Kuwait remains solid as oil prices fluctuate

Along with Saudi Arabia, Iran, Iraq and Venezuela, Kuwait is a founding member of OPEC, which holds almost 81% of the world’s proven oil reserves, with over 66% of these stocks located in the Middle East. Despite having just over a 10th of the landmass of England, Kuwait holds the sixth-largest proven oil reserves in the world, according to the BP’s “Statistical Review of World Energy 2014”.

History

Kuwait made its first discovery of oil in the Burgan field in 1938, and the first shipment of crude oil took place less than a decade later in 1946, marking the beginning of Kuwait’s central role in the global energy markets. Burgan 1, the country’s first oil well, tapped into the tip of the state’s vast resources and still produces oil today. By the end of 1950, there were 99 productive wells in Burgan pumping 344,000 barrels per day (bpd), according to GEO magazine. At the same time, oil was discovered at other sites around the field, and production from the entire field stood at 1m bpd by 1955.

Kuwait gained political independence in 1961, but took more than a decade to gain full control of its vast hydrocarbons resources from British and American oil majors. The government gradually bought shares in the Kuwait Oil Company (KOC) throughout the early 1970s, gaining full control of the company in 1975. In 1980 the government created Kuwait Petroleum Corporation (KPC) to bring all state-owned oil businesses under a single entity, and the new structure enabled a more integrated planning and investment programme in the oil and gas sector. Each KPC subsidiary was handed full control over its core business, which gave the companies the necessary flexibility to expand and grow. KPC was then given the mandate of marketing and selling the country’s oil into international markets.

Expansion & Acquisitions

While the 1990 Gulf War was a major setback for the industry, KPC was able to resume production at full capacity within months of Kuwait’s liberation. In the early 2000s the country increased its efforts to explore and develop its non-associated gas fields. This marked a critical juncture for Kuwait, as gas production, which was primarily used for power generation, had been limited by the country’s OPEC production cap until the discovery of non-associated reservoirs in 2006 in the Jurassic reservoirs at Rahiya, Mutriba and Um Niga.

Throughout this period, KPC also invested in expanding its global reach through a number of major acquisitions. Many of the company’s international investments focused on downstream activities in order to develop dedicated markets for the country’s crude oil exports. The national oil company has also invested in expanding and maximising production from its own internal reserves.

KPC discovered super-light crude oil at the Sabriya field in 2005, which marked an important milestone for the company’s exploration abilities.

The country also has ambitious plans to increase its production capacity to an estimated 4m bpd by 2020 in a bid to maintain its role as one of the world’s top oil producing nations. The government has indicated that it is tackling some of the issues that have hindered its oil and gas production programme, including a lack of investment over the last few years, regulatory restrictions on foreign investment and major delays in developing upstream projects.

Oil Reserves

At the end of 2013 Kuwait’s proven oil supplies reached more than 101.5bn barrels, accounting for 8.4% of OPEC’s total stock of 1.21trn barrels of oil, or roughly 6% of global reserves, according to OPEC. The country’s economy is intricately linked with its petroleum export revenues, which account for over 57% of GDP and about 93% of export revenues, according to the IMF’s 2014 Article IV Consultation report for Kuwait.

OPEC notes that Kuwait has increased its production by more than 14% from an estimated 2.57m bpd in 2007 to an estimated 2.93m bpd in 2014. The country exported KD26.83bn ($92.43bn) worth of hydrocarbons in 2014, which accounted for 95.2% of the country’s total exports, according to the Central Statistical Bureau. The IMF forecasts that the total oil and gas revenues drawn from the export of these reserves will reach an estimated KD29.3bn ($100.9bn) in 2014-15, representing growth of over 65% since 2007-08, when total oil and gas revenues were estimated to be KD17.7bn ($60.98bn).

Kuwait was the fifth-largest exporter of petroleum products among the 12 OPEC members in 2013, behind Saudi Arabia, UAE, Iraq and Nigeria.

