A global deal to cut oil production and rebalance the market is good news for Kuwait – but it expires after six months. Can the country’s oil business expand its way to stability? Kit Gillet reports.

Kuwait oil

Like many oil-reliant countries, Kuwait has faced a challenging few years. The drop in global oil prices hit the country hard: Kuwait derives about 60% of its gross domestic product and more than 90% of its exports from hydrocarbons. It was therefore a welcome development when an international deal was finally struck in November 2016 to temporarily reduce oil production with the aim of rebalancing the market as well as drawing down existing stockpiles.

The deal, the first production cut in eight years, saw oil-producing countries agree to reduce global supply by almost 2 million barrels per day (bpd). By late January 2017, the 13 members of the Organisation of the Petroleum Exporting Countries (OPEC), as well as 11 non-OPEC countries, had cut daily output by more than 1.5 million barrels, out of a total of 1.8 million barrels that was agreed, according to the Saudi Ministry of Energy and Industry. OPEC compliance was more than 90%, while for non-OPEC countries it was estimated at about 50%.

A level of optimism returned to the market, though prices are still below the break-even level in many Gulf countries.

For its part, Kuwait agreed to cut production by 133,000 bpd, though the country may end up seeing overall output fall by between 146,000 bpd and 148,000 bpd, according to oil minister Essam al-Marzouq, who says Kuwait is using this period to carry out maintenance on existing facilities. “We used this opportunity to do maintenance at some wells, whether they were at Burgan field or the northern fields,” Mr al-Marzouq told Sky News Arabia in early March.

Despite the efforts involved in concluding the deal, the agreement is only for six months, and is likely just a stopgap measure to steady the market. Countries such as Kuwait have shown little appetite to reduce production in the longer term.

Ambitious plans

Kuwait is investing heavily in new upstream and downstream production: oil and gas projects accounted for 27% of all planned projects in the country in 2016, according to the national bank. In February 2017, Kuwait Petroleum Corporation (KPC), Kuwait’s national oil company, said that it expects to spend about $115bn on oil projects over the next five years.

Kuwait has long had target of producing 4 million bpd by 2020, up from around 3.15 million bpd today, though in recent years that target has fallen to about 3.65 million bpd. In early 2017, KPC managing director of international marketing Nabil Bouresli said the country was also targeting 4.75 million bpd by 2040.

Kuwait is pushing for the development of additional oil and gas fields, as well as enhancing capacity at existing ones, notably Burgan, a mature field in the south of the country that accounts for a significant portion of the country’s total oil production capacity. 

One major upstream project nearing completion is the Ratqa field, close to the Iraqi border, which is set to supply 60,000 bpd of heavy oil once its first phase is complete, rising to 270,000 bpd after the second phase is up and running. The first phase is scheduled for completion by the end of 2017.

At present nearly all of Kuwait’s crude oil production comes from onshore fields, but there are now active attempts to expand offshore production capacity. State-owned Kuwait Oil Company (KOC) has said that it plans to drill its first offshore exploration wells by the end of 2017.

Gas expansion

Kuwait is also expanding domestic gas production. KOC has tendered three contracts worth a total of about $5.7bn for the development of the jurassic non-associated oil and gas reserves in northern Kuwait, which among other things involves the extraction of more than 10,472 tonnes of natural gas a day.

Meanwhile, downstream is considered a big opportunity for Kuwait, as well as a key part of the country’s diversification plan. “It makes sense that Kuwait invests in order to get as big a return as possible on that crude oil, and developing related downstream projects,” says Daniel Kaye, lead Middle East economist at Oxford Economics.

Two projects in particular are being touted as important for Kuwait’s downstream development: the Clean Fuels Project, which will upgrade and expand two of Kuwait’s existing refineries with a focus on higher value products such as diesel, and the Al-Zour refinery.

“These are major projects and will enable Kuwait to expand its downstream refining capacity considerably. The Al-Zour refinery will be among the largest refineries in the world, producing more than 600,000 bpd,” says Mr Kaye.

