Moving forward with new projects while increasing private involvement

With more than 100bn barrels of proven oil reserves, new discoveries in the north of the country and increasingly sophisticated extraction methods ready to be implemented, it is expected that oil revenues will continue to be Kuwait’s most significant economic pillar well beyond 2014. Kuwait ranked as the world’s sixth-largest oil producer in 2013, and despite having the second-smallest land area of all OPEC countries, the kingdom exports the third-largest volume of oil among members.

Focussed Efforts

The government’s ambitions to increase crude production by 33% within the next six years have brought a number of challenges into focus. The country’s power grid is struggling to meet demand, while laws limiting international oil companies’ (IOCs) participation in the industry have raised questions about how the government plans to effectively and efficiently develop technically challenging oil and gas fields in the country’s northern region and in the partitioned neutral zone (PNZ), which is shared with Saudi Arabia.

Recent moves to award major tenders for Project Kuwait and the Clean Fuels Project have demonstrated the government’s commitment to upgrades and expansion, although domestic political delays and indecision have hindered similar projects in the past. Expediting delivery of new energy projects, while increasing private sector participation in oil and gas production, will be critical to meeting long-term targets, as well as moving forward on ambitious renewable energy projects aimed at reducing the state’s dependence on hydrocarbons.

Sector Oversight

Kuwait’s oil sector and related policy are overseen by the Supreme Petroleum Council, led by the prime minister and composed of a rotating council of six ministers and six private sector representatives who each serve three-year terms. Policy implementation is overseen by the Ministry of Oil, whose remit includes both upstream and downstream segments, while the Kuwait Petroleum Corporation (KPC) controls domestic and foreign oil investments through a host of subsidiaries. Under KPC’s umbrella, the Kuwait Oil Company (KOC) manages upstream oil activities, including exploration and production activities, while the Kuwait National Petroleum Company (KNPC) controls the downstream segment. Petrochemicals operations are overseen by the Petrochemical Industries Company (PIC). The KNPC works with the Kuwait Oil Tanker Company (KOTC) to undertake export operations, while KPC’s foreign interests are managed by the Kuwait Foreign Petroleum Exploration Company, the Kuwait Energy Company and Kuwait Petroleum International.

Recent Reforms

The country’s oil leadership underwent significant changes in 2013 and 2014, including at the Ministry of Oil, which has seen nine different ministers appointed in the past 10 years. Mustafa Al Shamali was named oil minister in August 2013, but was replaced by Ali Al Omair in a reshuffle in January 2014. More significantly, the government replaced all managing directors at KPC and its subsidiaries in May 2013, a move aimed at injecting new blood into the oil sector. The reshuffle was also seen as a response to a $2.2bn compensation payment made to Dow Chemical Company following a failed 2008 deal to form a joint venture with the PIC.

Oil activities have played a prominent role in shaping Kuwait’s history, starting in 1913, when the first commercial prospecting activities began with an exploration mission from the British Royal Navy. Onshore activities kicked off in 1934 under a joint venture between British Petroleum and America’s Gulf Oil Company, which formed an early incarnation of the KOC. Oil was first discovered in 1938 in the Greater Burgan area, which has produced consistently for over 50 years, with production having begun after the Second World War.

The onshore segment was further developed by the American Independent Oil Company (Aminoil), which was nationalised in 1977. Getty Oil, later acquired by Chevron, was hired to develop the PNZ’s Wafra, Umm Gudair and Humma reserves. In the offshore segment, Japan’s Arabian Oil Company discovered the Khafji, Hout, Lulu and Dorra fields near the PNZ during the 1960s. The Kuwait Gulf Oil Company (KGOC) subsequently established two joint operating firms, the Al Khafji Joint Operations Company and the Wafra Joint Operations Company, in partnership with the Aramco Gulf Operations Company. Chevron and KPC remain participants in PNZ activities, but management of KPC interests has shifted to the KGOC, which oversees PNZ operations.