Production Sites

Most of Kuwait’s oil reserves are located in the Greater Burgan field, which is the second-largest onshore oilfield in the world after Saudi Arabia’s Ghawar field. The US Energy Information Administration (EIA) notes that the Greater Burgan reserve generally produces medium and light crudes, with API gravities ranging from 28˚ to 36˚.

The oilfield accounts for almost half of Kuwait’s current production, but the EIA estimates that the field has the potential to produce even more. KPC is investing in expanding capacity by implementing enhanced oil recovery processes.

Most of Kuwait’s larger fields outside of Burgan lie within the country’s northern region. EIA reports that the northern Raudhatain field, which has a capacity of 450,000 bpd, is the country’s second-largest source of production. The northern field of Ratqa also holds most of Kuwait’s heavy crude oil supplies, which are estimated to be in the range of 13bn barrels. Other major fields include Sabriya, which is estimated to produce 100,000 bpd, and the Umm Gudair and Minagish fields, which together maintain output of approximately 500,000 bpd.

The country also has additional reserves in the Partitioned Neutral Zone (PNZ), which is divided between Kuwait and Saudi Arabia. The two countries share revenues from the area, which is thought to hold some 5bn barrels of proven reserves.

Gas Reserves

Kuwait’s natural gas output has been generally limited to the extraction of associated gas from its oil production operations. While natural gas has not played a major role in the country’s economic growth so far, Kuwait does in fact have large reserves. According to OPEC’s 2015 statistical report, these stood at 1.78trn cu metres as of 2014. The country produced 16.5bn cu metres of natural gas in 2013, all of which was utilised by the domestic electricity generation market.

The EIA reports that production from natural gas discoveries in Kuwait’s northern region is a promising source of growth for the industry. KPC is currently investing in expanding production from these fields to almost 1bn cu metres of non-associated gas a day by 2020, according to InterFax Energy.

KPC’s investment programme includes plans to develop the 991bn-cu-metre Jurassic gas field in association with hydrocarbons major Shell. Phase one of the project is complete and now producing up to 4.8m cu metres of gas per day, while phase two and three of the development are currently in the works.

Sector Structure

Kuwait’s Supreme Petroleum Council (SPC), which was established in 1974, oversees all activities in the oil and gas industry, designs policies and approves major investments within the sector. The SPC is chaired by the prime minister and includes six ministers and six representatives from the private sector. The ministers of finance, oil, foreign affairs, and commerce and industry, as well as the head of the KPC and the governor of the Central Bank of Kuwait, form a core group within the council, while all other members serve three-year terms and are selected by the emir.

The decree establishing the body states that the SPC “undertakes the duty of drawing the general policy of petroleum wealth to maintain, exploit it properly and develop its associated and derivative industries for the purpose of securing the better investment of such wealth and realising the highest gains thereof and complete national petroleum integral industry”. In practice, this involves establishing policies on all hydrocarbons resources, including exploration and drilling for crude oil and natural gas; storing and refining crude and its derivatives; marketing and transporting oil and gas products and byproducts; and supervising research in the sector. Additionally, the council is also responsible for approving KPC’s strategy and investment plans.

The Ministry of Oil supervises the implementation of policy in upstream and downstream petroleum operations in the country as determined by the SPC, while KPC and its various subsidiaries execute these strategies and approved investments.

Kuwait’s constitution bans foreign ownership of state resources and revenues, which has made the process of working with the international private sector complicated. However, international oil companies (IOCs) still play a significant role within the hydrocarbons sector. The SPC has adopted a number of strategies designed to increase foreign participation through a product buy-back system.

Big Name

KPC serves as the umbrella company for all of Kuwait’s oil- and gas-related industries. The company has grown to become one of the most influential national oil companies in the world, with core activities in the exploration, production, refining, marketing and transporting of oil and petrochemicals. The company’s primary goal currently is to lift domestic oil production to 4m bpd by 2020. KPC exercises its mandate through a number of wholly owned subsidiaries within the sector.

