output cuts. means that from August until the end of the year,
operations were halted, supply will then be constrained by 7.7mn bpd,
though this also offered shut-in followed by a further reduction to 5.8mn bpd
a convenient reduction At capacity, Al-Khafji and the onshore Wafra from January 2021 until the end of April 2022.
in compliance with OPEC oilfield can produce around 550,000 barrels per As part of wide-ranging efforts to minimise
cuts. day; however, the fields were shut in because of the business impact of coronavirus (COViD-
disagreements between the two governments in 19), Aramco is understood to have delayed by six
W H at next: 2014 and then in 2015. months the Marjan and Berri crude increment
The importance of the Output resumed at both fields in Decem- programmes; the projects are set to more than
PNZ has been heightened ber 2019, increasing to 260,000 bpd by April, double oil production capacity from the assets
by consistent downward with production of 130,000 bpd from each to a combined 1.35mn bpd at a cost of around
pressure on oil prices, asset. Wafra has remained in production since $18bn. These developments are also expected
and Al-Khafji offers a December. to result in the output of up to 2.5bn cubic feet
convenient and cost- Operations at Wafra are managed by Wafra (71mn cubic metres) per day of associated gas,
efficient means of Joint Operations (WJO), which is jointly run by which will be piped to the Berri gas plant.
increasing output as KGOC and Saudi Arabian Chevron (SAC), with OPEC’s de facto leader and swing producer
prices have stabilised. the latter representing the Kingdom. Saudi Arabia’s crude production has fluctuated
While environmental and contractual con- wildly this year, reaching an all-time, single-day
cerns were cited as the reasons for the lengthy record of 12.3mn bpd in March as it and russia
shut-in, Middle East Oil & Gas (MEOG) under- engaged in an ill-timed race to the bottom for
stands that divisions within the Kuwaiti govern- prices.
ment and continuing discomfort regarding the Output plummeted just a few weeks later as
key role played by Chevron in operations were riyadh sought to bring about stability to the
the key factors preventing a restart. market following the dual crises of overpro-
The US company’s concession for Wafra was duction and COViD-19’s impact on demand.
renewed by Saudi Arabia without first consulting Against this backdrop combined with subdued
Kuwait. prices and production cuts, Al-Khafji is perhaps
The operation of Al-Khafji is less contentious, the most obvious example of the neighbours’
with KGOC partnered by Saudi Aramco subsid- swing production fields and the ease with which
iary Aramco Gulf Oil Co. (AGOC) in the Khafji these assets can be manipulated to increase or
Joint Operations (KJO) entity. reduce output as required.
in May, MEOG reported that the shutdown
of Wafra was unlikely, while Al-Khafji would Helping hand
be kept ready to resume production as soon as Meanwhile, higher output from the PNZ will
market conditions improved. Meanwhile, con- also help Kuwait to reduce the impact of the
tention regarding production was dodged, with downturn, which has led, directly or otherwise,
a source quoted by S&P Platts as saying that this the government to announce plans to cut the
was “now an OPEC question”. numbers of expats in the country massively.
Plans are in place to raise output capacity Kuwait has had little space to manoeuvre as it
at the PNZ to 575,000 bpd, with the increase has sought to toe the OPEC line, while aiming to
coming in the form of a 25,000 bpd ramp-up at stick to highly ambitious capacity targets of 4mn

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