Kuwait is also pushing forward with its imports of liquefied natural gas (LNG) to supply the local market. In March 2017, Kuwait National Petroleum Company (KNPC) awarded a $2.9bn contract to South Korea’s Hyundai Engineering to build an LNG import and regasification terminal at Al-Zour.

Overcoming challenges

One issue that has long delayed the development of more projects in Kuwait has been authorities’ reluctance to allow foreign ownership in the sector. The election of a new national assembly in November last year is unlikely to change things, and analysts suggest it could signal a return to political conflict between the government and the national assembly.

“The real issue is the long-term impact of political division on Kuwait’s oil sector and its capacity to implement the new projects Kuwait needs in order to modernise its oil sector, both upstream and downstream, and increase its production capacity,” says Mr Kaye. “There is a lot of investment going on in the sector but the issue of foreign involvement still hasn’t really been resolved.”

However, Mr Kaye believes that there is a chance that developments taking place outside the country could have an impact on attitudes in Kuwait. “The fact that Saudi Arabia is encouraging foreign investment in its ultra-sensitive oil sector might provide some impetus for Kuwait to open up,” he says. “Of course, conditions in Kuwait are much different. It doesn’t need the money in the same way Saudi does, and it has a very different political climate.”

Another cause for uncertainty in Kuwait’s energy sector is the ongoing dispute with Saudi Arabia over the ‘neutral zone’, where the two countries have joint control over the onshore Wafra and offshore Khafji fields. Production was halted at the 300,000 bpd offshore Khafji field in October 2014, while the 200,000 bpd Wafra field was shut under Saudi instruction in May 2015. Despite positive signs from the Kuwaiti side, few believe that the issue will be resolved any time soon.

“We’ve been in this holding pattern for a long time, where every three to six months the Kuwaitis give an announcement suggesting a reopening is forthcoming, but then nothing happens,” says Richard Mallinson, a geopolitical analyst at consultancy Energy Aspects. “There doesn’t seem like there has been a breakthrough on the political disagreements.”

Mr Mallinson adds that even if the two sides reached an agreement, it could still take three to six months to ramp up production. “It’s not like a tap that can just be turned on,” he says.

Overseas ambitions

Kuwait is also investing heavily in oil and gas assets abroad. In January 2016 the Kuwait Foreign Petroleum Exploration Company (Kufpec), a subsidiary of KPC, bought a $900m stake in an offshore gas and condensate field in Thailand, following the successful acquisition of offshore interests in Norway worth $300m in late 2016.

“The addition of the Thailand asset, along with the completion of the Norway acquisition last month, will provide the company with total production exceeding 100,000 barrels of oil equivalent per day for the first time in Kufpec’s history,” CEO Shaikh Nawaf Saud Nasir Al-Sabah said in a statement.

Meanwhile a new $7.5bn refinery in Vietnam, 35.1% owned by Kuwait Petroleum International and capable of processing 200,000 bpd of Kuwaiti crude for the local market, is expected to take delivery of its first shipment in May.

“These are positive developments, and are the kind of things that a lot of the national oil companies in this part of the world have been a little bit reluctant to do,” says Edward Bell, a Dubai-based commodities analyst at Emirates NBD. “It’s another revenue source for the government, and helps to diversify away some of the downturn risk that could happen at home.”

Extending the deal

While these are all positive long-term developments, in the short term the health of economies like Kuwait’s depend heavily on oil prices, which for the moment are strongly linked to the sustainability of the OPEC deal and whether that deal is extended for another six months.

“The big challenge will be the decision in May as to whether to extend the deal,” says Mr Mallinson.

He adds that the goal of running down oil inventories won’t be completed by mid-2017, so the deal may need to be extended. However, this will involve another round of talks, with all of the countries which tried to claim exceptions last time around pushing for exceptions once again. “It’s not a certainty that they will be able to hold the alliance together, but to achieve what they want in terms of rebalancing the market they do need to extend the deal,” says Mr Mallinson.


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