How U.S. Policy on Iran Got Stuck Between Saudi Arabia and Kuwait

(Bloomberg Businessweek) -- Jean Paul Getty became the richest man in America, and its first billionaire, thanks to a barren strip of desert where he discovered oil in the 1950s. The land was a “neutral zone” straddling Saudi Arabia and Kuwait—a relic of the time when European powers carved implausible ruler-straight borders across the Middle East. The fields continue to be a tremendous resource: They can pump the equivalent of $15 billion of crude a year at current prices. The famously stingy Getty squeezed oil out of the fields as hard as he could. In contrast, the Saudis and the Kuwaitis aren’t pumping a single barrel nowadays because of a century-old sovereignty dispute, pride, and money.

In other circumstances, the fight over the neutral zone would be an obscure local dispute of interest to a handful of government officials, foreign diplomats, and petroleum executives. But these aren’t normal times in the oil market—or in the Middle East, which is caught up in the policies of President Trump, who has an eye on containing Iran, and Saudi Arabia’s Crown Prince Mohammed bin Salman, who also has an eye on Iran but is surrounded by controversy over the murder of journalist Jamal Khashoggi.

U.S. sanctions on Iran are set to go back into effect in early November. With that already sending oil prices to a four-year high, Washington is encouraging its allies to open the taps fully so supplies can lower prices. The 500,000 barrels a day that the oil fields of the neutral zone could produce—about the same as OPEC member Ecuador—would go a long way to reassure the market that there’s enough additional crude to meet not only the loss of sanctioned Iranian production but also that of any future outage. “There is little spare capacity,” says Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former Obama administration oil official. “And that makes the market nervous.”

To get the neutral zone out of neutral, Washington has spent the past several months trying to push Saudi Arabia and Kuwait into a deal to restart the fields, which haven’t produced anything since they were shut down after a series of tit-for-tats in 2014 and 2015. So far, American diplomats have come home empty-handed. In the last attempt at a breakthrough, Prince Mohammed traveled to Kuwait at the end of September to meet the country’s ruler, Sheikh Sabah Al-Ahmed Al-Sabah. What was supposed to be a landmark two-day visit was cut short, with the prince leaving unexpectedly within a few hours of landing in the neighboring nation—without a deal. Privately, oil officials and diplomats familiar with the talks say the meeting went badly, with each side trading barbs.

On Oct. 3, the day after Khashoggi vanished, the 33-year-old prince said in an interview with Bloomberg News that “sovereignty issues” prevented a deal. “We think a 50-year-old issue is almost impossible to fix in a few weeks,” he said. “So we’re trying to have an agreement with the Kuwaitis to continue to produce for the next 5 to 10 years and, at the same time, we work on the sovereignty issues.” To restart the pumps, however, Kuwait wants a deal first.

The neutral zone, spreading over 5,700 square kilometers—an area a bit smaller than Delaware—was created by a 1922 treaty between Kuwait and the fledgling Kingdom of Saudi Arabia. In the 1970s the two nations agreed to divide the area and incorporate each half into their territory, although still sharing—and managing in common—the petroleum riches. The region contains two main oil fields: the onshore Al-Wafra and the offshore Khafji. The latter is now operated by a joint venture between the two countries’ state-owned oil companies. It was Al-Wafra where the disagreement began.

Chevron Corp., the second-largest energy company in the U.S., operates the fields there on behalf of Saudi Arabia. It’s done so since 2000, when it acquired Texaco Inc., which bought the Getty empire in 1984. In 2009, Saudi Arabia extended the original 60-year-old Getty concession, giving Chevron rights over Al-Wafra until 2039. Kuwait was furious over the announcement and claims Riyadh never consulted with it about the extension. The emirate wants the U.S. company to be subject to its laws, according to people familiar with the talks.

The relations between Saudi Arabia and Kuwait over the neutral zone further soured in 2014 when Riyadh unexpectedly shut down the offshore Khafji field, which lay in Saudi Arabia’s sphere of control. The official reason was environmental problems, but the timing was convenient for Saudi Arabia, which was concerned about a glut in the oil market. Kuwait responded a few months later in 2015, forcing the closure of the onshore Al-Wafra field, which is part of the territory that went over to the emirate after the partition in the 1970s. Since then the fields that created Getty’s oil fortune have remained shut. “The impasse between Saudi Arabia and Kuwait seems to have deepened,” says Amrita Sen, of Energy Aspects Ltd., a consulting firm in London.

The implications for Chevron remain unclear. For the moment, not a drop of oil is coming out of the neutral zone. In a statement, the company said it’s “focused on supporting operational activities to maintain readiness for production restart when that time comes.”

Despite pressure from the U.S., a restart is unlikely anytime soon. Expelling Chevron from the neutral zone, as Kuwait may ultimately demand, would cost Riyadh dearly—both in money and pride. Kuwait won’t compensate for it, either. Getty once said that “oil is like a wild animal,” adding that “whoever captures it has it.” In the neutral zone, the Saudis and the Kuwaitis are circling their prey.

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net, Howard Chua-Eoan

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