Kuwait energy investment budget tops $300 billion

Kuwait has earmarked US$340bn for radical energy spending spree

Kuwait is desperate to break loose from its chronic power shortages due to stagnation in its domestic gas production.
Kuwait is desperate to break loose from its chronic power shortages due to stagnation in its domestic gas production.

Analysis provided by IHS Senior Middle East Energy analyst Samuel Ciszuk

The Kuwaiti state oil industry is attempting a renewed push to launch major enhanced oil recovery projects on the emirate's mature oil fields, as well as trying to increase domestic gas production significantly to break loose from its chronic power shortages. Efforts to secure technology alliances with IOCs, upon which the drive hinges, might again be derailed, however, by deteriorating government-parliament relations.

Ambitious Targets

Speaking on the sidelines of a recent Kuwaiti energy conference, the chairman of state-owned upstream operator Kuwait Oil Company (KOC), Sami al-Rushaid, told Platts that, "we are in an aggressive exploration stage and mainly we are going after the gas - all over and deep horizon. We are directing most of our effort toward gas exploration", adding that, "we will probably even go offshore and we are going after the gas there. We see that there is a potential for additional gas discoveries and we are in desperate need for that for the power generation".

KOC is hoping to be able to develop and monetise about 13 tcf of gas reserves in deep horizons under the northern fields, but is hoping to find even more gas reserves elsewhere, including in its shallow waters offshore. "We have done the offshore seismic and have an extensive seismic programme going on for the drilling effort", he continued, however, cautioning that shallow water gas production was not foreseen until after 2020, in the Platts interview.

Al-Rushaid ranked the gas development programme as the more challenging compared to its ambitious 4-million-b/d 2020 production capacity target, telling the news agency that, "we are already at 3.4 million b/d, so not much more remains to reach our goal", while also saying that not all of the added production capacity would be from heavy oil deposits.

South Korea's Daelim is currently constructing the emirate's fourth gas processing train, aiming to have it completed by early 2013, although state-owned refiner Kuwait National Petroleum Co. (KNPC)'s deputy chairman and managing director of the Ahmadi refinery, where the train is located, Saad Al-Asaad told media that there was hope the project could be fast-tracked and completed sometime before 2013, underlining the desperation in Kuwait's gas availability balance.

The fourth train will be Kuwait's largest, with a 800-mmcf/d capacity, while the country's three older trains only have a 500-mmcf/d capacity. Al-Asaad told Platts that KNPC was hoping to have the train on-stream in sync with KOC's development of its second phase of northern gas production, lifting output to 600 mmcf/d and that it planned to tender the construction of a fifth processing train later this year, in order to accommodate KOC's plans to lift northern gas production to 1 bcf/d.

He further told Platts that KNPC was in the throes of signing a US$612.7 million contract for the construction of LNG storage tanks with South Korea's Gold Star, while both he and the chairman of KNPC and KOC parent company, Kuwait Petroleum Corp. (KPC), Farouk al-Zanki, confirmed that the persistently delayed 615,000-b/d al-Zour refinery project was likely to again be tendered soon on a lump-sum turnkey basis, at an estimated project cost of $12.97 billion, as soon as the Supreme Petroleum Council had approved the latest initiative.

Badly Needed

The Kuwaiti plans of growth, revitalisation and upgrades are badly needed, as particularly the downstream sector has suffered tremendously from the political standstill, which often have turned large projects, like al-Zour, into high-profile issues which Kuwaiti parliamentarians have managed to exploit and halt, in order to impose their political influence on the royal family-dominated government, despite formally not having any power over the ostensibly de-politicised oil sector.

Parliamentarians have therefore over the last 15 years used their influence in the budgetary sphere and their financial oversight powers, including the fight against corruption, to delay and frustrate progress on key projects like al-Zour, leading to it having to be retendered multiple times and still not having been successfully awarded despite initially having been planned for 2013-14.

The situation has been similar in the petrochemical and upstream sector, although with different casualties and parliamentary modus operandi. In the downstream sector, however, it has led Kuwait to today operating a fleet of refineries increasingly unable to produce refined products capable of meeting environmental standards in the most advanced European, North American and Asian markets, undermining its ability to add value to its main export commodity and losing lucrative market shares.

