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Wed 15 Feb 2012 12:10 PM

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Beyond Burgan: Kuwait’s new oil boom

Kuwait is famous for slow progress, but a production hike in 2011 and an ambitious outlook for heavy crude recovery may change perceptions

Beyond Burgan: Kuwait’s new oil boom
KOC’s CEO Sami Al-Rushaid (3-l), Oil Minister Mohammed Al-Busairi (3-r) and DMD for North Kuwait Hosnia Hashim (r) inspect a field in North Kuwait
Beyond Burgan: Kuwait’s new oil boom
Technicians at the control room at the Sabriya oilfield, south of Kuwait City

For a country with a reputation for delays, 2011 was an eventful year for Kuwait’s upstream oil & gas sector, which is looking beyond it’s mammoth Burgan field to tap more difficult oil.

In June, together with fellow gulf producers Saudi Arabia and the UAE, Kuwait quickly increased its oil production from 2.3 million barrels per day (bpd) to over a current total of over 3 million bpd.

The production hike followed a commitment from Oil Minister Mohammad Al-Busairi with his GCC counterparts to help soothe oil markets spooked by the sudden loss of Libyan crude. Kuwait lifted a self-imposed 10% cap on contract sales, and remedied an export bottleneck at the Mina al-Ahmadi oil terminal, allowing more oil from the Burgan field to be exported. Kuwait is currently the fourth-largest oil exporter in the world, with its population of 5 million consuming only 10% of its oil domestically, and is now pushing at the limit of its production capacity. By 2020, Kuwait hopes to have production capacity of 4 million barrels per day, and has announced a series of ambitious projects to make this
happen.

Feeding the dragon

Kuwait is becoming an increasingly important source of oil for China, a trend which is likely to continue as Iran’s presence on oil markets diminishes.

Kuwait’s crude oil exports to China surged 58.9% last December over 2010 to 853,000 tonnes, according to official data.

The state is now providing China with 3.9% of its oil needs, up from 2.6% a year ago. Since the establishment of Kuwait Petroleum Company’s Beijing office in 2005, Chinese refiners have steadily and significantly increased crude purchases from Kuwait.

As with other Gulf states, where China has lent on Kuwait for oil supplies, Chinese involvement in its supplier’s oil and gas sector have followed. Trade and foreign direct investment between the countries is increasing, with the upstream sector leading the way. Kuwait Petroleum Corporation (KPC) CEO Farouk Al-Zanki recently visited Beijing to enhance corporation’s relationship with major Chinese oil companies.

Tough going

Despite having one of the region’s most forward-looking and ambitious suite of national oil companies, Kuwait generally has a reputation as a difficult place to do business.

The World Economic Forum’s Global Competitiveness Report places Kuwait 34th overall, second last in the GCC behind Qatar (14th), Saudi Arabia (17th), the UAE (27th) and Oman (32nd), but ahead of Bahrain (37th), a much smaller producer. The state is deemed to be performing well on basic requirements but lagging in innovation and sophistication.

Inefficient government bureaucracy is cited as the single most significant problematic factor for doing business, earning the country, as Robin Mills of Manaar Consulting says, the old moniker of ‘Queue and wait’.

Examples are not hard to come by, with ‘Project Kuwait’ – an ambitious $7 billion plan to involve international oil companies in reviving production at Kuwait’s mature fields – on hold after political controversy.

Other upstream projects are going well, however, including the North Kuwait Heavy Crude recovery program  and an innovative steam-flooding project in the Partitioned Zone between Kuwait and Saudi Arabia.

The $340 million PZ pilot, which is the third test phase for the steamflood project, is expected to lead to full-field steamflooding of the field’s First Eocene reservoir. This would mark the first ever commercial application of conventional steamflooding in a carbonate reservoir.

A new oil and gas gathering centre at Kuwait’s third-largest oil field Sabriya, built by South Korea’s SK Engineering and Construction at a cost of $626.7 million dollars, can handle 165,000 barrels of crude oil per day and 85 million cubic feet of gas, and is a key part of Kuwait’s export growth plan. The project was completed six months ahead of schedule, showing that quick work can be done in the country, and setting down the gauntlet to non-Asian EPC contractors who are striving to compete with tight margins and strict deadlines.

Gas outlook

Kuwait produces around 175 million cubic feet of gas per day, and has an official target of 1 billion cu ft per day by 2015.

In common with other gulf states, Kuwait has seen surging domestic demand for gas for power generation, desalination and petrochemicals feedstock, and has consumed more than it has produced since 2007.

If Kuwait is to wean itself off expensive liquefied natural gas imports, it must either produce attractive and settled exploration and production deals for international oil companies or seek long-term supplies from its neighbours.

Fears over intensifying competition for ethane feedstock from heavy industry and the power generating sectors are reportedly rife among Kuwait’s petrochemical elite.

According to America’s Energy Information Administration, Kuwait imported 270 million cubic feet per day of LNG in 2010, supplied by Shell and Vitol under a contract running until 2013.

In February 2010 an Enhanced Technical Service Agreement for development of the Jurassic Gas fields was struck with Shell. The Anglo-Dutch supermajor was to deploy technical experts to Kuwait to support KOC in its management of the ongoing development of the Jurassic Gas fields. This project is both complicated and challenging, due to unconventional geological formations, difficult reservoir conditions and complex sour gas compositions.

The project has stalled as a parliamentary probe was appointed to investigate the contract in June last year, a typical victim of the country’s robust and often dysfunctional political scene.

Despite delays Kuwait is taking other steps to tackle its gas squeeze. Kuwaiti gas projects in the north and south of the country will add around 600 million cubic feet to the already existing production of 140 million cubic feet, according to Kuwaiti Oil Minister Mohammad Al-Busairi.

Through its huge projects in both regions, Kuwait hopes to improve feedstock supply to the gas needs of the petrochemical industry, according to Al-Busairi.

“The gas project in the north will be much clearer in 2017. It is an ambitious project and there are promising excavations that reveal signs of a considerable amount of reserves. But time is needed for more accurate readings,” he said.

The Partition Zone project may also invest in gas production, with the intention of improving gas utilization and eliminating continuous natural gas flaring at the Wafra Field.

Infrastructure projects are underway, with a recent $552 million contract with South Korea’s GS Engineering & Construction to build 10 storage tanks for butane and propane gases an example of Kuwait’s willingness to invest in the sector to meet domestic demand.

The tanks will have a capacity of 723,000 cubic metres and will be built at the 460,000 bpd processing capacity Mina Al-Ahmadi refinery.

Unique oil recovery projects, a critical need for gas, a drilling spree in the north and the managed decline of one of the world’s greatest oil fields in the south: Kuwait remains one of the most absorbing upstream environments in the region, and with plenty of money to spend, one that retains the ability to surprise.

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