Divided Zone dispute likely to be costly for Kuwait

19 May 2015

Dispute with Saudi Arabia has caused reputational damage

Over coming weeks, hydrocarbon production from the Divided Zone, which is shared by Kuwait and Saudi Arabia, is likely to fall to zero as Saudi Arabian Chevron shuts down its Wafra field, the last operational oil field in the region.

The $5bn Wafra field development scheme is the third major project to be derailed in the region in two years, in a shutdown that contractors are blaming on a political dispute between the two countries over how land in the shared territory is used.

The shutdown is likely to prove costly for Kuwait.

Companies, including South Korea’s SK E&C and India’s Punj Lloyd, are already pursuing compensation for related projects that have stalled because of the shutdown, according to sources.

With solid financial reserves after years of high oil prices, Kuwait can easily afford to pay off the companies claiming for cancelled contracts, but this is unlikely to be the most costly aspect of the Divided Zone shutdown.

Kuwaiti officials have already announced that they intend to ramp up domestic production to replace the lost production from the region.

Bringing an additional 275,000 barrels a day (b/d) online over a short period of time is likely to prove costly and problematic for Kuwait, which has little in the way of spare capacity.

The shutdown has also dealt significant reputational damage to Kuwait.

Chevron has complained loudly about being denied work visas for employees and access to materials, creating the impression that Kuwaiti authorities cannot ensure an environment that is conducive to the completion of projects.

After a number of high-profile project cancellations over recent years, contractors are already adding a risk premium when submitting bids on oil and gas projects in Kuwait and this is likely to move higher in light of recent events.

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