Ambitious Kuwait treads carefully
Can Kuwait's long history of strained oil production targets, a frequently striking workforce and political unease be transformed by robust economics, a well-crafted upstream strategy and a flourishing downstream business?
The turbulent narrative of Kuwait’s oil sector is underpinned by candid and transparent disagreements. The OPEC member’s oil production nearly halved when thousands of local oil workers refused to put on their hardhats. The three-day strike ended on April 20 after triggering a 3% spike in oil prices, with the country’s output falling by 46%, from the usual 2.8mn barrels per day (bpd) to 1.5mn bpd.
Putting out such fires is business as usual in Kuwait as the country’s freer political environment – unusual amongst Gulf countries – means the Ministry of Oil, state-owned oil company Kuwait Petroleum Company (KPC), and field workers, often voice their agendas. Simple economics mean the country can ill-afford the frequent disruptions that curtail its operational efficiency, however. Oil production accounts for 60% of Kuwait’s GDP and 95% of export revenues.
Kuwait posted its first budget deficit since 1999 in the 2014-15 fiscal year, as low oil prices took a toll on the country’s economy; a statistic that is both concerning and impressive. Kuwait’s Emir, Sheikh Sabah Al-Ahmed Al-Sabah, has called for stricter economic management, which mirrors the austerity measures being implemented by local governments and national oil companies throughout the Gulf.
“We are required to start with treatment and economic steps and programmes aimed at managing and reducing the budget articles, in order to deal with the shortages in the state financial revenues,” Sheikh Al-Sabah says, according to state-owned news agency Kuna.
KPC’s plan to reach 4mn barrels of oil production capacity by 2020 is subject to doubt among some energy stakeholders within – and outside – Kuwait. The target gives KPC less than four years to increase production by more than 33%, which is an ambitious target by any global standards. Rolling out the much-discussed enhanced technical service agreements (ETSAs) to incentivise international energy companies, which may include Total and Shell, to funnel cash into upstream oil projects, would support Kuwait’s 2020 goal.
Kuwait has also confirmed a $114.5bn spending bill that is aimed at bolstering the effectiveness of the oil sector over the next five years. Just under two-thirds of the financing (63%) has been earmarked for upstream exploration and development, with the remaining portion (37%) to support the country’s various refining and petrochemical projects.
“Like all oil producing countries worldwide, Kuwait has its challenges. But do not forget that we have well over half a century of experience – the country’s first crude oil shipment was in 1946. Kuwait is on track to reach 4mn barrels a day of oil production, and our major refinery expansion is also on schedule. There are many bright spots on the horizon,” Mohammed Al-Shatti, manager of KPC’s CEO’s office and Kuwait’s representative to OPEC, told Oil and Gas Middle East.
Global investors clearly have an appetite for Kuwaiti business, with considerable interest in KPC’s domestic downstream arm KNPC’s plans to raise up to $10bn-worth of loans to support major refinery upgrades.
Kuwait’s financial acumen was also highlighted by the government’s decision to reduce diesel and kerosene subsidies in January 2015 – the second GCC member to do so at the time, following Yemen’s cuts in mid-2014. Fuel-related subsidies are considered a national right in the Gulf states’ psyche, which makes introducing cuts a delicate political operation for all local governments in the region. Kuwait’s government raised the price of diesel to 0.170 dinar ($0.59) per litre from 0.055 dinar ($0.18), with kerosene prices also rising with monthly reviews. The move was forecast to save the government $1bn a year, with more cuts anticipated this year. Kuwait’s budget from 1 April, 2015, which assumed an oil price of $45 a barrel, forecast a $27bn deficit. Such data is expected to help the Kuwaiti government persuade the country’s population of 4mn that further subsidy cuts are necessary.
The ongoing major revamp of Kuwait’s refining sector has the potential to be the stick that Kuwait needs to beat the dents out of its reputation for missing project deadlines. Disagreements within the Kuwaiti parliament over budgets means it has taken nearly a decade for KNPC to gain approval to build the 615,000 bpd Al Zour refinery, which will also incorporate a petrochemical complex. The $16bn refinery will raise the country’s total refining capacity from today’s 936,000 bpd to 1.4mn bpd, with completion likely by 2020.
The extensive grassroots construction project is part of the Clean Fuels Project (CFP), which includes upgrading the Mina Abdulla and Mina Al Ahmadi refineries by 2020. On completion, the refineries’ combined capacity will increase by nearly 10% to 800,000 bpd, at 454,000 bpd and 346,000 bpd respectively. Kuwait’s aged 200,000 bpd Al Shuaiba refinery will be transformed into storage from 2017.
“Kuwait is making significant inroads with its downstream operations, which are being realised on the ground after years on paper. KNPC’s efforts today will help the country be more competitive as the Middle East and Asia’s refining capacity soars over the next decade,” Siamak Adibi, a senior consultant at Facts Global Energy (FGE), told this magazine.
