Recent Kuwaiti gas finds and substantial oil reserves require multi billion dollar investment programs.
Recent gas finds and substantial oil reserves require multi billion dollar investment programs to hit the Gulf state's ambitious targets.
Kuwait is a small but wealthy nation nestled at the northeastern tip of the Persian Gulf. It supports a relatively open economy and is blessed with substantial hydrocarbon resources.
Oil and refined goods account for nearly half of GDP, 95% of export revenues, and 80% of government income. High oil prices in recent years have helped build Kuwait's budget and trade surpluses and foreign reserves.
In May 2007 Kuwait changed its currency peg from the US dollar to a basket of currencies in order to curb inflation and to reduce its vulnerability to external shocks.
Oil and gas reserves
While Kuwait is believed to own an estimated 101.5bn bbl of proven oil reserves, according to the June 2007 BP Statistical Review of World Energy, there is some debate over this alleged 8-9% share of the world total.
The Saudi-Kuwaiti Neutral Zone holds a further 5bn bbl, half of which belong to Kuwait.
A leaked industry document unveiled in January 2006 suggests that reserves have been overstated, with 48bn bbl possibly a more accurate assessment of Kuwaiti resources.
The same source implies that only 24bn bbl of oil are actually proven. It is possible that third-party reserves estimates will therefore be downgraded at some later date, although the Kuwaiti government has so far failed to confirm the official position.
Kuwait will never disclose the size of its oil reserves for reasons of national security, then oil minister Sheikh Ali Al-Jarrah Al-Sabah was quoted as saying in May 2007.
Should the Kuwait government continue to keep foreign investment out of the oil sector, we could see the country struggle to maintain its reserves base and deliver significant capacity expansion.
Former oil minister al-Sabah in May 2007 made an announcement regarding a major oil and/or gas discovery to the official KUNA news agency.
The field is in the Dhabi area near the Iraqi border close to the existing Rawdatin field, and contains light crude oil and associated gas.
However, Sheikh Ali did not provide estimates of total reserves or well test rates nor an estimated date for the start of commercial production.
Oil supply and demand
Kuwaiti supply for May 2008 was around 2.59mn b/d, still below estimated sustainable capacity of 2.66mn b/d, although there should be some additional capacity expansion in 2008 to 2.83mn b/d.
Longer-term plans to boost capacity at northern fields to 900,000b/d with foreign company involvement still face political opposition.
New capacity has been sanctioned for northern fields with the GC-24 project at the Sabriyah field, although this seems unlikely to be realised until 2010.Direct foreign participation in upstream projects remains off limits, which may place an effective ceiling for capacity closer to 3.0mn b/d than the 4.0mn b/d longer-term official target.
BMI assumes a rise in Kuwaiti production later in the forecast period, as oil consumption increases in line with a recovering global economy, allowing OPEC to raise output.
We are forecasting an average 3.00mn b/d in 2012. Oil consumption of an estimated 281,000b/d in 2007 is set to reach 316,000b/d by 2012.
Kuwait had hoped to reach capacity of 4mn b/d by 2020. Project Kuwait is a US$7bn, 25-year plan, dating from 1997, to increase the country's oil production.
In particular, Kuwait aims to increase output at five northern oil fields from their current rate of around 650,000b/d to 900,000b/d within three years.
Project Kuwait has been repeatedly delayed, however, due to political opposition and resistance from nationalists and Islamists in parliament to the idea of allowing foreign companies into the country's oil sector.
Five members of parliament in May 2006 presented new key amendments to the Project Kuwait legislation, amid calls on the energy minister to halt privatisation plans in the oil sector until a privatisation bill is passed.
One of the proposed amendments calls for establishing Kuwaiti companies with foreign capital to take up the proposed oilfield development. It stipulates that foreign capital in the proposed companies should not exceed 40%, with another 40% given to Kuwaiti citizens.
At least 10% of the company's shares must belong to an oil company owned fully by Kuwait Petroleum Corporation (KPC).
A second amendment proposed that, for any investment contract signed by KPC to be effective, it must be issued by a law and for a definite timeframe, meaning that any contract must be approved by the National Assembly.
The amendments also called to subject all contracts to the Audit Bureau's prior supervision, which gives the right to the Bureau to reject any provisions of the contract.
The financial and economic affairs committee has been reviewing Project Kuwait, after MPs voted in December 2006 to send the draft law back to the committee.
After holding several lengthy meetings with then energy minister Sheikh Ahmad Fahd al-Sabah, the two sides agreed on the legal framework of the bill, but have so far failed to hammer out an agreement on the financial and economic aspects.
If the new amendments are eventually approved, it would mean that the development will not be carried out directly by foreign companies but by the proposed Kuwaiti companies with foreign capital.
Kuwait has estimated that its national oil industry alone will need to spend around US$27.6bn on domestic upstream oil development to meet the 2020 production goal.
Gas supply and demand
In 2006, a 991.1bcm non-associated gas deposit was discovered in northern Kuwait, comprising the free natural gas fields in the Sabriya and Umm Niqa areas.This was Kuwait's first gas find that is not part of an oil field. Initial studies proved that 60-70% of the discovered volume can be accessed. Kuwait Oil Company (KOC) started producing gas from the fields on June 5 2008.
