Kuwait's supersized E&P plans

US$90bn investment plan seen as jump start to stalled energy projects

Kuwait's upstream sector appears to have broken free of political deadlock.
Kuwait's upstream sector appears to have broken free of political deadlock.

IHS senior Middle East energy analyst Samuel Ciszuk investigates Kuwait’s US$90 billion investment scheme.

State-owned Kuwait Petroleum Corporation (KPC) recently announced a $90-billion investment programme for the five years ahead, signalling an attempt to relaunch much of Kuwait’s stalled upstream and downstream projects in the hope that the emirate’s political deadlock has eased a bit.

There has been some indication that the Kuwaiti political situation has eased this year, with parliamentarians keen not to come across as holding the country’s economy hostage to gain political power, the royal family-dominated government looking more ready to share influence over the oil sector, and a new KPC leadership potentially ploughing a more independent furrow.

For years, Kuwaiti projects have been deadlocked by a constant tug-of-war between the government and the parliament, with the latter trying to extend its rather circumscribed powers.

The five-year plan is an ambitious programme for Kuwait Petroleum Company to regain the initiative in the industry following years of disappointments and also shows the extent of pent-up investment demand in the emirate’s energy sector, although politics still remains the stumbling block with some signs pointing again to growing government-parliament acrimony.

Advanced Plans

KPC’s $90 billion programme over the coming five years will fund and develop its upstream production capacity, upgrade its oil tanker fleet, build refineries abroad and expand its domestic refining capacity.

The investment programme is, as would be expected, mostly going to target domestic upstream and downstream projects, with the only named overseas refinery ventures being joint venture (JV) projects in Vietnam and China in which KPC is one of the partners.

Nevertheless, the expected capacity increase from the programme is looking less impressive than might be expected given the vast sums involved, with outgoing KPC chairman Sami al-Rushaid saying that heavy oil production from Kuwait’s northern fields by 2015-16 would come onstream at a rate of about 60,000 b/d.

Eventually, the heavy oil production is targeted to reach 250,000-270,000 b/d, probably largely thanks to investments undertaken up until 2016 as part of the announced programme.

The timeframe, however, and the low initial increment indicate the difficulties KPC and its upstream subsidiary Kuwait Oil Company (KOC) have in developing the technically demanding heavy oil reserves.

As part of the emirate’s push to develop a 4-million-b/d production capacity over the coming decade, up from today’s 3.3-million-b/d capacity, the heavy oil reserve developments will be paramount.

Still, a previous hoped-for enhanced technical service agreement between KOC and ExxonMobil, among those scuppered by resistance in the Kuwaiti parliament, was actually targeting a production capacity of 700,000 b/d from the northern fields’ heavy oil reserves.

This shows that KOC on its own still has a lot of ground to cover before it can even expect to reach similar results as leading IOCs in the technical sphere.

Great Needs

With most of the 350,000-450,000 b/d of the remaining increment to be delivered by 2020 seemingly not being funded through the now released five-year plan—and some of the post 2016 250,000-270,000 b/d increment possibly also being financed by the following spending plan—most of the announced programme seems to indicate the extent of needed investments to upgrade and renovate existing upstream and downstream facilities.

The years of deadlock between parliament and government in Kuwait has led to many normal upgrade and expansion projects being cancelled across the sector, leaving Kuwait with an industry suffering from crumbling facility integrity levels and inefficiencies.

Moreover, a very strong resource-nationalist sentiment in the parliament has particularly targeted projects in which KPC and its subsidiaries have tried to establish joint projects with IOCs, destroying the NOCs’ abilities to learn new techniques and facilitate technology transfers.

This has paradoxically rendered KPC rather isolated and dependent on pure service providers, though these rarely have much incentive in transferring their technological know-how, given the pressure on KPC to control project costs to the maximum.

The severe upgrade needs throughout the oil and gas industry in Kuwait are demonstrated by the emirate’s deeply problematic health and safety statistics over the past decade, with its refineries, as well as upstream and midstream facilities, being significantly more dangerous workplaces than in any of its oil producing neighbours, save of course Iran and Iraq, both of whose industries have suffered for years under sanctions and other abnormal operational situations.

Continued Deadlock?

While most sectors in Kuwait have suffered from the general political deadlock of the last decade, the oil sector has in particular been targeted by parliamentarians trying to extend the powers of their body over the industry, in which, according to the constitution, it nominally has no say.

As part of the general efforts to extend the parliament’s powers and democratise the emirate, the parliament has used other oversight abilities and powers to put spokes in the wheel of government-launched upstream and downstream development plans.

The use, for instance, of anti-corruption investigative powers or transparency initiatives for public tendering processes have often been used.

These, however, have created the side-effect of a climate of fear in the state industry bureaucracy, dissuading KPC and its subsidiaries’ managers from taking ownership of initiatives and projects, compounding the standstill.

Nevertheless, the parliament has itself gained a de facto influence by continually halting projects.

Some recent signs have pointed to the government moving towards a model where its influence over KPC project spending would become institutionalised, in effect giving parliament a say in the strategic oil and gas sectors’ direction.

Another positive sign could potentially be the appointment of a more independent top level of management at KPC, which in a best-case scenario could steer a forceful course between government and parliament.

New management might also present Kuwait’s dire needs to the parliament from a technocratic point of view, given that parliamentarians have often distrusted the KPC leadership as hand-picked by the government.

Whether this materialises is still too early to say, but given the need for radical regeneration in the upstream and downstream sectors the government has also shown signs of losing its grip on KPC direction.

Whether the end result is that a more independent KPC leadership could get its point across to parliament about the much-needed investment and development remains uncertain.

A relatively high degree of resource-nationalistic idealism is still prevalent in the chamber, leading to high levels of scepticism about KPC enlisting help from foreign and especially private entities.

Outlook

Domestically, Kuwait needs to start making progress relatively quickly in three main areas.

Firstly it needs to invest significant amounts in upgrading its upstream and midstream sector in general, to raise operational integrity in its facilities and safeguard reservoir management efficiency for the long-term benefit of its production capacity.

This includes upgrading its knowledge of enhanced oil production (EOR) techniques.

Secondly, it needs to significantly improve its heavy oil production skills and technology, in order to be able to deliver the higher production capacity it has hoped for.

This will become especially important, as neighbouring Iraq raises its production capacity over the coming decades, so as to safeguard Kuwait’s size in the OPEC quota system and its market share.

Thirdly, Kuwait badly needs to upgrade and expand its refining capacity, with its existing plants being too old to function efficiently and increasingly locking Kuwait out of advanced fuel markets because its products do not live up to the latest environmental fuel standards.

A relaunch of the clean fuels project, aiming to upgrade the Mina al-Ahmadi and Mina al-Abdullah refineries, is absolutely necessary. A successful entry of JVs in the petrochemical sector, to bring in more modern technologies, would also be good, even though most investors will still be wary following the botched deal between a KPC subsidiary and U.S. chemical giant Dow.

Whether politics actually can prove to be more conductive to Kuwait’s oil industry being able to regenerate itself, however, remains a key question.

While both the government and parliament have signalled a greater willingness to co-operate during much of the year, recent weeks have again seen a familiar return of acrimonious accusations about government interference in the due process and, in return, parliamentary obstructionism.

With Kuwait’s oil and gas project history for the last 15 years having been dominated by aborted attempts, confidence on all sides is low and no-one is likely to celebrate until the first projects actually start to get under way, as little real institutional or legal change has actually taken place and the political mood swings are likely to continue.

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