Kuwait’s foreign downstream arm, Kuwait Petroleum International (KPI), is expanding KPC’s geographical footprint, especially in Europe and Asia. KPI and Japanese oil refiner, Idemitsu Kosan Co, have applied to set up a joint venture to sell oil products in Vietnam, with both companies involved in the construction of the country’s 200,000 bpd Nghi Son refinery. The refinery is scheduled to start operations in 2017. KPI’s downstream presence in Asia includes China and the Philippines. KPI, also known as Q8 in Europe, is focussing on storage plants following the sale of its Rotterdam refinery to global trading firm Gunvor. It has recently acquired assets in Italy, Luxembourg and Belgium, and is eyeing new business in the UK and Spain.
Navigating testy politics
Against a backdrop of dynamic politics, there has been ongoing support for Nizar Mohammed Al-Adsani’s technical expertise and focused strategies since he was appointed KPC’s chief executive officer in May 2013. KPC’s CEO tends to be technically-minded, and has hands-on experience of the oil sector, while the oil minister is well-versed in politics and less focussed on how the micro cogs of the industry turn. Consequently, well-documented clashes ensue; Kuwait has appointed more than 10 oil ministers in the last two decades.
A disagreement between the top brass at KPC and then oil minister Ali Saleh Al-Omair in 2015 meant that the majority of KPC’s board, and some of the CEOs of the company’s subsidiaries, threatened to resign. The protracted argument culminated in a rare intervention from Emir Al-Sabah. Anas Al-Saleh, the current deputy prime minister and finance minister, also became the acting oil minister last November, while Al-Omair now leads the Ministry of Public Works and serves as a state minister for parliamentary affairs. Al-Omair’s tenure as oil minister for nearly two years is notable for its relative longevity.
“Political disputes in the Kuwaiti parliament have not helped the country’s oil industry reach its capacity targets. But a change in the oil industry’s structure, including partial privatisation along the lines that are being proposed by Saudi Arabia, would help develop Kuwait’s oil production capacity, by introducing new funding and greater efficiency,” Dr Leo Drollas, an independent energy consultant and former director and chief economist for the Centre for Global Energy Studies (CGES), told Oil and Gas Middle East.
Kuwait is considering offering shares in service companies operating under KPC’s vast umbrella, but not within KPC itself.
Meanwhile, a disagreement between Kuwait and Saudi Arabia over their shared Neutral Zone has escalated since late 2014. A political boundary was drawn to equally divide the Neutral Zone and subsequent oil reserves in 1969, with the majority of operations at the 200,000 bpd Wafra field and the 300,000 bpd Khafji field. Saudi Arabia turned off the taps at the Khafji field in October 2014, citing unexplained environmental causes, and the subsequent tension between the two oil producers led to production at the Wafra field being halted in May 2015.
Several rounds of high-level negotiations have failed to restart production at either field, which has hit Kuwait particularly hard, especially as the country’s 2020 production capacity target nears. Kuwait has little spare capacity compared to Saudi Arabia’s 1.5mn to 2mn bpd. A political handshake would not alleviate Kuwait’s production challenges immediately as it could take more than six months before production at the fields reaches the same level of output that was recorded in 2014. However, the long-running uncertainty surrounding operations in the Neutral Zone has not spilled over into the two countries’ united front during OPEC negotiations.
Innovative upstream strategies
KPC’s strategy for oil production from 2020-2030 outlines the need to produce 270,000 bpd of heavy oil from Kuwait’s fields, which means one thing: the wider use of enhanced oil recovery technologies (EOR). Kuwait is pushing for economic diversification as low oil prices have highlighted the Achilles’ heel of energy-centric economies in the Gulf and beyond. Accordingly, KPC is increasingly focussed on using renewable energy resources to support EOR projects.
Harnessing solar-powered EOR could support Kuwait’s pledge to have renewables represent 15% of its total energy mix by 2030. The momentum across the Gulf to increase the use of renewable resources as a stand-alone energy supply, and as part of oil producers’ EOR portfolios, is gaining strength following the global climate change conference (Cop 21) in Paris in December 2015. GCC countries plan to allocate $100bn to support renewable energy projects over the next two decades, which will also leverage the region’s 1,400 to 1,800 hours of sunshine a year, according to Dr Samira Ahmad Omar, the director general of Kuwait Institute for Scientific Research (KISR). Innovation has featured on Kuwait’s strategic map for decades, with KISR designing and operating a pilot 100kW solar energy station in 1978.
“It really does make sense to utilise the abundant sunshine that Kuwait is blessed with, rather than importing expensive energy to produce oil,” Rod MacGregor, co-founder and CEO of Glasspoint Solar, told this magazine. “Deploying solar [power] to recover Kuwait’s heavy oil can reduce the country’s reliance on diesel and imported gas and develop these fields more economically, sustainably and independently.”