The plan for years has been to raise Kuwait's refining capacity from 930,000 b/d to 1.415 million b/d through the al-Zour refinery and the consequential retirement of the obsolete Shuaiba refinery and then upgrade the two remaining facilities under projects which also have faced politically motivated deadlocks.

Upstream, Kuwait has slowly been able to move ahead on its own on many fronts with which it initially needed IOC assistance, however, the process has been painstakingly slow and resulted in the emirate's production capacity remaining largely flat through the decade between 1995 and 2005 and afterwards.

Some increases were finally achieved and brought onstream—in theory, as Kuwait's production under OPEC quotas since mid-2008 has been restricted to about 2.2 million b/d—during 2009 and 2010, lifting production capacity from about 2.8 million b/d to 3.2-3.4 million b/d, although there has been some scepticism about Kuwait's ability to produce sustainably at the higher end of that span.

Very strong resource-nationalist sentiment in the Kuwaiti parliament which has significant popular backing—the Kuwaiti constitution even explicitly prohibits production-sharing agreements (PSAs)—has meant that most attempts to incentivise technical service contracts with IOCs either floundered on political resistance, or on IOCs feeling insufficiently incentivised to engage in projects requiring large technology transfers.

This forced KOC to rely on oil service companies, which however, rather expectedly, has turned out to be less of an opportunity to gain technology transfers than if strategic partnerships with IOCs had been possible. Kuwait's future growth hinges on the development of rather complex deep horizon gas deposits and the development of deep horizon heavy oil reserves, as well as increasingly moving offshore, something that Kuwaiti industry has limited experience of. Such nuances are nevertheless largely lost on parliamentarians, who would rather use the oil sector issues as a bat in the constant tug-of-war between parliament and government to extend the elected body's limited areas of responsibility.

Using budgetary constraints and, perhaps even more damaging, sometimes knee-jerk corruption allegations to halt projects amid lengthy investigations, they have inserted themselves into the oil sector, despite formally not having any authority over it. While from a democratic standpoint this might have been warranted, stagnation and a climate where industry officials have become increasingly afraid to take decisions has developed, further undermining the efficiency of the vital sector.

Outlook and Implications

The repeated cycle of parliamentary-government deadlock and snap elections in the second half of the past decade did, in the end, cause some significant political fatigue among the Kuwaiti population, not the least since the emirate was seen as largely having lost out on economic growth during the past economic boom in the region, due to its prolonged decision-making stagnation.

This resulted in the last elected parliament taking a more moderate tone, signalling that a more co-operative period in Kuwaiti politics could be in the making. Now that large projects again are starting to emerge from the drawing boards, government-parliament relations are again souring, however, with the government seen as unwilling to extend parliamentary powers and parliamentarians increasingly prone to oppose government policies out of sheer principle.

On a practical level, it is the royal family's refusal to accept royals being questioned by parliament—seen as a step towards no-confidence votes in Kuwait—which undermines their status, while at the same time being protective over their dominance over strategic ministerial portfolios in the country.

The recurring cycle two weeks ago led to a new resignation of the government, with the emir, Sheikh Sabah al-Sabah, reported to have asked Prime Minister Sheikh Nasser al-Sabah to form a new cabinet. The prime minister's latest resignation is the sixth since he formed his first cabinet in 2006, showing the depth of Kuwaiti problems and indicating that the relative lull during 2010 is likely to be over.

With the political climate heating, tenders of large projects will again be complicated, as engineering companies and contractors will fear getting burnt on starting to prepare projects which are then stalled and eventually pulled back, adding further to Kuwait's costs.

On the upstream development side, the Reuters' report that KPC, through its subsidiaries, is hoping to spend $90 billion until 2015 and $340 billion until 2030 (on both upstream and downstream) is promising and at least for the first number likely means that the relevant capital expenditure budget increases largely have been passed.

Platts reports KPC's al-Zanki as saying that talks with ExxonMobil over a long-stalled partnership for heavy oil development are still ongoing, while Shell entered into a new enhanced technical service agreement over gas development with KPC last year. Still, it is when projects are cemented that they tend to draw political ire in Kuwait, leading to the current renewed political crisis in the emirate again looking like a precursor to dashed hopes, further prolonging Kuwait's need to import LNG to meet its own domestic gas demand.

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