State-owned oil exporter KOC’s story is that of Kuwait’s history in the oil and gas sector. The company was initially established by British Petroleum and the US Gulf Oil Company – which later became Chevron – to manage their operations in Kuwait.

As the sector was nationalised and when KPC was established, KOC took over all domestic exploration, drilling and production operations. As part of its mandate, KOC is also responsible for receiving, mixing, storing and exporting crude oil, as well as the marine operations at all the oil terminals in Kuwait through its Export and Marine Operations Group. The Kuwait National Petroleum Company (KNPC) manages KPC’s domestic downstream sector. KNPC was established in 1960 as the first national private company operating within Kuwait’s oil sector, which was dominated by foreign companies at the time. The government bought out KNPC in 1975 as part of its broader nationalisation programme. KNPC’s operations were eventually streamlined to focus on KPC’s domestic refining and gas processing operations. KNPC currently manages the country’s three refineries, among other strategic projects. The domestic operator is responsible for two of Kuwait’s biggest investment projects through the Clean Fuels Project and the Al Zour Refinery project.

Sector Specialists 

Other specialised companies focused on the domestic oil and gas value chain include the Kuwait Aviation Fuelling Company ( KAFCO), the Oil Sector Services Company (OSSC) and the Kuwait Gulf Oil Company (KGOC).

KGOC has a primary mandate of managing the country’s share of natural resources at Wafra Joint Operations in the PNZ and Al Khafji Joint Operations, located near Khafji, Saudi Arabia. The two countries share these reserves equally, with KGOC serving as Kuwait’s representative.

KAFCO is the sole supplier of jet fuel at Kuwait International Airport, delivering more than 800m litres of jet fuel annually. KAFCO operates a fleet of eight refuelling tankers, of which four have a capacity of 65,000 litres, two of 45,000 litres and two of 20,000 litres. OSSC provides support services for all KPC subsidiaries, including health and social benefits, housing and security-related services.

Global Reach

KPC also has a number of subsidiaries that manage the country’s foreign assets and operations. The Kuwait Oil Tanker Company (KOTC) serves as the main transport company for KPC, managing the country’s shipments of crude oil, refined petroleum products and liquefied petroleum gas (LPG) across the globe.

KOTC operates a modern fleet of very large crude carriers, petroleum product tankers and LPG carriers on a commercial basis in order to provide a strategic distribution network for KPC’s global oil exports. KOTC also operates a Marine Agency Branch, which serves as the sole agent for all tankers calling at Kuwait’s seaport and a Gas Branch that deals with filling and distributing LPG cylinders for local industry and domestic consumption.

The Petrochemical Industries Company (PIC) is KPC’s petrochemicals arm with major domestic and international operations. According to the firm, 70% of the petrochemicals products in PIC’s portfolio are produced in Kuwait. These include fertilisers, olefins and aromatics. PIC also owns two fertiliser plants for the production of ammonia and urea. The company operates under a number of local joint ventures, including EQUATE, with Dow Chemical, and Gulf Petrochemical Industries Company, with Saudi Arabia Basic Industries Corporation. In addition, PIC also has four plants across Canada, Germany and the UAE that it operates under joint ventures with Dow, while the firm is also attempting to diversify its reach geographically by tapping markets in Asia.

Global Interests

KPC established Kuwait Petroleum International (KPI) in 1983 to manage its refining and marketing interests globally. KPI launched a new brand identity in 1986, operating its retail services under the Q8 brand (see analysis). The firm expanded rapidly in the 1990s through a number of major acquisitions, such as Mobil’s retail petroleum network in Italy, BP’s assets in Luxembourg and a joint venture with Sweden’s OKF, which made OKQ8 the biggest fuel retail market player in Sweden.

