Kuwait unclogging its oil pipes

The discovery of a new gas and oil field in the northern Al-Dhabi region of Kuwait is helping to revitalise the country's plans for boosting oil production. Kuwait's government is currently aiming to boost the country's output from 2.6 million barrels-per-day (bpd) to 4 million bpd by 2020 but key components of that plan, including Project Kuwait, the multi-billion dollar upstream development of the northern oilfields, have stalled under political pressure and cost inflation. However, following a series of shake-ups and discoveries in the sector, industry insiders are saying the outlook is starting to look brighter.

The 2020 plan has been a cornerstone of the government's energy policy, as it seeks to increase oil production capacity from 2.6 million bpd to 3 million bpd in 2010 and 4 million bpd in 2020. The plan for increasing crude output has been mirrored by efforts to boost downstream capacity as well, raising refinery levels from the current 940,000 bpd to 1.5 million bpd. Cost estimates vary, but in some cases, up to $65 billion is expected to be spent upgrading the country's infrastructure to meet the targets.

By far the biggest news for the production-boosting plans has been the discovery of a new gas and light oil field in the Al-Dhabi area in northern Kuwait, the sixth such field in the region. While the oil minister, Sheik Ali Al-Jarrah Al-Sabah, declined to give details on the size of the new Dhabi II field, the discovery does lie adjacent to the Raudhatain oilfield, which has reserves of over 6 billion barrels. Sheikh Ali said the discovery would have a "positive impact" on both the country's oil strategy and gas production in the near future. Al-Dhabi follows on the heels of two earlier discoveries in the northern regions, which will provide an estimated additional 35trn cu ft of gas and well over 50,000 bpd once in full production. The discovery, says the oil minister, opens the door for Kuwait to meet its 2020 targets by 2012, a full eight years earlier than expected.

Faisal Hassan, head of research for Kuwait-based Global Investment House told Oxford Business Group, "the discovery of the new gas and oil field in the Al-Dhabi region is the result of the country's plan to look out for new areas to augment its oil and gas production, and we feel there will be more new discoveries soon. There was a discovery of a non-associated natural gas reserve in March 2006 in the north of the country and we expect more of a shift towards natural gas for domestic electricity and water generation, which in turn will free up more crude oil for export."

Furthermore, Project Kuwait has finally begun to move into the "finishing stages", according to Sheikh Ali. The plan, which looks to boost production to nearly 1 million bpd in the five northern oilfields, has been under discussion for over a decade now, but has been continually beset by political squabbles. The $8.5 billion proposal establishes a framework for private sector involvement in the country's energy sector, a first for Kuwait since the oil industry was nationalized in the 1970s (currently, international oil companies - IOCs - such as ChevronTexaco and BP, which are both bidding on the contract for Project Kuwait, operate in Kuwait largely through limited technical service agreements). As a result, however, several members of parliament expressed opposition to the project, fearing foreign control of national resources, and the plan stalled in parliament. Speaking with Oxford Business Group, industry executives said questions were raised about the need to boost output with the state's coffers already stuffed with surplus.

Earlier this week, however, Sheikh Ali re-emphasized the need for IOC involvement in Project Kuwait, stating that exploration and production in the north would be difficult and any such development required greater shared expertise to make the most of the project. He added that investment bank Morgan Stanley had been brought on board to review the continued feasibility of the project and that a revised plan should be presented to parliament within the next two months.

Global Investment House's Hassan said, "Project Kuwait, though much delayed, is an important and essential element in the government's plans to increase oil production capacity to 4 million bpd by 2020. The project primarily aims at developing the secondary reservoirs in the northern oilfields with the help of IOCs but even if Project Kuwait is delayed further, we believe the country will continue to invest aggressively in alternative long-term plans to raise proven crude oil reserves and oil production capacity."

Another central component of the 2020 plan centres on boosting downstream refining capacity, through the construction of a fourth refinery in Al-Zour. Like Project Kuwait, the Al-Zour refinery proposal has gone through a turbulent birth, but following the re-issuance of the tender, the project is back on track. The proposal was tendered late last year, with an expected price tag of around $6 billion, but after bids came back nearly three times higher than expected, the plans were shelved. However, the three existing refineries, already running at 940,000 bpd, would be unable to meet the 1.5 million bpd refining targets alone. As a result, Sheikh Ali recently announced that a new cost-plus-profit tender would be issued with a budget of around $12 million, saying, "we have to be realistic [with the market]". If all goes according to plan, the project will be up and running by the beginning of 2011.

Jason J. Nash is Head of Research at the Oxford Business Group
(www.oxfordbusinessgroup.com)

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