Oil Reserves

While Kuwait’s proven oil reserves are among the largest in the world, the famous Greater Burgan area has been in slight decline over the past decade. The government is now moving to drill new wells and increase both exploration activities and enhanced oil recovery (EOR) at new and existing fields to support efforts to reach an ambitious production target of 4m barrels per day (bpd) by 2020, up from present levels of about 3m bpd. The US Energy Information Administration (EIA) reported that as of 2013, Kuwait’s territorial boundaries contained approximately 102bn barrels of proven oil reserves, or around 6% of the global total. Kuwait ranks sixth in terms of overall oil reserves worldwide, with additional reserves held in the PNZ adding an extra 2bn barrels to the country’s total.

The majority of Kuwait’s reserves and production are concentrated in mature fields discovered between 1930 and 1960, with the largest of these, the southern Greater Burgan area, encompassing several reservoirs including Burgan, Magwa and Ahmadi. Burgan is the second-largest oilfield on earth, after Saudi Arabia’s Ghawar field, and generally produces medium and light crude, with American Petroleum Institute (API) gravities falling between the 28° and 36° range. It holds 70bn barrels of reserves spanning a 60-sq-km area south of Kuwait City, and contains five reservoirs, 2000 completed wells, 14 processing facilities and two disposal plants.

Enhancing Recovery

Burgan produces between 1.1m bpd and 1.3m bpd, nearly half of Kuwait’s total; however, the KOC reported in 2005 that the field had reached peak production at 1.7m bpd, necessitating the deployment of new EOR techniques to reach heavier, more technically challenging oil reserves.

In the past, oil producers typically only managed to recover about a third of a reservoir’s oil using traditional methods. Employing EOR techniques, including the injection of steam, chemicals or gas into a reservoir, allows companies to increase recovery by an average of 10%, according to Royal Dutch Shell. The Kuwaiti government has already introduced EOR in Burgan, with the Wara reservoir currently being developed using water-injection EOR techniques. A 2013 report published by the Society of Petroleum Engineers lauded early EOR efforts at Burgan, praising Kuwait for introducing EOR in a timely fashion.

“Potential benefits from EOR will have a huge impact on the extension to the life of Burgan and its strategic importance worldwide. This is the first time that the KOC has taken a bold step into the field without extensive laboratory screening. As a result of taking this calculated risk, the KOC has soared ahead in experience on EOR in the Greater Burgan Field, within a small timeframe,” read the report.

New Discoveries & Production

Additional production centres in southern Kuwait include the Umm Gudair, Minagish and Abduliyah reservoirs. Umm Gudair and Minagish produce a variety of crude oil grades, which offer API gravities of 22-34°. These fields have been among the first to see EOR techniques introduced. In 2003 water injection commenced at Minagish to offset natural production declines. Outside of Burgan, northern Kuwait holds the remainder of the country’s major oil reserves, much of it heavier and more sour (higher sulphur content). Kuwait’s second-largest reservoir, Raudhatain field, contains 6bn barrels of reserves and has a total capacity of 350,000-400,000 bpd, with the adjacent Sabriya field adding a further 100,000 bpd and holding an estimated 3.8bn barrels of reserves. A number of new discoveries in the region have increased long-term growth prospects. In 2009 an exploration well discovered light crude and associated natural gas at the Mutriba oilfield, west of Raudhatain, and production is now set to commence by 2015. Closer to the Iraqi border, the Al Ratqa and Abdali fields were obtained in 1993, following the conclusion of the 1990-91 Gulf War. They add another 75,000 bpd of production capacity, with development planned in multiple phases, the first of which will see the KOC tender an engineering, procurement and construction contract to reach 60,000 bpd of production by 2017. The KOC hopes to expand this to 120,000 bpd by 2020, which will involve construction of a production facility, pipelines, steam-generation facilities and an oil export facility.

Light Crude

Light crude oil has been discovered in the centre of the country, including in South Maqwa in 1984 and Kra’a Al Mara in 1990, although development has not progressed past the planning stages. Another successful discovery was made in 2006 in the northern Sabriya and Umm Niqa areas, which could add 20bn to 25bn barrels of reserves, although this oil is more heavy and sour than that found in Maqwa and Kra’a Al Mara.