In the 2000s Q8 expanded its airport refuelling operations in Western Europe and Asia. The company reports that it markets an estimated 301,000 bpd of product in Western Europe, with an additional 90,000 bpd sold directly from its two refineries in Italy and Holland through its network of more than 4000 retail stations across the continent.

Finally, KPC also owns the Kuwait Foreign Petroleum Exploration Company (KUFPEC), which has major operations in exploration, development and production of crude oil and natural gas in Africa, the Middle East, Asia, the UK, Norway, Canada and Australia. KUFPEC is currently active in 15 countries and has recently made significant investments in Canada’s energy markets. One goal has been to aid in the transfer of technology and know-how from Canada’s experience with heavy crude oil to support the development of Kuwait’s own heavy crude reserves.

IOCS 

Kuwait manages some of its operations through contracts with a number of IOCs, but has comparatively less foreign direct investment in the sector than its GCC counterparts. There is a constitutional ban on foreign ownership of Kuwait’s resources and revenues, which complicates the nature of international private sector participation in developing the country’s oil and gas resources. Production-sharing agreements, for example, are a standard incentivebased contract for IOC investments, but are deemed unconstitutional under Kuwaiti law.

However, leveraging IOC participation is a core part of Project Kuwait, the project initiated in the late 1990s to help the state achieve its ambition of boosting production capacity to 4m bpd. IOC involvement is targeted particularly for developing the more complex northern fields. Given the constitutional ban, the government proposed developing an incentivised buy-back contract that gives the government full ownership of oil reserves and revenues, while IOCs are paid per barrel extracted. However, the incentive structure under these contracts was still weak.

More recently, the government has again acknowledged the need for the technical expertise and knowledge IOCs can bring and has taken measures to increase foreign participation in the oil and natural gas sectors through new contracts known as enhanced technical and service agreements (ETSAs). These are more performance-based and increase the incentive for foreign participation. Shell, for example, signed an ETSA to develop the Jurassic natural gas field in northern Kuwait in 2010. However, political developments have delayed progress towards increasing output from the field over the past few years and have hindered investments from other international companies.

Export Blend

According to the EIA, Kuwait’s crude exports are a blend of all its crude oil output. Production from the Burgan field forms the basis for the blend, which includes the heavier, sour crude from the northern fields. The export blend is known as Kuwait Export and has an API gravity of 31.4˚, though it is quite sour with a sulphur content of 2.52%.

In 2013 the country exported an estimated 2.1m bpd of Kuwait Export, according to OPEC, most of which was sold on contract to India, South Korea, China, the US and Europe. Markets in the Asia-Pacific region have traditionally been the prime destination for Kuwaiti hydrocarbons exports. Around 75% of oil sold, or an estimated 1.5m bpd of Kuwait Export, landed in Asia in 2013. The US is also a major client, receiving an estimated 334,000 bpd in 2013, while European markets took approximately 83,000 bpd in that year, according to the EIA.

More recently, Kuwait has targeted growth in China, with exports jumping by 13.7% between 2013 and 2014, according to the state-owned Kuwait News Agency (KUNA). This trend is expected to continue going forward as KPC signed a 10-year contract with China’s Unipec to double supplies to 300,000 bpd in 2015. According to KUNA, the deal represents KPC’s biggest-ever crude oil sales contract by volume and revenue. Reuters reported that the deal for 300,000 bpd of crude oil would account for 15% of Kuwait’s petroleum exports and would be worth an estimated $120bn. The agreement is structured on a cost-plus-freight price, where KPC will utilise KOTC to deliver the crude oil supplies directly. KUNA also reported that KPC has renewed a long-term contract with South Korea, which has been purchasing an estimated 400,000 bpd of Kuwait Export.

In a bid to diversify its client base and to provide support to its regional neighbours, Kuwait is also expanding its supplies to Egypt to an estimated 2m barrels of crude oil a month. The deal would prioritise shipments to Egypt and could also include refined products such as diesel.

