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Middle EastApril 1 2019

Kuwait invests in oil and gas while toeing OPEC line

As an OPEC member, Kuwait has agreed on oil production caps and accepted the new normal of low oil prices. Kit Gillet assesses what this means for the country’s long-term ambitions.
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It has been more than four years since global oil prices plummeted, and for countries such as Kuwait, the fifth largest producer among the Organisation of the Petroleum Exporting Countries (OPEC), lower oil prices have increasingly become the new reality.

The agreement to cut global production that was signed by major oil producing countries in November 2016 is still in place, and has helped to stabilise the market. However, for Kuwait, which relies on oil for more than 90% of its public revenue and about 60% of its gross domestic product, the current low oil price landscape is less than ideal.

As part of the agreement, Kuwait accepted a daily cap of about 2.7 million barrels per day (bpd), cutting daily production by an initial 130,000 barrels. In January 2019 the country pumped 2.75 million bpd, slightly below the 2018 average, with the current output projection for this year flat at just under 2.8 million bpd. Even so, Kuwait has ambitious long-term goals, with a previous target of 4 million bpd a day by 2020, and 4.75 million bpd by 2040, up from a total capacity of about 3.15 million bpd today. 

Personnel shake-ups

International oil prices dropped sharply in the last quarter of 2018, and tensions between the Kuwaiti government and parliament continue to raise issues for the sector. In December, Kuwait once again changed its oil minister, after previous incumbent Bakheet Al-Rashidi resigned following internal disputes and delays to key projects. The new minister, Khaled al-Fadhel, was formerly an undersecretary at the Ministry of Commerce, as well as a professor at Kuwait University’s faculty of engineering and petroleum.

Meanwhile, in February 2019 national oil company Kuwait Petroleum Corporation (KPC) rearranged senior management at each of its eight units, highlighting the continued disruption at senior level across the industry.

“In the past few months it has effectively swept out all of the officials in place and replaced them,” says Bill Farren-Price, director at RS Energy Group. “It’s not something new – I think by my own tally there’s been about 13 oil ministers in the past 15 years. But that’s not a recipe for continuity of decision making or continuity of strategy.”

Reports have also suggested that KPC is considering combining its eight business units into four, in order to streamline the company.

A strategy rethink

While Kuwait continues to invest heavily in both upstream and downstream production, there are signs that the country is rethinking some of its longer term investment strategies. 

In February it was reported that KPC was reassessing its capital investment plans, announced in 2018 and worth an estimated $500bn between now and 2040. The plans called for $114bn in capital expenditure in the first five years, with an additional $394bn up to 2040, which would have helped the country meet some of its ambitious long-term targets. 

Among other things, Kuwait has been targeting the production of 85,000 bpd of heavy oil by 2021, and is investing in developing its reservoirs of dense crude. “KPC has long had plans to develop the northern oil fields, Rutga and Umm Nigha, which produce heavy oil as well as condensate. This is not a low-hanging fruit; it’s relatively high break-even oil, in the Kuwaiti context at least,” says Mr Farren-Price. “Senior policy-makers are beginning to wonder whether there’s really any logic in producing more expensive oil with long lead times when the capital could be better allocated to optimising existing production.”

Major investments by Kuwait, both upstream and downstream, will continue, however. The country also remains committed to expanding its foothold in overseas production and refining. In August 2018, Kuwait Foreign Petroleum Exploration Company (Kufpec), which is part of KPC, borrowed $1.1bn to invest in oil and natural gas projects, specifically targeting shale operations. Kufpec aims to produce 150,000 bpd by 2020, up from 100,000 in 2018, with operations currently in Australia, Norway and Canada. 

Meanwhile, in November it was reported that state-owned Kuwait Oil Company had placed orders worth $1.3bn for drilling rigs, the largest order in the company’s history. Kuwait is also looking to increase its natural gas output to about 100 million cubic metres a day over the next decade and a half, up from 54 million cubic metres today.