The PNZ was established in 1922, covering an area of about 10,000 km and containing some 5bn barrels of oil and 1trn cu feet of gas. Production capacity in the PNZ is approximately 600,000 bpd, which is divided equally between Saudi Arabia and Kuwait. Onshore production stands at 240,000 bpd, and is currently in decline, according to the EIA. The Wafra oilfield, which contains approximately 3.4bn barrels in proven and probable reserves, is the PNZ’s primary onshore field and has been in production since 1954.

Chevron is currently working to offset field declines and boost production at Wafra to 80,000 bpd using steam-flooding EOR, which involves injecting steam into heavy oil reservoirs, reducing viscosity to allow for extraction. Front-end engineering and design work for the undertaking will commence in 2015, with the project expected to launch in 2017.

Further exploration is ongoing. In February 2014 the KGOC announced it had signed a $225m contract with Schlumberger subsidiary WesternGeco Company to execute the country’s largest ever 3D seismological surveillance in the Wafra field. Preparations commenced in March 2014, with surveying operations expected to begin before the end of the year, covering more than 4600 sq km.

Offshore

Offshore, PNZ’s production capacity stands at 350,000 bpd, although the KGOC plans to double this by 2019. Approximately 85% of current offshore production is sourced from Khafji, an extension of Saudi Arabia’s Safaniyah field, the largest offshore field in the world. However, difficulties in accessing crude reserves have made the cost of offshore extraction within the PNZ four times higher than in the rest of Kuwait, which has contributed to ongoing delays in offshore development. The Hout and Dorra fields are not currently under production, and recent announcements have resulted in a less-promising outlook for Kuwait’s PNZ activities.

In December 2013, following months of political deadlock and an August 2013 decision to shelve further development at the Dorra offshore gas field, The Wall Street Journal reported that Saudi Arabia planned to move forward on expanding capacity at Khafji without Kuwait’s participation.

Exports

Kuwait consumes only a small portion of its oil production, with the EIA reporting the country used a total of 406,000 bpd in 2012, leaving the majority of production available for exports. Domestic consumption has been rising steadily, however, led by increased oil-fired electricity generation. Kuwait is heavily dependent on oil export revenues, which account for 65% of GDP and 95% of all export revenues as of 2013. OPEC pegged the total value of Kuwait’s oil exports at $112.93bn in 2013, and expects the country will remain one of the world’s top producers as the government pushes towards its 4m-bpd target. Oil income dropped slightly during the first nine months of the 2013/14 fiscal year, according to government figures, hitting KD22.2bn ($78.1bn) compared to KD22.84bn ($80.3bn) in 2012. In late 2013 oil production briefly dipped to 2.9m bpd from 3m bpd, during a slowdown of OPEC oil output, although daily international oil consumption is expected to increase by 1.4m barrels, or 1.5%, in 2014. In January 2014 Kuwait Finance House said the country’s oil sector is expected to expand by 4% over the next six years, with OPEC projected to produce at below the group’s agreed ceiling of 30m bpd in the first quarter of 2014, which will keep oil prices stable in the short term.

Oil Prices

The Ministry of Oil expects prices to remain above $100 a barrel in 2014, largely as a result of significant production interruptions in Libya, Iraq and Egypt. In March 2014 KPC said it forecasts production to rise to 3.4m bpd by mid-2015, with current capacity standing at 3.25m bpd, according to Hashem Hashem, CEO of the KOC.

Kuwait’s crude exports are a single blend of all crude types, with most oil sold on term contracts. In 2013 the country’s crude exports stood at an estimated 2.07m bpd, according to OPEC, while the EIA reported that Kuwait’s net exports of total liquids totalled 2.4m bpd in 2012, the third-highest level worldwide after Saudi Arabia and Iran. In terms of markets, the Asia-Pacific region is the largest destination for Kuwait’s crude exports, receiving approximately 1.5m bpd of crude oil, followed by the US at 191,000 bpd, and Europe at 80,000 bpd.

Kuwait has several operational oil export terminals, the largest of which is Mina Al Ahmadi, followed by terminals at Mina Abdullah, Shuaiba and the PNZ’s Mina Saud. Government plans to increase output have led to new terminal construction on Boubyan Island, although this facility is still in the planning stages. Recent contracts awarded to private sector participants for the Clean Fuels Project, which will reduce sulphur levels in downstream production, as well as plans to construct the world’s largest oil refinery by 2018, will substantially raise production capacity, and suggest that the country’s export landscape could soon undergo a transformation.

