While a global deal to cut oil production has helped to rebalance the market, Kuwait, along with other oil-reliant countries, must now look to what happens when the deal ends. Kit Gillet reports.

Kuwait oil

It has not been an easy few years for oil-reliant countries such as Kuwait, with the sharp drop in global oil prices that began in 2014 decimating revenues. The November 2016 agreement by major oil producing nations to temporarily cut global oil production by almost 2 million barrels per day (bpd) in order to stabilise the market has had a positive effect on prices, but at an economic cost for those countries involved.

For Kuwait, it meant agreeing to a production cap of about 2.7 million bpd, cutting daily production by 130,000 barrels just as the country is planning strong expansion in both its upstream and downstream capacity. However, with the agreement likely to end in the near future and significant investment announced for the next five years, Kuwait could be set for strong expansion of both its oil and gas footprints.

Ending the deal

The November 2016 agreement, signed by the 13 members of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries such as Russia, has stabilised the global market. The deal, which led to the first cuts in eight years, was extended for another year in November 2017, in order to further rebalance the market and reduce stockpiles. For Kuwait and its ilk, the most pressing questions are: how much longer will the agreement last, and what happens when it ends?

“Across the Gulf Co-operation Council, and for Kuwait in particular, this is pretty much the dominant oil story right now,” says Edward Bell, a Dubai-based commodities analyst at Emirates NBD. “Last year was a question of how compliant each of the producers was going to be. This year, the focus is how does OPEC measure its success and when is the right end point for the deal?”

Kuwait, which has complied fully, relies on hydrocarbons for upwards of 90% of its exports, as well as roughly 60% of its gross domestic product.

In December, Essam al-Marzouq, Kuwait’s then-minister of oil, told Bloomberg that the production cuts could end by late 2018, depending on the market outlook when the countries meet in June. “We still have a full year left in the agreement, but there is a possibility that we exit the cuts agreement before 2019 if the market is rebalanced by June,” he said, pointing to pressure from Russia.

Ambitious targets

Despite the economic hit of the past few years, Kuwait has announced plans to invest heavily in the sector, in order to reach its ambitious oil and gas targets, which include 4 million bpd a day by 2020 and 4.75 million bpd by 2040, up from an overall capacity of about 3.15 million bpd today.

“To achieve these targets, KPC [national oil company Kuwait Petroleum Corporation] plans to spend $114bn in capital expenditure over the next five years and an additional $394bn beyond that to 2040,” KPC chief executive Nizar al-Adsani said at an industry event in Kuwait City in January 2018. He also announced that KPC had begun a pre-feasibility study on lifting its domestic refining capacity by about 300,000 bpd, with the ultimate goal of raising refining from less than 800,000 bpd today to 2 million bpd by 2035.

Plans are also in place to increase natural gas production to 59.4 million cubic metres a day by 2040, he said, from about 5.6 million  cubic metres in 2017. Kuwait’s daily natural gas production is already expected to hit 14.15 million cubic metres in 2018, and 28.3 million cubic metres by 2020.

Revival in activity

According to business intelligence provider MEED, activity in the Kuwaiti oil sector picked up in 2017, with 15 contracts worth a combined $3.7bn awarded, including a $1.3bn contract for British oilfield services provider Petrofac to construct a gathering centre at Kuwait’s main oilfield, Burgan Field.

In early 2018, state-owned Kuwait Oil Company (KOC) announced that initial operations at its Lower Fars heavy crude oil development project in the north of the country would begin in August 2019, with capacity expected to reach 60,000 bpd. The $3.9bn project, the largest construction activity in the company’s history, aims to extract heavy oil from the Lower Fars reservoir in the Ratqa oil field. Subsequent phases of development could see output rise to 270,000 bpd.

Kuwait is also moving ahead with attempts to expand offshore production capacity. In early 2018 it was reported that KOC would be tendering contracts for offshore exploration drilling for six locations in 2018, with three specialised companies involved in drilling and explorations – Schlumberger, Baker Hughes and Halliburton – invited to submit offers.

