Kuwait's Mina al-Ahmadi refinery, as part of the long awaited Clean Fuel Project

Kuwait's Mina al-Ahmadi refinery, as part of the long awaited Clean Fuel Project

Oil companies are looking to Kuwait's government for signs that the country's major energy projects are to get under way, but legislative deadlock is hampering their future.

Kuwait’s energy sector is a story of unfulfilled potential. The small Gulf state is the seventh largest oil exporter in the world, and has about one-tenth of the world’s proven oil reserves. But grand plans for infrastructure development in the energy sector over the past decade have come to nothing.

When it comes to planning new projects, the Kuwaiti government certainly does not lack ambition. In 1997, it launched Project Kuwait, an upstream oil development scheme aimed at increasing production from 2.1 million barrels per day (bpd) to 2.6 million bpd. In 2005, the plan was updated with a new production target of 4 million bpd by 2020. The country’s downstream plans are equally impressive, including a scheme to build a fourth refinery at Al-Zour and another, known as the Clean Fuels Project, to upgrade two existing refineries.

The flagship Al-Zour refinery scheme, expected to cost between $16bn and $18bn, would give Kuwait another 615,000 bpd of refining capacity and enable it to meet increasing domestic power demand and facilitate exports of jet fuel and diesel to Asia. The Clean Fuels Project, which would cost an estimated $18bn, involves the upgrading of the Mina al-Ahmadi and Mina Abdullah refineries to international standards, and a slight increase in combined capacity, from 736,000 bpd to 800,000 bpd.

Creating competitiveness

These are no vanity projects. According to the government, Kuwait will face a shortage in feedstock for its power plants by 2017 even if the fourth refinery is up and running. Given the high sulphur content of Kuwait’s crude oil, there is also a strong environmental case for increasing production of more cleanly burning fuels, which would remove the yellow tinge in the skyline surrounding Kuwait City. “These are must-have projects,” says the regional head of one international company operating in the oil sector.

“The fourth refinery should be a priority,” says Kamel al-Harami, an independent oil analyst in Kuwait. “It would provide Kuwait with a more sophisticated refinery able to meet quality requirements in the future, it would create job opportunities and it would enable them to cut down on gas import bills.”

There is no shortage of funding for these projects. At the end of 2009, the Central Bank of Kuwait held foreign assets of Kd5.1bn ($18.3bn) and currency reserves of Kd3bn. In the 2010-11 fiscal year alone, the Kuwaiti government is expected to generate a budget surplus of between Kd4.9bn to Kd6.1bn, according to a February 2011 economic brief published by National Bank of Kuwait. And the Kuwait Investment Authority, the country’s sovereign wealth fund, manages an estimated $250bn to $300bn in assets.

Slow progress

But years have passed without progress being made on any of the country’s major energy projects. External factors have not helped. In 2008, the projects were hit by rapidly rising costs, swiftly to be followed by the global economic downturn, which put a brake on both bank lending and contracted activity. The main barriers, though, have been internal. A combination of a lack of executive leadership and a fractious relationship with parliament has left the sector deadlocked.

“There are a dozen or so commercial families that dominate parliament,” says an international executive in Kuwait City with links to the oil industry. “Both solutions to problems and the problems themselves are driven by these families. Nothing will be built by anybody before every important person and every major family is lined up behind it. There’s a tendency in the government to do nothing, rather than upset anyone.”

The fourth refinery project has experienced setback after setback. The first attempt to award major construction contracts on the scheme was abandoned, when prices came in significantly above the government’s budget. Then, in July 2008, the government decided that it would award the contracts on a cost-reimbursable basis, thereby transferring the risk of further price increases onto contractors. But parliament intervened, saying that the contract awards had failed to adhere to regulations stipulating that they first be approved by the Central Tenders Committee, a state body set up to oversee the award of major contracts. “This all could have been solved, if the government had made an agreement with the parliament on how to tender the project,” says Abdullah Nubari, a former member of parliament.

Taking ownership

Kuwait’s upstream strategy has also become mired in political controversy. Article 21 of the constitution states that the country’s natural resources and the revenues deriving from them are “the property of the state”. As a result, international oil companies have been prevented from developing oil and gas reserves on a production-sharing basis, instead being confined to technical service contracts that have delivered little.

Article 21 also states that the government has a responsibility not only for the “proper exploitation” of its natural resources, but also for their “preservation”. In June 2008, parliament attempted to flesh out the meaning of “preservation” by proposing a bill limiting production to 1% of proven reserves. If this were applied, production would be limited to about 2.7 million bpd, rendering the ambitions of Project Kuwait meaningless.