Natural Gas

Thanks to its abundant and easily accessible oil resources, Kuwait has largely put natural gas development on the backburner. However, pressing new electricity demands is pushing the natural gas issue to the forefront of industry priorities. Growing demands for power and water, increased environmental concerns and new technological advancements have made gas extraction and processing an appealing endeavour for Kuwait. Hoping to diversify its oil-heavy economy, the government has moved to expand development of non-associated natural gas fields, with significant discoveries already made in northern Kuwait.

IOCs have shown strong interest in gas production, although foreign ownership laws and political uncertainty have so far prevented expedient development of the country’s gas reserves. Adding to the challenge is the fact that many of Kuwait’s gas fields, such as the Jurassic fields in the north, are technically challenging reserves consisting of tight, sour gas deposits that require sophisticated technology to harvest. IOC participation will be a key determiner of commercial gas extraction and production schedules. Kuwait currently relies on oil and natural gas to fuel its power and desalination plants, with the former being most common. Converting oil-fired plants to natural gas is a simple and relatively inexpensive process, improving efficiency, reducing emissions and freeing up additional oil for export.

In a March 2014 interview with KPC’s in-house magazine KPC World, Menahi Al Onezi, the KOC’s deputy CEO for exploration and gas, said that the country currently produces 1.35bn cu feet per day (cfd), while the company hopes to increase production to 4bn cfd by 2030. In 2011 Kuwait consumed approximately 502bn cu feet of natural gas, or around 1.4bn cfd, according to the EIA.

Electrifying

Kuwait’s electricity demand has sometimes outpaced supply, which has resulted in costly refinery shutdowns on several occasions, usually in the summer months but most recently when a January outage closed all three refineries for a week. Since 2009 the country has consumed more natural gas than it produces, according to the EIA, and any delays to the development of gas fields within the PNZ, which are estimated to contain 1trn cu feet of gas, will only exacerbate these problems in the longer term. With domestic electricity demand increasing by 20% between 2009 and 2013 (see analysis), the country has turned to liquefied natural gas (LNG) imports as one method through which to reduce dependence on oil-fired power stations.

In June 2009 Kuwait partnered with Royal Dutch Shell to import LNG, receiving its first LNG imports in August that year. KPC later signed another deal with energy firm Vitol in April 2010 to supply the country with LNG until 2013. In 2013 the EIA reported that Kuwait imports an estimated 245m cfd of LNG, largely from Qatar and Nigeria.

Special Delivery

Gas delivery is made through the Gulf’s regasification terminal, Mina Al Ahmadi GasPort, which has a capacity of 500m cfd. Kuwait has also recently expressed interest in LNG supplied from an upcoming natural gas project in southern Iraq, led by a consortium of Royal Dutch Shell, Mitsubishi and Iraq’s Southern Oil Company. The KNPC announced in March 2014 it had awarded a design contract for a new onshore LNG import terminal to engineering firm Foster Wheeler. The terminal, which will have an initial capacity of 1.5bn cfd, is expected to be operational by 2020. Extracting domestic resources could prove a more profitable and sustainable solution to the LNG challenge.

Kuwait is hardly lacking for supply – the country holds an estimated 63trn cu feet of proven natural gas reserves as of 2013, according to the EIA. However, less than 1% of these reserves are extracted annually, and natural gas reserves have remained largely unchanged since 2006, despite the country’s rising dependence on natural gas imports.

Associated gas, which is found within petroleum deposits and commonly viewed as a by-product, comprises the vast majority of Kuwait’s gas production at present, standing at 1.2bn cfd as of March 2014. This gas had traditionally been flared rather than utilised, although the negative environmental impact of natural gas flaring, coupled with the fact that associated gas can be processed and used for onsite electricity generation, EOR and feedstock for the petrochemicals industry, have led the government to shift its strategy in recent years. “We’re trying to utilise associated gas now instead of flaring. In the 1980s this was not the policy, but today we only flare if there is an upset in the system, if there is an emergency. We do not flare purposefully; we flare to protect,” Mazin Nayef, technical professional specialist in the KOC’s electrical division, told OBG.

