Kuwait navigates the oil hazards

If all things were equal, state-owned Kuwait Oil Company (KOC) would be busy pressing ahead with the help of international oil companies on an ambitious upstream expansion programme designed to raise oil production capacity to 4 million barrels per day (bpd) by 2020, an increase on current output that is just shy of the 3 million bpd mark.   

But in the current oil price climate, Kuwait’s chances of effecting long-standing plans to develop heavy oilfields in the north of the country are limited; low prices create a more challenging climate for upstream projects, coming on top of existing bureaucratic impediments. Indicators such as the rotary rig count – which shows how many drilling rigs are in commission – show that in January 2016, Kuwait had eight fewer (at 40) than it did in the same month of 2015.

That is not to say that KOC has not been pushing hard to boost production, as it has license to do under current Organisation of the Petroleum Exporting Countries (OPEC) production strategy. With the 'neutral zone' – shared with Saudi Arabia – off limits for the moment, Kuwait has been forced to concentrate its efforts on the giant Burgan field in the south-east of the country. This may have boosted production in the near term, but is not considered sustainable over the long term, given the maturity of the field and the need to preserve the integrity of the reservoir.

In limbo

Kuwait’s oil plans are, of course, contingent on the wider OPEC policy. Under Saudi tutelage, the organisation has encouraged members to pump to the maximum over the past year. However, in early March, with speculation rife about an impending OPEC production freeze designed to put a floor under prices, Kuwait may in the event be forced to rein in output. "If there is an agreement, Kuwait will commit to the freeze," acting oil minister Anas al-Saleh confirmed.

There is no denying that low oil prices have hit Kuwait’s finances hard, which also compromises capital expenditure spending on its oil and gas sector. According to National Bank of Kuwait (NBK) research, oil export revenues fell from Kd4.3bn ($14.3bn) in the second quarter of 2015 to Kd3.7bn in the third quarter as Kuwait export crude prices slid from an average of $58 per barrel to $47 per barrel (and still lower in the final quarter of 2015). Given that for much of the first quarter of 2016, prices have been about $40 per barrel, Kuwait is facing additional pain this year. The NBK anticipates oil revenues to come in lower in the coming quarters, as downward pressures on oil prices persist.

“It’s the job of oil sector planners to see through the oil price cycle, and even if prices are just $35 per barrel now, at some point the market will turn and if they don’t have the capacity in place, they will miss out on the revenues,” says Daniel Kaye, the lead Middle East economist at Oxford Economics. “On the other hand, the government is under pressure to reduce spending in areas that are least politically painful and there may be justification for postponing investment spending in the oil sector, which is not very labour intensive.”

Despite an unpromising backdrop, KOC says it is sticking to its capacity growth plans. It is, for example, proceeding with some sizeable contract awards for upstream projects. Contractors have been invited to bid this year on the second phase of Kuwait’s Jurassic non-associated oil and gas reserves expansion scheme, which involves the production of about 120,000 bpd of crude and more than 8.5 million cubic metres a day of sour gas from the West Raudhatain, East Raudhatain, Umm Niga and Dhabi fields in the north of the country. In January 2016, the oil field services giant Schlumberger was awarded a contract worth Kd143m for the Umm Niga package.

Neutralising effect

There is solid evidence to back up the authorities’ claims about investing in expansion of oil capacity. According to NBK, Kuwait stood out as the Middle East's biggest market for oil and gas projects in 2015, with an estimated Kd6bn-worth of contracts awarded in 2015. Plans are in place for the drilling of 2000 wells, the building of four new gathering stations and two booster stations, as well as the tapping of heavy oil deposits, which will account for the bulk of future supply increases.

Under long-term plans, KOC has also announced plans to spend $15bn to expand output from non-heavy oil formations in the Sabriya and Raudhatain fields by about 300,000 bpd. Heavy oil from the Ratqa field would contribute 60,000 bpd by 2017 in a first phase, before rising to 270,000 bpd by 2020 in the second phase.