Zone of contention

One issue that could strongly affect overall oil production is the ‘neutral zone,’ where Kuwait and Saudi Arabia have joint control over the onshore Wafra and offshore Khafji fields. Production was halted at the Khafji field in October 2014, while Wafra was shut down under instructions from Saudi Arabia in May 2015. Combined, the fields have a capacity of 500,000 bpd. Talks about restarting operations have been on and off since production was first halted, and in October 2018 Saudi Arabia’s crown prince, Mohammed Bin Salman, said the two parties were getting close to striking a deal.

Analysts, however, believe that a renewal of production in the neutral zone is not imminent. “I’m not convinced that breaking that stalemate is a top priority. I saw the recent comments, but then we have seen similar comments in the past few years as well,” says Maya Senussi, senior Middle East economist at Oxford Economics. “In the current environment of restrictions I don’t see any urgency,” she adds, saying that it is more in Saudi Arabia’s interest to come to some sort of conclusion “because it wants to be seen as the swing producer having more spare capacity”.

Expanding downstream

Significant investment in recent years has also gone into expanding Kuwait’s downstream operations. This includes the upgrade and expansion of the country’s two existing refineries, Mina Al Ahmadi and Mina Abdullah, as part of the $13bn Clean Fuels Project, which was launched in 2014 and is nearing completion. The two refineries are being integrated into a single complex, with a strong focus on higher value products such as diesel. 

Meanwhile, the Al-Zour oil refinery, which will be among the world’s largest, is more than 75% complete and expected to be operational by 2021, with a capacity of more than 600,000 bpd. Combined, these projects will increase Kuwait’s total refining capacity to 1.4 million bpd by 2020. 

Meanwhile, in November 2018 Kuwait National Petroleum Company (KNPC) unveiled plans to invest $25bn in new downstream projects over the next 20 years, which would ultimately bring Kuwait’s total refining capacity to 2 million bpd by 2035, with KNPC currently undergoing a feasibility study for the construction of a new refining complex.

“I think Kuwait’s strategy is similar to what several of the other Gulf countries are pursuing,” says Robin Mills, CEO of Dubai-based Qamar Energy, an energy consulting and advisory services firm. He points to the combination of expanding refining at home, growing domestic production, steadily expanding gas production and investing in various overseas refineries and petrochemical plants, mostly in key Asian growth markets. “Where they struggle has been execution, particularly at home, with the political opposition. They have no technical problem increasing production, they have the reserves and the projects – but they really struggle to bring them forward,” adds Mr Mills. 

One way that Kuwait could potentially speed up investment and growth would be to invite foreign participation in the sector. However, the authorities have so far been reluctant to allow any foreign ownership. “Kuwait, not unlike many of the OPEC countries, has huge suspicion of the entrance of foreign oil companies, and that’s why the burden of capital expenditure lies squarely on the shoulders of KPC and the state,” says RS Energy’s Mr Farren-Price.

At the same time, Kuwait continues to export most of its oil to Asia, where prices are higher, and this trend will likely continue following the opening of the Nghi Son oil refinery in Vietnam. The $9bn facility is 35.1% owned by Kuwait Petroleum International and began commercial production in November 2018. It has a refining capacity of 200,000 bpd and processes Kuwaiti crude for the domestic Vietnamese market. 

Further agreements

Kuwait – which has one of the lowest break-even points in the region, at about $47 a barrel – is constrained by its adherence to the OPEC agreement while also benefiting from the stability it offers and the higher oil prices that accompany it. 

It is still unclear when the agreement will end. The 2016 deal, which led to the first cuts in global production in eight years, was extended in November 2017, and again in November 2018, when its members agreed to take 1.2 million bpd off the market for the first six months of 2019. Many believe that it will be extended at least one more time.

“I expect the agreement will be renewed because if you look at most of the balances that have been forecast they show a lot of extra production coming in the second half of this year, so they’ll have to maintain their cuts to be able to offset this increase in supply,” says Mr Mills. “The cuts might be adjusted one way or the other, but I think they will continue.”

This leaves Kuwait, like many of its neighbours, monitoring oil prices while continuing to invest heavily in future production and growth – though perhaps a little more cautiously than in the past.

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Read more about:  Middle East , Kuwait