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July 31, 2017,   10:25 AM

Kuwait Embarks On An Energy Investment Spree

Herman Wang and Adal Mirza

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Like most major oil-producing nations, Kuwait, the country strategically located at the top of the Persian Gulf, has aggressive plans to boost the output capacity of its key commodity, with a $115 billion spending program over the next five years that includes both upstream and downstream investments. Kuwait is OPEC’s fifth largest oil producer, with a production capacity of close to three million barrels per day (b/d). Its spending plan aims to raise that capacity to four million b/d by 2020 and then eventually 4.75 million b/d by 2040.The country certainly has the funds to under-write the expansion, but serious questions remain about whether it has the political will or the systems in place to deliver it, given the painfully slow pace of project development in recent years. The International Energy Agency, for instance, has forecast that Kuwait’s sustainable crude production capacity would reach only 3.09 million b/d by 2020, far short of the country’s goal and just a 150,000 b/d increase from 2016 levels.

Relations between the government and parliament are often rocky, with last year’s controversial fuel price hikes incensing many lawmakers, and now, longstanding critics of the government have been emboldened by the results of the November 26 election that boosted their numbers to about half the National Assembly. The continued dissent could further stunt Kuwait’s development plans, with opposition members eager to pounce on any missteps to “grill” ministers. This usually ends up with the emir dissolving parliament rather than see ministers closely linked to the ruling Al-Sabah family interrogated by members of the assembly. More elections follow, and in the political vacuum, development stalls.

“Foreign technology and project management expertise are essential for tapping Kuwait’s geologically complex reserves,” the IEA noted in its Oil 2017 medium-term forecast. “For decades, Kuwait has struggled to develop upstream projects due to strenuous parliamentary opposition.”

Details of the planned investments are still scant at this stage. They involve increasing capacity at existing fields, as well as developing new fields in the north of the country, such as Abdali, Bahra and Ratqa, while also stepping up exploration activity. The plan will require output at the giant southern Burgan field to be maintained at around 1.8 million b/d, as well as adding around 700,000 b/d of oil and condensates at the technically challenging northern fields.

In January, state-owned Kuwait Oil Company (KOC) received bids from international engineering companies for the construction of a new crude oil gathering center to maintain production at Burgan, which is also Kuwait’s largest oil field. The estimated $1.33 billion, 120,000 b/d facility is expected to be completed in 2021. It will connect wells at Burgan and serve as a collection point for crude, providing initial treatment by separating associated gas and removing salt.

At Ratqa, near the border with Iraq, KOC hopes to bring its first heavy oil production on stream by the end of 2018, ramping up to 60,000 b/d after six months. On the downstream side, where Kuwait holds 746,000 b/d of domestic refining capacity, the country is taking a look at diversifying its portfolio and further developing its overseas refining and petrochemicals complexes in Vietnam and Italy, as it attempts to extract more value from the barrels of crude it pumps.

Kuwait and Oman earlier this month signed a deal to develop a greenfield refinery and petrochemicals complex at Duqm, Oman, formalizing what would be the first collaboration between two sovereign Persian Gulf states on a major down-stream petroleum project. The planned 230,000 b/d refinery is expected to cost $7 billion and go into service at the end of 2020, with 65% of its feedstock coming from Kuwait.

A Clean Fuels Project, set to start operations by mid-2018, will involve the upgrading of Kuwait’s two domestic refineries to a combined capacity of 801,000 b/d, followed by the expected construction of the 615,000 b/d al-Zour refinery and petrochemical complex in July 2019.

At any rate, some of the oil expansion ambitions may have to be put on hold, at least in the near-term, as Kuwait and its fellow OPEC members look set to extend production cuts into the second half of the year, in a bid to support prices and work down the world’s glut of oil in storage. Under the agreement in force since January, the country has reduced its output to about 2.70 million b/d in the first three months of this year, according to the latest S&P Global Platts OPEC production survey, just below its quota of 2.71 million b/d.

KOC announced in January that it had closed some 90 wells and would bring forward field maintenance to bring the country into compliance.

Extending the output cuts could jeopardize the restart of oil production from the Neutral Zone between Saudi Arabia and Kuwait. The two countries had agreed to resume production this year from the 300,000 b/d offshore Khafji field in the zone, which was shut by Saudi Arabia unilaterally in October 2014 in an escalating political dispute with Kuwait. But any restart would likely have to be offset by production cuts elsewhere.

Details of any OPEC cut extension are still to be worked out, including how long it will last and whether the current level of output reductions will be maintained. OPEC agreed to cut 1.2 million b/d under the current deal, with 11 non-OPEC producers led by Russia committing to cut 558,000 b/d in concert. Ministers from the 24 participating countries met in Vienna on May 25 for negotiations. Regardless of the oil cuts sanctioned by OPEC, Kuwaiti officials have maintained that investing in the country’s oil sector remains a priority, with global demand set to rise in the long-term.

Herman Wang is an OPEC Specialist at S&P Global Platts and Adel Mirza is the Middle East Editor at S&P Global Platts


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