The biggest near-term obstacle confronting Kuwait’s upstream oil ambitions is the long-running dispute with Saudi Arabia, the large neighbour with which it shares the 'neutral zone'. Production halted in May 2015, after the 200,000 bpd Wafra field was shut under Saudi instruction. The 300,000 bpd offshore Khafji field was shut as far back as October 2014. That leaves Kuwait losing hundreds of thousands of barrels of output.

“Resolution of the 'neutral zone' dispute would open up the taps there, potentially adding another 500,000 bpd of supply, but we’re not optimistic about that happening soon,” says Bill Farren-Price, director of consultancy Petroleum Policy Intelligence. “Likewise, with Kuwait’s upstream expansion ambitions, no one is expecting those to yield anything substantial this year.”

A refined view

If upstream ambitions are inevitably cramped, in the circumstances that still leaves the Kuwait authorities investing substantial amounts in the downstream and natural gas sectors. It is these that will register the biggest increases in both spending and activity this year.

In July 2015, downstream operator Kuwait National Petroleum Company (KNPC) awarded the long-delayed 'new refinery' contract at Al-Zour for Kd3.9bn. This 615,000 bpd-capacity refinery is primed to be the Middle East’s largest when it is fully operational. It is also expanding existing refineries, as well as investing in a greenfield plant.

These projects form part of a wider strategy to overhaul the refining sector, something that got under way in earnest in 2014 with the award of the 'clean fuels' project, a $15bn project to boost the quality and output of petroleum products at the Mina Abdullah and Mina Al-Ahmadi refineries. This is the largest programme in the KNPC portfolio. The programme will upgrade facilities and retire the existing Shuaiba refinery, boosting production to 800,000 bpd. Another downstream project is to integrate a large olefins (petrochemicals) plant into the refinery complex. This project may not be tendered until 2016 however.

KNPC’s ambitions were demonstrated by its recent decision to request a Kd3bn loan, which would be used to finance the 'clean fuels' refinery upgrade project, and will allow KNPC to pay contractors who began work on the scheme last year.

Serious intent

Kuwait’s downstream ambitions also extend overseas, where it is targeting new Asian markets. A new plant in Vietnam will come on stream in 2017, processing 200,000 bpd of crude for the local market, under a joint-venture arrangement that involves state-owned oil firms Kuwait Petroleum International and PetroVietnam. Kuwait aims to secure a large downstream portfolio in Asia as part of a long-term strategy to consolidate its share in a key long-term growth market.

Back at home, the major new thrust in Kuwaiti energy policy is in building a sustaining long-term liquefied natural gas (LNG) import capacity, designed to ensure sufficient feedstock for power generators. These plans received uplift in early March, when KNPC awarded a $3.9bn contract to South Korea's Hyundai Engineering to build an LNG import and regasification terminal at Al-Zour.

Kuwait has been importing LNG since 2009, initially through a small offshore floating storage and regasification unit. The new plans call for the LNG regasification terminal that will include two berths for the simultaneous unloading of large LNG carriers. The terminal will also include four full-containment LNG tanks, each with a working capacity of 225,500 cubic metres.

"Kuwait is showing it is pretty serious about LNG, spending an enormous amount on the onshore regasification terminal and putting in new storage tanks which would put it on a par with Korean and Japanese terminals,” says Andy Flower, an independent LNG consultant.

On the other hand, the investment in LNG import capacity also signals that nothing much is likely to happen soon with Kuwait’s plans to develop domestic tight gas (a type of natural gas) deposits.

Kuwait’s impressive slate of projects runs into the tens of billions of dollars and stands as testament to Kuwait’s seriousness of intent about developing its hydrocarbons sector. The focus is on boosting refining capacity for now, but if oil prices – and, crucially – political obstructions are overcome, Kuwait will be looking to do more to ensure that its long-standing oil production capacity expansion dreams are not left to rot.