Kuwaiti government focusing investment in heavy oil

Kuwait’s oil reserves include a total of approximately 13bn barrels of heavy crude oil, located primarily in the country’s northern fields of Raudhatain, Sabriya, Abdali, and Ratqa, as well as the Partitioned Neutral Zone (PNZ). Developing production in the northern Jurassic fields will help the government to meet the key objective of Project Kuwait to increase oil production capacity to 4m barrels per day (bpd) by 2020.

According to the US Energy Information Agency, developing heavy oil production from the Ratqa field is a major focus for Kuwait Petroleum Corporation (KPC), which plans to add capacity for another 60,000 bpd from the field by 2017 and up to 270,000 bpd by 2020. KPC is also exploring the possibility of expanding production from the Wafra field in the PNZ, with a goal of boosting output of heavy oil by over 80,000 bpd. The Wafra plant was shut down for maintenance in May 2015. The temporary closure removed 250,000 bpd from global supply during the maintenance period, though the cessation of operations was expected to continue through the end of 2015.

CLASSIFICATIONS: Heavy oil from these fields cannot be sold in its natural form and requires a different refining process to become commercially viable. The density of crude oil is measured in API gravity units, which essentially compare the density of the oil with the density of water. Oil with an API gravity below 10˚ would sink in water. Light crude oil, which is generally the most valuable, is defined as having an API gravity that is higher than 31.1˚, while heavy crude oil is defined as having an API gravity below 22.3˚. The heavy oil from Kuwait’s northern fields is estimated to have an API gravity in the range of 11-18˚, according to a paper written by the Kuwait Oil Company (KOC).

The density of oil has significant commercial consequences, as heavy oil costs an estimated $47 per barrel to develop, according to Rystad Energy consultants. This is almost double the average cost of producing oil in the Middle East, which is approximately $27 per barrel. Furthermore, the crude oil from these fields is sour, as it has a high sulphur content of more than 5% sulphur by weight, according to the KOC study. Sweet crude, in comparison, has a sulphur content that is below 0.5% by weight. The high sulphur content and the heavy density of the oil makes the refining process more complicated and is generally not possible using a conventional crude oil refinery.

VIABILITY: For these reasons, the commercial viability of developing Kuwait’s heavy crude oil depends on sustained higher global oil prices, which would need to remain above the threshold of $47 per barrel.

However, despite the fall in oil prices in 2014, the government of Kuwait has moved forward with its plans to develop production from the country’s heavy crude oilfields. The country has set itself the target of increasing total output by over 30%, from a current capacity of approximately 3m bpd to an estimated 4m bpd by 2020 in order to maintain its share of OPEC production. The decision to develop the heavy crude oilfields indicates that the country needs to tap into these reserves to compensate for depletion in production from other fields over the next five years and to add capacity in order to meet the 2020 target.

DEVELOPING HEAVY CRUDE OUTPUT: The central tenders committee awarded its first engineering, procurement and construction (EPC) contract to develop new heavy crude oil production capacity in the northern fields in January 2015. A consortium which was led by UK-based Petrofac and Athens-based Consolidated Contractors Company (CCC), the largest construction firm in the Middle East, won the $4.2bn contract. Targets for phase one of the Lower Fars Heavy Oil Development include the capacity to produce 60,000 bpd of heavy crude by 2018. The Lower Fars development in the Ratqa field will be the first crude oil production facility in Kuwait to utilise the cyclic steam stimulation techniques and other advanced enhanced oil recovery (EOR) processes to maximise production limits.

The project has been in the pipeline for a number of years. The state initially signed a deal to develop the Lower Fars site with ExxonMobil in 2007 but eventually set the plan aside. The front-end engineering design (FEED) was finally awarded to WorleyParsons, an Australian consulting firm. According to the FEED work, which was completed in 2012, phase one of the Lower Fars development will include extensive data collection, building central process facilities, developing water treatment facilities, drilling an estimated 900 wells, piloting EOR techniques to optimise production and constructing the additional infrastructure required for the remote location of the oilfield.

