Digging deep: Exploring new ways to extract oil

Nearly two-thirds of the investment spending identified in the country’s five-year development plan, some KD20bn ($72.1bn), has been earmarked for the oil sector. The expenditure of these funds is largely geared towards expanding production capacity from around 3.15m barrels per day (bpd) to 3.5m bpd by 2015 and 4m bpd by 2020. This investment could help Kuwait, which, according to the “BP Statistical Review of World Energy”, holds an estimated 7.6% of the world’s reserves, to bring more of its oil to market. Indeed, with output hovering around 2.7m bpd over the last 10 years, the country has one of the highest reserves-to-production ratios in the world.

INCREASING OUTPUT: Average crude oil production in 2010 amounted to 2.5m bpd, an increase of 0.6% over 2009 but still lower than the average of 2.8m bpd recorded in 2008. Output was up during the second half of 2011, as Kuwait, like Saudi Arabia, stepped up its production to fill in the gap left by Libya, whose output fell to 390,000 bpd in March, the lowest level since 1962. This expansion – which meant that production hit 2.7m-2.8m bpd during July 2011 – occurred despite the inability of Kuwait and Saudi Arabia to convince other OPEC members to raise output quotas during the 12-nation bloc’s meeting in June 2011. Kuwait’s official OPEC quota stands at 2.5m bpd, but like other OPEC members, the country can – and does, at times – exceed this limit. According to Mohammad Al Busairi, the minister of oil, the intent of the increase in oil production was to temper volatility in global oil prices. “Without such a measure, the oil prices would have shot up much higher than the current level and would have caused a global crisis that would boost the global economic recession,” he told local media. Indeed, other oil-producing countries have expressed concern that the current price of oil may be stifling recovery and growth in their destination markets. Oil demand from the OECD is expected to remain around current levels during the 2011/12 period, with weak demand in the US, according to NBK Capital, a Kuwait-based investment bank. However, non-OECD oil demand is expected grow by 3-3.5% during this same period.

EXPANDING CAPACITY: The recent increase in output has underscored the limits of Kuwait’s capacity, which currently stands at 3m bpd, although sustainable production levels are lower. Expanding capacity will require both the development of new fields and an overhaul of areas already in operation. More than 60% of current production comes from the Greater Burgan field, which is 70 years old and has seen declining output in recent years.

Kuwait Oil Company’s (KOC) announced intention to expand production capacity to 4m bpd will therefore rely on the development of other fields. Some 320,000 bpd are expected to come from new developments in the country’s northern oil fields, known as the Lower Pars, which have until recently not been seen as commercially viable, due to their depth and complexity. With a density between 11 and 18 API, the oil is heavy and difficult to extract by conventional means. Its high sulphur content also drives up the cost of operating and refining.

For a time, KOC considered bringing in foreign expertise to help boost production in the Lower Pars, and the company was in negotiations with ExxonMobil, Shell and Total in 2010. While no major agreement was reached, Kuwait Petroleum Corporation signed a memorandum of understanding with Japan Oil, Gas, and Metals National Corporation in July 2010 to investigate the possibility of using carbon dioxide injection in the Lower Pars.

BOOSTING PRODUCTION: So far, KOC has proved that it is able to boost production without significant involvement from the international oil companies (IOCs). As of mid-2011, total output from the country’s existing and developing northern oil fields amounted to 850,000 bpd, an increase from the 800,000 bpd recorded in 2010. However, to bring this area’s total production to 1m bpd, the target set by KOC, more IOC involvement may become necessary.

FOREIGN PARTICIPATION: Kuwait continues to maintain a high level of state control over the oil industry. The country nationalised its energy industry in 1975, putting all reserves under the purview of the Supreme Petroleum Council (SPC), which had been established the year before.

Article 21 of the Kuwaiti constitution states that no natural resources can be leased, sold, or otherwise given to outside interests, which means that concessions in the traditional sense cannot be granted. Furthermore, all revenue generated from the exploitation of natural resources is required to go to the state. The one exception to this law is the “neutral zone”, an area jointly exploited by Kuwait and Saudi Arabia, where Chevron Texaco operates under a production-sharing agreement (PSA).

In March 2001, in an effort to boost levels of foreign direct investment (FDI) in the country, the National Assembly passed the Foreign Direct Capital Investment Law (No. 8/2001), which allows foreign investors to carry out economic activities in a number of areas, including some industries and hydrocarbons-related services. Interpretation of this law has been the cause of some controversy. Direct involvement of foreign companies in exploration and production is still forbidden, and outside companies interested in providing technical services are not allowed to conduct pre-contract subsurface studies, a factor that has been cited as a stumbling block for some would-be investors.

As Kuwait’s extensive reserves of easily extractable oil and gas eventually dwindle, there may be greater incentives to bring in IOCs with specific technical expertise in enhanced oil recovery (EOR) techniques. Secondary recovery (which relies on pumping water, gas, or steam into the well to push oil to the surface after natural pressure dies down) is already in use, and is due to become more prevalent as fields mature. Water injection facilities at the Wara reservoir of the Greater Burgan oil field are planned, which could increase production capacity at this subsection of the field from 80,000 bpd to 350,000 bpd by 2014. A tender for this project is expected before the end of 2011. Tertiary recovery, also known as EOR, is in limited use, but it will likely become necessary as conventional reserves are further drawn down.

PROJECT KUWAIT: Although participation by IOCs has been somewhat stymied by the country’s legal framework, some innovative contract structures have been proposed that would both satisfy Kuwait’s constitutional requirements and provide incentives for IOCs to take on these projects. For example, Project Kuwait (PK), which aims to allow the involvement of IOCs through an incentivised buy-back contract (IBBC) structure, was an attempt to attract international investment to help increase oil production at the country’s complex northern oil fields ( Raudhatain, Sabriya, Al Ratqa and Abdali).

As the law prohibits production sharing, concessions or the booking of reserves by IOCs, the IBBC allows the government to maintain full control over production levels and 100% ownership of reserves. Under the terms of IBBCs, foreign companies are paid a per-barrel fee, capital recovery costs and financial incentives for increasing reserves. PK is a key component of government plans to increase oil production to 4m bpd by 2020. However, few contracts have been able to make it through the National Assembly, which must approve all IBBCs.

ETSA: A method of foreign participation in exploration and production that has met with more success is the enhanced technical service agreement (ETSA). In such an agreement, an IOC offers technical advice for a set fee, plus tiered incentives for additional increases in production.

Royal Dutch Shell was the first IOC to successfully arrange an ETSA with KOC, which was approved in 2010. This ETSA was established in connection with services rendered at the recently discovered non-associated gas fields, but similar agreements could presumably be reached for the oil sector as well.

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The Report: Kuwait 2012

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