Country Focus: Kuwait exemplifies downturn tackle
Despite modest production, oil revenues-reliant Kuwait has taken the initiative to facilitate the OPEC/non-OPEC output cut deal. Now its NOC is exemplifying how to make do with existing resources and yet thrive during turbulent times
Kuwait has for decades been a major player in the global oil industry, holding significant sway over the supply of crude to the world.
Since the late 1940s, Kuwait’s economy has thrived on the oil boom, and oil revenues continue to fill the government’s coffers, making the tiny Gulf state the fifth wealthiest country in the world in terms of (IMF and World Bank) GDP per capita estimates, and its currency – the Kuwaiti Dinar – the strongest in the world (KWD1 = $3.3).
Kuwait has recently shot to prominence again by virtue of its key role in coordinating the landmark deal between OPEC and non-OPEC oil producers back in December 2016 to reduce oil output, as a measure to curtail supply and prop up oil prices. Ever since the implementation of the deal, Kuwait’s oil minister Issam Almarzooq has taken the initiative to co-chair with Russia a Joint Ministerial Monitoring Committee, which also includes oil ministers of Oman, Algeria and Venezuela, to track the adherents’ devotion to the deal.
Kuwait, which itself has maintained strict loyalty to the agreement to reduce its oil output, being in the monitoring committee has also been effectively reporting compliance figures of the deal signatories every month, in a bid to ensure that the agreement produced the desired results in stabilising the global oil market. More recently, Kuwait was credited for playing an instrumental role in convincing OPEC and non-OPEC members to extend the output cut deal for a further nine months, at the oil producers’ meeting on May 25th, in order to prolong the positive impacts the pact had produced until then. Kuwait’s Almarzooq continues to be at the helm of the watchdog body that will scrutinise adherents’ commitment to the deal until March 2018.
Experts say Kuwait’s fervour to ensure output reduction is only in its own interests. “Kuwait’s output has fallen from 2.91mn bpd when the first OPEC/non-OPEC production cut agreement was made back in December 2016 to currently at 2.71mn bpd. That’s a 6.9% cut in production,” says Ehsan Khoman, director, Head of Research and Strategist for MENA at MUFG.
“The rollover agreement which Kuwait played an active part in supporting is a strong signal to the market that OPEC intends to continue supporting prices at the expense of market share. Beyond supporting prices, by cutting production, Kuwait and other OPEC members are pushing markets towards rebalancing and as such, this material and sustained drawdown in inventory is likely to support oil prices going forward,” Khoman tells Oil & Gas Middle East.
(article continues on next page...)
Ghassan Alakwaa, analyst – Energy Research at KSA-based APICORP, agrees to that notion, saying, “Like the rest of the GCC countries, Kuwait has a desire to increase (oil) prices, even if it comes at the expense of lower production.”
Kuwait’s current oil production stands at 2.71mn bpd and it plans to increase this to 3.65mn bpd by 2020, including a goal of achieving a heavy oil production of 60,000 bpd by 2019. The country’s key oilfields include: Greater Burgan, with a production capacity of 1.7mn bpd; Raudhatain, which produces 350,000 bpd; Sabriya with a capacity of 100,000 bpd; Ratqa with 45,000 bpd; and Abdali with 30,000 bpd.
However, Kuwait would need the support and assistance of foreign oil and gas companies if it intends to ramp up oil production and attract investments towards its energy sector. Traditionally, and unlike the upstream sectors of its Middle East peers, IOCs have hardly been involved in exploration and production (E&P) activities in Kuwait.
Lynn Morris-Akinyemi, senior research analyst - Upstream, for the MENA region at Wood Mackenzie, explains why: “Post nationalisation (of the oil industry) in 1975, no foreign company participation is permitted in Kuwait’s upstream sector outside of the Partitioned Neutral Zone (PNZ). Under Kuwait’s constitution, the state controls and owns all hydrocarbon resources, and has the sole authority to exploit and safeguard those resources. As there is no direct foreign participation, Kuwait’s upstream sector is primarily an EPC and oilfield services market.”
She adds: “Post the Gulf War (in 1991), (Kuwait Oil Company) KOC began to work with international oil companies, such as BP, Shell, Chevron, Total and ExxonMobil, under the framework of technical service agreements (TSAs). The TSAs were essentially consultancy-type arrangements, where the IOCs provided technical/project management expertise to KOC, with KOC retaining full operatorship. Enhanced Technical Service Agreements (ETSAs) were introduced in the late 2000s with the first three successfully awarded in 2016.”
The oil and gas services market, as Morris-Akinyemi mentions, has been quite lucrative and American industrial technology major Emerson has been one of the prominent foreign services provider in Kuwait.
“Emerson Automation Solutions has been contributing to the Kuwaiti oil and gas market ranging from upstream, midstream and downstream solutions for Kuwait Petroleum Corporation and its subsidiaries,” Arif Mustafa, general manager for Kuwait, Qatar, Iraq and Jordan at Emerson Automation Solutions, tells this magazine. “Emerson is proud to serve the Kuwait oil and gas market with products and solutions from traditional instrumentation, flow measurement technologies, process analysers, Final Control (Valves), integrated Control & Safety Systems, RTU-SCADA solutions.”
(article continues on next page...)
Industry analysts believe that as the national oil company, KPC has performed a commendable role in protecting Kuwait’s oil and gas sector – the very lifeblood of the economy – from the pernicious effects of the prevailing downturn, predominantly through the adoption of effective operational excellence measures.
“Given Kuwait’s reserves and current production, most of which is based on lost-standing conventional oilfields, Kuwait’s industry is sustainable into the foreseeable future, even in fairly low oil price environments. The challenges they face are the global challenges of the industry, especially peak demand,” Jason Rosychuk, a senior associate at law firm Pinsent Masons, believes.
“KPC has been making great strides in embracing operational excellence initiatives,” Vinod Raghothamarao, director consulting, Energy Wide Perspectives, at IHS Markit, comments. “They have moved from cost to value-driven performance, made the connection between improved asset management and execution excellence, asset utilisation with increased visibility into complex operations to control costs and optimise the performance of employees and facilities and improved collaboration with oilfield services for world-class logistics,” he explains.
He further says: “KOC/KPC has definitely played a key role in establishing Kuwait as a key oil producer by embarking on ambitious production targets, ramping up heavy oil and adopting enhanced oil recovery techniques to tap their ageing and mature fields. KOC has earmarked a $33bn budget to carry out expansion plans to raise production to 4mn barrels per day by 2020. KPC has indicated that it will maintain crucial exploration programmes, despite current low oil prices, in order to achieve a reserves replacement ratio above 100%. This will definitely help keep Kuwait’s oil and gas industry sustainable.”