KUWAIT - The Divided Zone.

The DZ is shared equally by Kuwait and Saudi Arabia, under a treaty signed on Dec. 2, 1922 to settle a territorial dispute between the two countries. The treaty was revised on July 7, 1965. On July 2, 2000, the governments of Kuwait and Saudi Arabia signed an agreement settling a long-standing dispute in their territorial waters.

The DZ covers an area of 6,200 sq miles. It is split into four sections - two offshore and two onshore - with Kuwait and Saudi Arabia each administrating their half of the zone. The DZ's total production capacity of about 680,000 b/d is split evenly between the two. The partitioned area contains about 5,000m barrels of oil reserves and 1 TCF of gas. The two offshore sections are operated by Khafji Joint Operations (KJO) - 50:50 for Kuwait Gulf Oil Co. (KGOC) and Aramco Gulf Operations Co. (AGOC). There are two offshore fields, Khafji and Hout, which have production capacity of about 280,000 b/d. Until the late 1990s, both sections were operated by Arabian Oil Co. (AOC) of Japan; but the firm's two concessions for the Saudi and Kuwaiti sections expired in 2000 and 2003, respectively. However, AOC has been retained by KGOC for managerial and technical advice under a five-year technical services agreement (TSA). The company also has a 20-year agreement with KPC to purchase a minimum 100,000 b/d of Khafji, Hout or Kuwaiti crude.

The two onshore sections cover the Humma, South Fawaris, South Umm Gudair and Wafra fields. Both onshore sections were run by Saudi Arabian Texaco/KOC Joint Operations, although KGOC took over KOC's interest in 2005. Following the expiry of AOC's concession, Saudi Arabian Texaco's DZ production rights make it the only foreign upstream operator in either Kuwait or Saudi Arabia. However, its concession is due to expire in late 2009 and it remains unclear whether it will be renewed.

The 1965 joint administration accord was supplemented in 1969 by an agreement whereby the northern half was administered by Kuwait and the southern part was administered by Saudi Arabia. A joint Kuwaiti-Saudi committee oversees exploitation of these resources. Texaco shares its area's oil production equally with Kuwait. Saudi Arabia gets taxes and royalties on Texaco's share.

Each of Saudi Arabia and Kuwait has a 10.94% stake in AOC. The loss of AOC's main oil producing business was a factor behind its decision to merge with unlisted Japanese refiner Fuji Oil, which has a capacity of 192,000 b/d. The two companies, which have integrated their businesses, set up a holding firm on Jan. 31, 2003. (The former US onshore operator on Kuwait's side of the DZ, Getty Oil, was sold to Texaco in 1984, with Texaco purchased by Chevron in 2000).