The KOC reported that gas flaring was reduced to 1.32% for the 2011/12 fiscal year, dropping to its lowest level in history, 0.7%, in August 2011. The KOC also reported an unprecedented reduction in gas flaring in northern Kuwait, which was estimated at 0.21% in October 2011. As of 2013 the country flared some 1% of its associated gas, which has resulted in $2.75bn in energy savings, according to Hosnia Hashim, the KOC’s deputy managing director for north Kuwait.

Promising Source

Non-associated gas, or raw natural gas extracted independently of other petroleum products, is viewed as the most promising source of gas production growth in Kuwait, especially given new discoveries in the northern Jurassic fields. Production is currently low compared to associated gas. Non-associated production reached 145m cfd in March 2014, an increase over the 140m cfd output in the previous year, although the government hopes to significantly expand non-associated production to 600m cfd by 2016, and 1bn cfd by 2020.

Jurassic Future

The non-associated Jurassic fields, discovered in 2006 and estimated to contain 35trn cu feet of gas, are a promising source of future supply. The project has been described as one of the most technically challenging in the world, however, due to the reserve’s geological composition. A 2013 report by the Journal of Petroleum Technology highlighted some of the technical difficulties facing production, which include extracting highly corrosive sour gas from deep, high-pressure, high-temperature reservoirs. “The well fluid is characterised by high hydrogen sulphide (5%) and carbon dioxide (5%) content. Handling such highly corrosive well fluid creates a wide range of challenges, from upstream at the wellhead to downstream at the processing facility,” read the report. The government hoped that the first phase of the Jurassic fields would produce 175m cfd of natural gas, although it has so far only hit 145m cfd. The EIA had reported that the second phase target, to reach 1bn cfd by 2015, was unrealistic given project delays, and the KOC has since adjusted its production objectives.

The KOC’s Al Enzeni told KPC World that the company now hopes to reach 1bn cfd by the project’s third phase, which will be completed in 2020. The second phase target has been re-adjusted to 600m bpd, and the company plans to build 12 additional wells in the Jurassic fields annually until these milestones are achieved, according to Al Onezi. The field was also expected to reach a light crude production capacity of 350,000 bpd by 2015, although the KOC has since adjusted this to 300,000 bpd by 2020.

Kuwait’s Kharafi National is implementing the project’s second phase, which includes the construction and commissioning of an oil and gas treatment facility, under a build-operate-transfer model in which control of new production facilities would be handed over to the KOC after five years. In 2012 the company announced it had appointed the UK’s Petrofac as a sub-contractor to replace Italian firm Saipem as it works to complete the second phase, which is expected to create capacity of 500m cfd. Phase two’s deadline has since been pushed from 2013 to 2016.

IOC Participation

More promisingly for foreign investment, enhanced technical service agreements (ETSAs) have been adopted as a method through which to increase IOC participation in energy activities. While the Kuwaiti constitution prohibits any use of production-sharing agreements that provide an equity stake for IOCs in development projects, ETSAs can be used to ensure IOC expertise is utilised in challenging projects, and have frequently been employed to support EOR activities. According to Nouf Al Abdulrazzaq, the general manager of BP in Kuwait, “There is limited technical support in the industry and the government is now focusing on the right way to attract IOCs and services to push the agenda to cover upstream, downstream and petrochemicals.”

ETSAs offer a fee in exchange for technical expertise from foreign oil companies, without providing ownership of any resources to the company. Under the ETSA framework, agreements do not require parliamentary approval, and high fees are commonly combined with performance-based payments, making an ETSA an attractive option for multinationals hoping to enter the market. Royal Dutch Shell was one of the first to make such an agreement, and has been developing the Jurassic project through an ETSA signed with the KOC in 2010. The ETSA enables the company to provide support within the constraints of sector legislation. Its role is not that of a traditional oilfield service provider or operator; rather, it acts as supporter through an integrated technical approach, on a performance-based reward basis, with the KOC as the controlling owner/operator.