If the political deadlock in Kuwait’s energy sector is to be broken, strong and clear leadership will be needed. But some perceive this to be what the country is lacking. In September, a new chief executive, Farouk Al-Zanki, was appointed to run the state-owned Kuwait Petroleum Corporation (KPC). Six months later,the rest of KPC’s staff are still only employed on a temporary basis.

“There is a new head of KPC, but the rest haven’t been changed, so they are all working on a three-month basis,” says Mr Al-Harami. “So we don’t have a team running the country’s oil sector. [Mr] Al-Zanki cannot appoint his own team – it has to be the oil minister. He cannot form his team without consulting the prime minister, and they can’t see eye to eye. So they leave it – perhaps until September.”

Typical of Kuwait’s lack of focus is the fact that the oil minister, Ahmed Al-Sabah, also holds the information ministry portfolio. In recent weeks, both he and the prime minister, Nasser Al-Sabah, have come under fire from parliament, whose members have demanded that the two men present themselves for questioning. Demands for such grillings are commonplace in Kuwait, but it is equally rare for ministers to accede to them. Often, they prefer to resign, making continuity in policy an impossible challenge. “Most of the ministers leave quickly, so they don’t have a chance to make any impact,” says Ali Al-Foodari, a retired Kuwaiti general and biographer of the emir.

Frequent changes in personnel have become a particular problem in the oil sector. “The number of oil ministers they’ve gone through in the past few years is ridiculous,” says the regional head of one international contractor. “The state organisations also keep changing their senior people, and they change everyone else. There’s no continuity of experience. You can’t run an energy sector when the chief guy keeps getting changed.”

Political confusion

In recent weeks, the situation has been complicated by the political instability that has engulfed the Middle East and north Africa (MENA). Analysts and observers in Kuwait do not see a serious risk of political upheaval – there is already a degree of openness and political freedom in Kuwait that is not enjoyed elsewhere in the MENA region, and the government is generous in giving salary increases and hand-outs of oil money to its people. But there are widespread demands for the government to tackle corruption, and for institutional reform.

In the midst of all this political confusion, there is little sign that the stasis in Kuwait’s energy sector can be resolved. “For years we have seen project after project proposed and fall off the table,” says the Kuwait-based executive. “Virtually all of the projects have found their way from the top of the list to the bottom and back to the top. It’s very hard to be optimistic because there’s such a long track record of failure.”

Others are similarly downbeat. “The plans they’re proposing now are the same as those they propose every couple of years,” says the regional head of the international contractor. “The oil minister seems to be quite proactive, but he’s not the first oil minister to be proactive. On the business side of things, there are officials who are ready to go ahead with some of these projects, but there are political issues with the way things are done.”

There is even confusion over whether the government is prioritising the fourth refinery project or the Clean Fuels Project. “A few months ago, it said that the Clean Fuels Project would definitely go ahead because there are no strings attached to it and there are environmental needs,” says the regional head. “But now it transpires that if the main refinery project doesn’t go ahead, the clean fuels project won’t happen.”

Making changes

If Kuwait’s energy sector is to begin to fulfil its potential then, according to many in the energy industry, changes need to be made sooner rather than later. “Kuwait needs a full-time oil minister – not one who has another post,” says Mr Al-Harami. “Then he needs to form a team to work with [Mr] Al-Zanki, be open, be transparent, and face parliament. He must be a strong personality, and he must know what he is doing. When he took the post he said that he would try to satisfy all 50 MPs, which of course is not possible.”

Jasem Khalid Al-Sadoun, head of Al-Shall Investment, a local consultancy, agrees: “Nothing will progress if there isn’t a change in attitude on the part of the government. At the moment, no one trusts in the management of the oil sector, so the attitude is that it is better to prevent them from doing anything. This has to change.”

Some in the industry are now clinging to the hope that if the current prime minister is removed in the coming weeks it may provide an opportunity for a fresh approach to the country’s energy projects. “What Kuwait needs is a prime minister who can knock heads together and get the fourth refinery going, because at the moment every barrel of oil [the country sells] is effectively a loss leader,” says one international executive. “Maybe if there is a new prime minister, the first thing he can do is to make a bold move for a final tender of the fourth refinery project. That would be ideal. It’s a really pivotal time for the country. The economy needs to be jump-started, and it has to come from the government.”

But given the country’s track record over the past five years, few dare to hope that the deadlock can be broken so easily. “I’m not optimistic,” says Mr Al-Harami. “There is a strategy, and there is money, but this is not enough. It also needs teamwork; it needs effort; it needs international companies and service companies to be brought to the market. At the moment, nothing is happening. It’s disappointing, but it’s a fact.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter