Oil prices may have dropped, but Kuwait is investing heavily in the hydrocarbons sector this year in a bid to meet an ambitious production target. James King reports.

If the low oil prices were meant to bring Middle Eastern hydrocarbons projects to a grinding halt, Kuwait appears not to have received the memo. Despite years of indecision affecting the country’s upstream expansion plans, state-owned Kuwait Oil Company (KOC), the upstream arm of Kuwait Petroleum Corporation, appears keen to maintain a healthy momentum behind its project activities, with senior executives unveiling fresh plans to tender for enhanced technical service agreements on some of its oil fields.

A tender is expected this year, KOC chief executive Hashem Hashem said at a conference in Bahrain on March 9, 2015, with oil majors such as BP, Chevron, Total and Royal Dutch Shell expected to be interested. This would help furnish KOC’s plans to hike oil production at some of its largest fields, as part of a long-term target – formalised under the name Project Kuwait – to incentivise foreign investment in order to help the country raise its oil production capacity from about 3.2 million barrels per day (bpd) to 4 million bpd by 2020.

KOC has proved to be one of the Gulf's more active national oil companies recently, awarding nearly $9bn-worth of contracts last year, about double the level it recorded in 2013. The drop in oil prices is not expected to disrupt plans to increase its onshore oil and gas drilling rigs by 50% to 120 by early next year. Plans are also afoot for a 2015 tender of so-called enhanced technical service agreements for the Ratqa heavy oil field, which is located close to the Iraq border.

Full steam ahead

Kuwait’s northern fields are estimated to be producing 700,000 bpd currently, but KOC aims to boost this to 1 million bpd, mostly as a result of ramping up output from heavy fields, such as Ratqa, which require more intensive extraction processes than their light oil field counterparts. 

This growth plan provides confirmation, analysts say, that KOC’s main production portfolio will not be buffeted by low prices. "In Kuwait, and in the Gulf generally, there’s a perception that the low oil price environment won’t last. They believe it’s a temporary, six-month decline – although that doesn’t mean they think prices will immediately return to the $100-a-barrel days,” says Justin Dargin, a Middle East energy expert at Oxford University.

As Kuwait works hard to boost output, the oil it is extracting is getting progressively heavier, which increases production costs. The country boasts reserves estimated to hold 13 billion barrels of heavy oil, mostly located in the north of the country. “The majority of the future supply in Kuwait is heavy oil, so if it wants to increase output, it will have to come from its heavy oil deposits,” says Mr Dargin.

These fields comprise Ratqa, Raudhatain, Sabriya and Abdali, which KOC hopes will one day be able to pump more than 1 million bpd. 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 work

One of the key elements of Project Kuwait is the development of the Ratqa field, in the north of the country. It is estimated that heavy oil from the Lower Fars heavy crude oil scheme in Ratqa will contribute 60,000 bpd by 2017, on completion of the first phase of its development project, before rising to 270,000 bpd by 2020, when the second phase is set to be complete. 

Kuwait gave notice in January 2015 that it is serious about moving forward with its heavy oil fields, with the award of a $4bn engineering, procurement and commissioning (EPC) contract to a consortium led by London-listed oil field services group Petrofac and Athens-registered Consolidated Contractors Company. This covers the first phase of the Lower Fars development programme, with the scope of work taking in greenfield and brownfield facilities, and including EPC, start-up and operations and maintenance work for the main central processing facility (CPF) and associated infrastructure as well as the production support complex.

It will also include a 162-kilometre pipeline, which will transport the heavy crude from the CPF to South Tank Farm located in Al Ahmadi in the east of the country, from where KOC could send it to Al-Zour, an oil refinery under planning and development in the south of the country. The EPC element of the project is expected to be completed in just over four years. 

Such large investments suggest that the cash-rich Kuwaitis can indeed survive in a low-price environment, but it has not been plain sailing. According to local investment bank NBK Capital, Kuwait saw crude production in late 2014 slip to 2.7 million bpd, mostly due to the cessation of production at the 300,000 bpd offshore Khafji field, which it shares with Saudi Arabia under the Neutral Zone agreement. Kuwait voluntarily excused itself from the Khafji expansion project in 2013, amid domestic disagreements over the funding of the project.

Staying competitive

Kuwait’s oil export earnings fell by 9% in the third quarter of 2014, NBK figures show, standing at Kd7.4bn ($24.7bn). The Kuwait export crude price fell by 4.2% year on year in the quarter, after rising by 4.4% year on year in the previous quarter.

All the while, Kuwait has been competing aggressively with its fellow Gulf oil producers, cutting official selling prices at a faster rate in order to win customers in the core Asian markets. In 2014, Kuwait was selling its crude for about 50 cents a barrel less than Saudi Arabia's Arab medium-grade crude, the widest discount since at least 2004. The decision to discount to Arab medium is in part down to Kuwait’s loss of market share to neighbouring Iraq and Iran.

Despite this rivalry with its larger neighbour, Kuwait does not diverge from the Saudi-orchestrated Organisation of the Petroleum Exporting Countries strategy, which has allowed prices to sink as part of an effort to bolster the organisation’s market share. "Kuwait seems pretty much on board with what Riyadh wants to do, which is keep production quite high and defend its market share even if that implies lower oil prices for a time. Gulf countries such as Kuwait can afford to ride out the lower prices without the immediate downside effect that others – such as Iran or Venezuela – will feel,” says Daniel Kaye, senior economist at consultancy Oxford Economics.    

In conjunction with these wider exploration and production investments, Kuwait will also devote significant resources to its midstream and downstream energy sectors in the coming years. KOC is expected to issue project awards this year for a new gathering centre in the south-east of the country with an expected value of $1bn. But the big-ticket items will be taken up by massive refining schemes, the new Al-Zour refinery and the Clean Fuels Project (CFP). Al-Zour will have a 615,000 bpd capacity, with about one-third of that devoted to feeding fuel oil to domestic power stations.

Last year, Kuwait spent heavily on downstream contracts, with outlays estimated to have reached $13bn. The CFP and Al-Zour will carry a combined $30bn price tag. The CFP involves the overhaul of two refineries at Mina Al Ahmadi and Mina Abdullah, boosting capacity and reducing the fuel's sulphur content. Kuwait remains the second largest refiner in the Middle East after Saudi Arabia, with a total capacity of 936,000 bpd.

Political barriers  

The refining expansion projects still need to overcome political resistance, a traditional challenge in Kuwait. Political influence has in the past stymied foreign investment in Kuwait’s upstream, with Project Kuwait, for instance, having been the subject of a number of political disputes and having met fierce resistance from parliament. 

Although the state-owned Kuwait operators are in favour of reaching out to foreign oil companies, political wrangling has often stood in the way of such investments. “Officials in Kuwait’s oil sector generally acknowledge the need for foreign investment in the oil and gas sector. What is holding things up is at the political end of spectrum. Early last year there was talk of an improvement in the political environment that would be a catalyst for unlocking extra investment in the sector. But that hasn't fully materialised yet,” says Mr Kaye.

Such obstacles have also frustrated efforts to develop domestic natural gas deposits, the so-called Jurassic formations in the country’s north. These are technically challenging, ultra-deep reservoirs requiring high-pressure extraction techniques.

Kuwait’s natural gas output has plateaued at an estimated 4.25 million cubic metres a day, which has amplified the country's gas import dependence for the medium term. For the past few years, the country has imported rising cargoes of liquefied natural gas (LNG), which though expensive does at least allow its power generation facilities to keep going. Kuwait is committed to buying 2.4 million tonnes of LNG a year up to 2020, as it builds a permanent gas import infrastructure.

“In terms of its natural gas, Kuwait is in a worse position than any other Gulf state, and that is largely due to the internal dynamics. [That] is what is driving Kuwait to import LNG and to increasingly invest in energy projects outside the country,” says Mr Dargin.

The big challenge now is to maintain its heavy oil and downstream investment, so that it is better prepared to capture the anticipated revival in energy markets. 


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