Kuwait’s supersized E&P plans

IHS senior Middle East energy analyst investigates Kuwait’s $90 billion investment scheme.
Kuwait’s supersized E&P plans
Chairman and managing director of KOC, Sami al-Rushaid.
By Daniel Canty
Sat 22 Jan 2011 12:00 AM

State-owned Kuwait Petroleum Corporation (KPC) recently announced
a US$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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