Kuwait: Expanding downstream

With a recent increase in oil production and global crude prices above $100 per barrel, Kuwait is expected to run a substantial fiscal surplus in 2011 thanks to its hydrocarbons export revenues. But the country is looking beyond the market for crude oil and investing in refineries both at home and abroad.

Last month local media reported that Kuwait’s production had reached 2.9m barrels per day (bpd) in September. This is the highest level since output peaked at 2.85m bpd in September 2008, local media reported. Both Kuwait and Saudi Arabia have ramped up production in recent months, in part due to a drop in exports from Libya and surging demand from Asia. This increase came despite their inability to convince other OPEC members to raise output quotas during the 12-nation producer bloc’s most recent meeting in June.

The minister of oil, Mohammad Al Busairi, said that the move by Kuwait to increase production had tempered volatility in global oil prices. “Without such a measure, the prices of the oil 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 said.

While this move may stabilise prices moving forward, Kuwait is nonetheless expected to earn $104.10 per barrel on its oil exports in 2011, according to the latest IMF Article IV staff report for the country, a significant increase over $58.20 in 2009 and $76.40 in 2010. Oil export earnings are accordingly forecast to grow from $61.7bn in 2010 to $85.9bn in 2011. As a result, the fiscal surplus is expected to rise by almost 5.5 percentage points to reach 26% of GDP in 2011, despite the fact that the government has budgeted a substantial increase in expenditures.

The National Bank of Kuwait (NBK) has painted a similar picture in its August 2011 Economic Brief. As the NKB report notes, the government has assumed an oil price of $60 per barrel in its budget for fiscal year 2011/12, a substantial jump over the $43 per barrel used in the previous year’s budget, but still far below market prices.

With a 20% increase in spending planned, the government has projected a deficit of KD6bn ($21.8bn) for 2011/12. However, NBK has estimated that, with a more realistic assumption regarding oil prices and actual spending slightly less than budgeted, the government will end 2011/12 will a surplus of KD9bn-10bn ($32.6bn-36.2bn). This would be the country’s 13th consecutive surplus.

Hydrocarbons exports account for more than 90% of government earnings, according to the IMF report. While most of this reflects crude oil revenues, Kuwait also sells refined petroleum products. The country has three refineries (at Mina Abdulla, Mina Al Ahmadi and Al Shuaiba), with a combined capacity of 936,000 bpd. Kuwait plans to build a fourth refinery and upgrade the two refineries at Mina Abdulla and Mina Al Ahmadi as a means of meeting future demand.

The country has also mounted a strong push to build refineries and other downstream facilities in Asia, including two joint ventures in China and Vietnam. Also under consideration is a project in Indonesia, an $8bn-9bn oil refinery on the island of Java that would have a capacity of 300,000 bpd, effectively more than doubling current local oil processing capacity. Kuwait Petroleum Corporation (KPC), the state-owned energy company, would partner with Indonesian state oil and gas company Pertamina to build the facility, with KPC supplying crude oil at a discounted price, international media reported.

In May, Hussein Ismail, the chairman of Kuwait Petroleum International (KPI), which controls KPC’s global operations, said that construction of the facility in Indonesia could begin as early as 2012 and added that a feasibility study is ongoing. “The company is still studying the project and the economical aspects concerning it,” he said.

Local media reported in late August that KPI would receive an income tax break for up to 10 years but added that the Kuwaiti company had asked for additional financial benefits before proceeding with the project. According to Evita Legowo, the director-general of oil and gas at Indonesia’s Ministry of Energy and Mineral Resources, KPI has requested exemptions on import duties for equipment and chemical materials, a request that would be discussed with the minister of finance.

Kuwait’s investments in refining capacity demonstrate a broad strategy designed to increase the country’s role in the market for downstream products worldwide. Securing long-term projects in high-growth Asian markets should serve the country well as it decides how to gain the most value from its petroleum supplies and experience in the industry.