Oil Prices

While these export contracts ensure Kuwait has secured demand for its crude output, recent volatility and the plummeting price of oil has sent a shock through the country’s economy. Oil prices fell by more than 40% between June 2014 and December of the same year. Brent crude oil prices dropped to five-year lows, reaching levels that had not been seen since the global financial crisis.

On the supply side, there have been a number of developments that have raised the supply of crude oil outside of OPEC countries. American oil production, in particular, has risen sharply in recent years. While the country does not export significant quantities of oil, it is now importing far less. OPEC, which controls the vast majority of global supply, has considerable influence on oil prices, but has indicated that it will not cut production. One reason the bloc cites for this decision is that given the increase of oil supplies globally, any cuts from OPEC will simply be substituted with supplies from another country; a reduction in OPEC output would essentially subsidise more expensive production, such as shale oil.

Demand Side

On the demand side there are concerns that weakening economic growth across major markets, including Europe, China and other Asian economies, could lower the demand for oil in the short term. Markets saw something of a return to normalcy in 2015 as crude oil prices rallied in February on expectations that global oil output, which has been a key factor in dropping prices, will not increase. The price of Brent had rebounded somewhat by April 2015, surpassing $60 per barrel.

The price of Kuwait’s local crude, Kuwait Export Crude, also gained through February and ended April at around $60 per barrel. There are indications this price rally was fuelled by news that US oil companies are cutting production and reducing capital investment programmes because prices are no longer economical for shale projects, according to the National Bank of Kuwait (NBK).

Data showed that active US oil rigs reduced output by 39% from a peak in October 2014, according to figures from the NBK. A number of international players, including BP and Total, and some US shale oil producers, such as EOG, Noble Energy and Devon Energy, have indicated that they are cutting expenditures by 20-40% in 2015, according to the NBK. As of mid-August 2015, however, Brent prices had dropped to $50 per barrel.

Kuwait has responded to this volatility by amending its expenditure plans. The government cut its annual budget for 2015/16 by 17.8%, basing its spending projections on an average oil price of $45 per barrel, according to Arabian Business. Kuwait’s oil is relatively cheap to produce, which enables KPC to operate at a profit even at lower oil prices.

Bader Al Jenae, chairman of PetroGulf, told OBG, “The drop in the global oil price has not had as significant an impact on Kuwait as on other countries, due to the low cost of production and steady output.” However, the government’s heavy reliance on oil revenues does mean that Kuwait needs oil prices to remain above $54 per barrel in order to balance its annual budget moving forward, according to the Wall Street Journal and the IMF. While all indicators point to oil moving beyond this figure, Kuwait also has significant fiscal reserves built on major budget surpluses over the last 15 years.

Investment Programme

Despite the oil price shocks, the government of Kuwait has defied expectations and is pushing ahead with a major investment programme across the economy with a significant focus on the oil and gas sector. The government has outlined plans to develop critical infrastructure projects and a large number of major oil developments for a total five-year investment of more than $116bn, according to market data tracker Ventures Onsite. The Ministry of Oil has also indicated that spending in the oil and gas sector alone will top $100bn by 2020. The key goal is to increase output to 4m bpd and to invest in downstream activities to expand and diversify Kuwait’s energy portfolio.

Major energy sector investments include the multi-billion-dollar Al Zour Refinery and the Clean Fuels Project, both of which will vastly increase Kuwait’s downstream refining capacity. These projects will also enable Kuwait to process heavier crude oil. This will provide the necessary support for the country to expand its output from newer oil fields in the northern region that have significant reserves of heavy crude oil, thus boosting overall production.

Commitment

While there have been a number of investment plans that have not resulted in project execution over the last decade, there are indications that the government is committed to meeting its targets under this five-year strategy. For example, 2014 was a stellar year for the country’s projects market, with a number of major multibillion-dollar deals signed within the energy sector alone.