WORK PLANS: Phase two of work will increase the total production capacity and link the facilities with the Al Ahmadi export terminal on the coast with a pipeline system, including a 165-km line that will transport heavy crude from the central process facility to the South Tank Farm. This will give KPC the option of using production for the proposed Al Zour Refinery that is being built in the south of Kuwait. The third and final phase of work will develop utilities and other local production infrastructure. The total investment in the Lower Fars heavy crude oil development is expected to be in the range of $7bn, according to World Oil.

The EPC contract anticipates that work on developing the production facilities will take a total of 52 months, including 10 months to prepare the project and collect data. The plant will be turned over to KOC though Petrofac, and CCC will maintain a team for an additional eight months to support KOC with operations and maintenance of the facility.

In addition to investing in expanding production of its heavy crude oil reserves, Kuwait is also developing downstream refining capacity to distil heavy crude into higher-value products. While light crude is generally more valuable because it produces more expensive distillates such as gasoline, refiners are increasingly developing capacity to process the heavier crudes, which are suitable for producing lubricating oil and heavy gas oil.

Heavy crude oil produced at the Lower Fars development will eventually be transported to the planned Al Zour Refinery. The 615,000-bpd refinery is being built as part of Kuwait’s strategy to bring refining capacity to 1.4m bpd. While the project is complex due to the difficulties in processing heavier crude oil, KPC is drawing on experience from Venezuela and Canada, which hold 92% of the world’s heavy oil reserves, to develop the Lower Fars project and the Al Zour Refinery. The facility is being designed to process all of Kuwait’s heavy crude oil output, according to World Oil.

INVESTMENT PLANS: The Al Zour Refinery is one of Kuwait’s biggest projects currently in the pipeline. The government is expected to invest over $15bn in the new refinery, which will eventually be one of the largest oil refining plants globally. The project is a vital part of KPC’s broader strategy to develop its downstream capabilities. In addition to bringing more of the oil and gas value chain into the country, the Al Zour Refinery will also enable Kuwait to meet more stringent environmental indicators and thereby sell its petroleum products to a broader market. When completed, the refinery is expected to supply local power plants with low-sulphur fuel in order to reduce emissions.

The project received approval from the Supreme Petroleum Council in 2012, and a $528m project management consultancy contract with Amec was signed in the same year. Honeywell has already been selected to provide the integrated control and safety system. In 2014 the government awarded a preliminary construction contract to Dutch firm Van Oord. The firm is expected to carry out dredging work at the project site. The EPC contracts were awarded in July 2015, with the project completion expected by the end of 2019.

RESEARCH: In addition to investing in building infrastructure to extract heavy crude reserves and the processing facilities to refine the product, Kuwait is also investing in a comprehensive research and development programme to support its heavy crude oil investments.

The Kuwait Institute for Scientific Research manages the Heavy Oil Programme, which seeks to establish “a reservoir knowledge hub that will maintain advanced databases and offer advanced training and selected consultancy on issues related to the exploitation of heavy crude reserves in Kuwait”, according to the institute’s website. This facility has state-of-the-art laboratories to manage the research programme, which focuses on key areas, including tar-mat reservoir characterisations, in particular for the Burgan fields; heavy oil reservoir rock and fluid mobility characterisations to evaluate potential recoveries from the Burgan and Ratqa formations; reservoir damage management; as well as oilfield water management.

The Lower Fars and the Al Zour Refinery projects are both critical investments that will respectively increase oil output in the short term and enable the country to maximise the extraction of its resources in other heavy oilfields over the longer term. Furthermore, the Al Zour Refinery, which will eventually be one of the largest heavy crude oil refineries in the world, should give the country an edge in the downstream processing segment as regional trends indicate that the presence of heavy oil in the Middle East’s overall energy mix is on the rise.