An initial target of 1.9bcm per annum is believed to have been set. While the fields contain mainly gas, they will also produce some oil, and KOC expects to extract 50,000b/d of light crude and condensate. In terms of gas, the company aims to increase output to 10.3bcm annually by 2015.
Kuwait hopes to increase its domestic natural gas production, both through reduced flaring of associated gas and through new drilling. Production of gas could reach 15bcm by 2010 and, ultimately, Kuwait could export the fuel.
In the meantime, however, despite increased output, the country will still need to import additional volumes of gas to meet its needs and various gas import projects are being assessed.
In July 2000, Kuwait and Qatar signed a Memorandum of Understanding (MoU) for the possible import of Qatari gas from the offshore North Field. In February 2003, MoUs were signed for a US$2bn pipeline from Qatar's port of Ras Laffan to al-Zour South in southern Kuwait.
Gas could have begun flowing through the line by the end of 2006, at an annual rate as high as 8.3bcm. Saudi Arabia has expressed opposition to the pipeline, which would pass through Saudi territorial waters, and has not yet granted approval.
Besides Qatar, Kuwait is also looking at importing gas from Iran, most likely from its huge South Pars gas field, via pipeline. The gas is to be used for power generation and water desalination.
A tentative deal to import small quantities of Iraqi gas could come into effect over the next few years. BMI forecasts assume gas consumption reaching 29bcm by 2012, requiring imports of up to 9bcm.
Refining and oil products trade
Kuwait is a substantial exporter of refined oil products, with the trade amounting to more than 500,000b/d and worth more than US$7bn per annum in 2006.
The Kuwait National Petroleum Company (KNPC), which operates the country's refining sector, is reportedly planning to spend over US$8bn by 2010 on upgrading its refining assets.
One aim is to increase capacity to produce ultra-low-sulphur transportation fuels. Another is to process an increasingly heavy and sour crude oil production slate as new oil field developments come online.
A contract for an upgrade to the Mina al-Ahmadi refinery was signed with Hyundai in May 2005, which will allow it to reconfigure lower sulphur diesel and gasoline, and reduce the proportion of fuel oil in its product mix.
The upgrade project is expected to be completed in 2008 at a cost of US$400mn.
At the end of September 2007, Kuwait approved a KWD4bn (US$14.6bn) budget for the construction of a new 615,000b/d refinery at al-Zour.
The budget, which is more than double original estimates, was authorised by the Supreme Petroleum Council on September 25.
This followed months of indecision over rising costs and the cancellation of an international tender in February thanks to the submitted bids coming in far above the anticipated budget.Once operable, the al-Zour refinery will be the largest in the Middle East after Saudi Arabia's 550,000b/d plant at Ras Tanura.
The al-Zour refinery is now scheduled to come on stream in March 2012, a slight delay from the last estimated start-up date of end-2011 and more than a year behind the original plan to launch at end-2010.
The cost of building refineries has risen dramatically recently as several countries seek to boost capacity to meet growing demand for refined products worldwide. This trend has had a severe impact on project budgets and timescales.
Acknowledging this fact, Kuwait is offering the new contract on a cost plus profit margin, through which Kuwait will pay the cost of the project to the successful bidder plus an agreed profit. This is designed to insulate contractors from the consequences of escalating prices for materials.
May 2008 saw Kuwait award five key contracts for the al Zour refinery. A consortium of Japan's JGC Corporation and South Korea's GS Engineering & Construction won the largest contract, worth around US$4bn, which provides for the installation of six distillation and atmospheric residue desulphurisation units and diesel, naphtha and kerosene hydrotreating plants.
Three other South Korean firms, SK Engineering & Construction, Daelim Industrial Company and Hyundai Engineering & Construction, were also awarded contracts at a total value of some US$8.35bn.
US engineer Fluor holds the project management contract for the plant and was awarded the US$2bn offsites and utilities contract.
Kuwait currently has three refineries: Mina Abdullah and Mina al-Ahmadi, which have a combined capacity of 730,000b/d, and Shuaiba with 200,000b/d. Kuwait is planning to invest a preliminary KWD245mn (US$876mn) to boost capacity at the first two plants to a combined 800,000b/d.
These expansions, along with the new al-Zour refinery, will boost Kuwait's refining capacity from 930,000b/d to 1.42mn b/d. Shuaiba, an ageing facility which increasingly suffers from mechanical faults, will continue to operate until al-Zour starts up, after which it will be closed down.
The al-Zour refinery may now cost as much as US$19bn, US$5bn more than the budget allocated to the project at present, according to an April 2008 report in the al Rai newspaper.
According to al Rai, KNPC will now attempt to raise the approved budget for the project up from the current US$14bn. This figure is already double Kuwait's initial estimates for the costs of building the plant.
BMI's forecast of demand reaching 316,000b/d by 2012 provides export potential of 2.68mn b/d. BMI is assuming OPEC basket prices of US$106/bbl in 2008, US$96/bbl in 2009, followed by an average US$90/bbl in 2010-12.
This provides potential crude oil export revenues of US$88.2bn in 2012.
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