Signing Up

Agreements such as the Shell ETSA are becoming increasingly common. In July 2010 the KOC signed a memorandum of understanding with Japan Oil, Gas and Metals National Corporation to assess the feasibility of injection of carbon dioxide as a potential EOR technique, while in August 2010 Petrofac signed a $430m deal with the KOC to boost capacity at Raudhatain and neighbouring Sabriya fields using water-injection EOR. In the same month Kuwait and Iraq agreed in principle to increase IOC participation in their jointly developed oilfields.

Political tension has hampered the signing of new ETSAs, however, with the Shell ETSA falling under a parliamentary probe in 2011, which was then referred to the public prosecutor in 2012. In May 2013 online publication Energy Intelligence reported that the results of the probe would be released before 2014, though it had not yet been published as of June.

“One big challenge is to find an effective model for working with IOCs. Other countries, like Saudi Arabia, have really encouraged foreign investment, so you have seen many new joint ventures signed. On the other hand, Kuwait signed a joint venture with Dow, having obtained all the necessary approvals, and then after pressure from parliament, the deal was cancelled and Kuwait had to pay damages. This political interference sends the wrong signals to foreign multinationals,” Nader Sultan, the CEO of Ikarus Petroleum Holdings, told OBG.

Water

Rising domestic demand, oil production and new EOR techniques have all led to unprecedented demands for water in Kuwait. While the country has the smallest amount of renewable water resources in the world, it has experienced a more than 10-fold rise in water consumption since 1970, according to the Kuwait Institute for Scientific Research (KISR).

In 2012 Kuwait recorded the highest water consumption in its history, with per-capita consumption reaching 500 litres per day, one of the highest rates worldwide. The Ministry of Electricity and Water (MEW), which oversees these resources, has pointed to the fact that heavy government subsidies, which cover more than 90% of water costs for residents, are unsustainable. For example, distilled water is priced at just 20 fils ($0.07) per 1000 gallons (3785 litres) at farms in the Sulaibha area, and 100 fils ($0.35) per 1000 gallons at state facilities and firms.

“With misuse, 1000 gallons can be consumed per day in a single household. Each person consumes 140 gallons per day, which is very high. We want to reduce usage by at least 70 gallons, but water costs are heavily subsidised, and it is difficult to change citizens’ mentalities,” Suhailah Marafie, director of the MEW’s department of studies and research, told OBG. With low annual precipitation, Kuwait has turned to desalination plants to meet demand. The KISR pegged the cost of providing water to citizens at over $1.2bn annually in 2011, and projected that at current rates, the entirety of Kuwait’s oil revenues will be needed to fund water treatment by 2050, unless new technologies are applied to reduce the cost of desalination. The country’s desalination capacity stood at estimated 453m gallons per day (gpd) as of December 2013. The government and KISR have moved to rapidly meet new demand, with the Kuwait Financial Centre (Markaz) reporting that total investments in the water sector reached $5.28bn between 2005 and 2014. The government has channelled $3.4bn into water treatment plants, including the construction of the Sabiya distillation plant’s first and second stages, the Shuaiba north distillation plant, and the Shuwaikh reverse osmosis and desalination plant. Construction of the Al Zour North distillation plant, expected to open in 2014, will also improve the country’s water supply, involving construction of 15 multi-stage flash distillation units, each with a capacity of 17m gpd, in addition to a reverse osmosis desalination plant with a capacity of 25m gpd, for a total capacity of 280m gpd.

The ministry has additionally implemented a new citation system to ensure customers reduce water usage and pay overdue bills, reporting in December 2013 that it had successfully reduced water usage by 4%, equating to $194m in savings.

Outlook

Extracting hydrocarbons reserves using sophisticated EOR technology, while simultaneously pushing for new gas production, will help the energy sector maintain momentum as it moves towards its 2020 production goals. The challenging nature of new developments has provided a strong impetus for sustained public-private cooperation. Kuwait’s recent reshuffle of key positions within the industry and the influx of new agreements to implement expansions and upgrades highlight the long-term opportunities for stakeholders. Pressing issues in power and water will continue to challenge the sector in 2014; however, with increasing focus on natural gas and renewable resources opening new doors for investment, the sector is expected to maintain its lead in terms of fuelling economic growth.