Furthermore, in addition to directing investments to strengthen the domestic oil supply chain, Kuwait is also targeting investments in foreign assets. Major deals in Asia, particularly in Vietnam, China and India, have expanded Kuwait’s supply chains and helped create dedicated markets for its crude oil supplies.

Electricity & Water

Kuwait’s electricity and water supply chains are closely linked to the country’s energy sector. The nation relies on its oil and natural gas supplies to generate the bulk of its electricity. Despite its vast resources, Kuwait has limited natural gas production and can struggle to meet peak electricity demand, particularly in the summer months. It has, therefore, increasingly diverted a portion of its valuable oil supplies to generate power. According to the EIA, oil was used as fuel to generate more than 70% of Kuwait’s power in 2011, while natural gas accounted for 28%, representing a significant drain on the government’s revenues.

The government is tackling this issue on two fronts. Recent deals and discussions with Shell, Qatar and Iran indicate that Kuwait is expecting to remain a net liquefied natural gas (LNG) importer and is securing LNG supplies for its power and water needs. Kuwait signed a deal with Qatargas in April 2014 to boost LNG supplies. A few months later, the government signed a $12bn LNG supply deal with Shell and a $3bn deal with BP in May 2014 to meet its total LNG import requirements, which are estimated to be more than 2.5m tonnes per annum, according to Reuters. The country is currently also undertaking supply discussions with Iran, which holds some of the world’s largest natural gas reserves.

In addition to importing LNG, however, Kuwait is also investing in developing its domestic natural gas output. KOC has reportedly shortlisted five IOCs to provide strategic advice on how to boost oil and gas output, according to Interfax Energy. Shell, BP, Total, ExxonMobil and Chevron are likely to bid for the five-year contract in the 2015/16 fiscal year.

Kuwait is also investigating the potential for developing alternative energy sources to help meet its growing electricity demand. The Kuwait Institute for Scientific Research is leading much of this work and has recently launched three projects with a combined capacity of 70 MW to test the efficacy of different renewable sources in the country.

These renewable energy projects include a concentrated solar power station with a capacity of 50 MW, a 10-MW photovoltaic solar station and a wind power station with a capacity of 10 MW, according to Technical Review Middle East. The project will feed into the national electricity grid directly, with the broader goal of easing the pressure on Kuwait’s power plants during peak seasons.

Independents

While KPC and its subsidiaries dominate Kuwait’s energy supply chains, the country is gradually seeing a few local independent companies spring up in this field. Kuwait Energy is one such company that is based in the country and has emerged as a niche player in MENA oil markets. Kuwait Energy is engaged in the exploration, appraisal, development and production of oil and gas, with a specific focus on the MENA region.

The company currently has 12 exploration, development and production assets in Egypt, Iraq, Yemen and Oman. In 2014 the company’s joint venture with the UAE’s Dragon Oil made a second oil discovery at Block 9 in Iraq. The consortium has also announced plans to further explore the site, along with the Egyptian General Petroleum Corporation, the national oil company of Egypt, which has bought a 10% participating interest in the consortium. The company had proven reserves of approximately 165.7m barrels of oil equivalent as of May 2014, with production touching 24,250 bpd of oil equivalent as of November 2014, according to company reports.

Outlook

Kuwait’s position as one of the biggest players in international energy markets is backed by the country’s large proven reserves of both crude oil and natural gas. The success of the national oil company has further ensured that revenues from this natural resources wealth have been strategically invested across global oil and gas value chains.

Although the past several years have been marked by parliamentary challenges that hindered investments in the energy sector, the Kuwaiti government has nonetheless demonstrated its commitment to reviving vital projects and investing in the country’s energy markets, with 2014 witnessing a number of large-scale deals that underlined the government’s commitment in this regard.

While international oil prices will have a significant impact on government revenues, low production costs and ample financial reserves will shield the country from the downturn. Furthermore, the announcement of the five-year, $116bn investment programme is expected to inject the oil and gas sector with significant momentum going forward.