And while Kuwait continues to rely heavily on imported gas for its energy needs, in 2017 it invited bids for the development of non-associated gas fields in the north of the country.

One significant development in the push towards raising overall production would be the restarting of operations in the ‘neutral zone,’ where Kuwait and Saudi Arabia have joint control over the onshore Wafra and offshore Khafji fields. These have a capacity of 200,000 bpd and 300,000 bpd, respectively. Production was halted at the Khafji field in October 2014, with Wafra shut in May 2015 under instructions from Saudi Arabia.

Kuwait isn’t diversifying away from hydrocarbons, but it is certainly diversifying within the energy portfolio quite effectively

Bill Farren-Price

Issues need to be resolved before production restarts, but some believe the end of the global oil agreement could add more impetus to talks. “Once the cuts are formally set aside, I imagine that the incentives on both sides of the border are for the problems to be overcome,” says Bill Farren-Price, CEO of consultancy Petroleum Policy Intelligence. “Potentially it’s 550,000-600,000 barrels a day, so it’s a big chunk of production, with half accruing to Kuwait and half to Saudi Arabia. They would want to get on with reactivating that oil production.”

Developments downstream

Kuwait has also been pushing to grow its footprint further down the hydrocarbon value chain. Part of this involves the ongoing upgrading and expansion of the country’s two existing refineries, Mina Al Ahmadi and Mina Abdullah, as part of the Clean Fuels Project, with a focus on higher value products such as diesel.

The other major domestic initiative is the Al-Zour refinery, which will be among the largest refineries in the world. Expected to be completed in 2019, it will have a capacity of more than 600,000 bpd.

“It’s been a long haul, but Kuwait has made huge strides in modernising its refineries. Kuwait isn’t diversifying away from hydrocarbons, but it is certainly diversifying within the energy portfolio quite effectively,” says Mr Farren-Price.

In August 2017, Kuwait also dispatched its first shipment of crude oil to the new $9.2bn Nghi Son refinery in Vietnam, set to come online shortly. The facility, which is 35.1% owned by Kuwait Petroleum International (KPI), has a refining capacity of 200,000 bpd and will process Kuwaiti crude for the Vietnamese market.

Foreign presence

Kuwait has continued to invest in oil and gas assets abroad. In recent years KPC subsidiary Kuwait Foreign Petroleum Exploration Company (Kufpec) has purchased stake in an offshore gas and condensate field in Thailand, as well as offshore interests in Norway. While Kufpec recently reduced its output targets for 2020, from 200,000 bpd of oil equivalent to 150,000 bpd, this is still up from 84,000 bpd in 2017.

In October 2017, Kufpec announced its first investment in overseas liquefied natural gas (LNG) production, with a 13.4% share in Australia’s Wheatstone LNG Project. The project will supply 8.9 metric tons of LNG a year, with some of this being made available for import to Kuwait.

Meanwhile, KPC affiliate KPI owns a 50% stake in Duqm Refinery in Oman, which will have the capacity to process about 230,000 bpd of crude oil once complete. In December, Kuwait oil minister Bakheet Al-Rashidi said financing of up to $5bn for the project was expected shortly from international lenders, with work to commence in mid-2018.

“What has been encouraging is the finalising of the agreement with Duqm Refinery, because that shows Kuwait is committed not only to activities domestically but also internationally,” says Maya Senussi, senior Middle East economist at Oxford Economics.

Challenges ahead

Kuwaiti authorities are reluctant to allow foreign ownership in the oil sector, but this may change with Saudi Arabia showing signs of opening up.

“I think as Saudi Arabia gradually opens up, Kuwait will probably have no choice but to follow that lead as well,” says Ms Senussi. She points to ongoing tension between the Kuwaiti government and parliament as potentially detrimental to future developments. “We should be expecting more tension between the government and the parliament, and that will continue to present challenges to overall project spending, including in the oil and gas sector,” she adds.

Still, with Kuwait having one of the lowest breakeven prices in the region, at about $47 a barrel, and with oil prices predicted to remain in the low to mid $60s a barrel in 2018, the country is well placed to push ahead with its ambitious expansion plans.


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