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Major changes in offing as Kuwait revenues soar

Kuwait Times: Major changes in offing as Kuwait revenues soar

“Three consortiums of IOCs are keen to lead the project that should produce five billion barrels of crude oil over a 20-year period. The group leaders are BP, heading Occidental Petroleum (US), ONGC Videsh and Indian Oil Corp.; ExxonMobil – Royal Dutch/Shell, ConocoPhillips (US) and Maersk Oil & Gas (Denmark); and ChevronTexaco – France’s Total, Russia’s Sibneft, Petrol- Canada and China’s Sinopec.”

29 September 2005

Moin Siddiqui

Sep 29, 2005

KUWAIT: Kuwaiti MPs have finalised a much anticipated draft law for the $7 billion Project Kuwait scheme to allow foreign oil companies to develop northern oil fields. The next step is a full debate in October. Kuwait, the sole owner of nearly one-tenth of the world’s proven oil reserves, is keen to liberalise its petroleum industry, assuming however, the government can overcome deepseated political and legal obstacles to foreign direct investment by the oil multinationals into upstream exploration/production activities. The country’s economy is in exceptionally robust shape, reflecting higher crude prices and production. The petroleum sector accounts for 90 per cent of state revenues and about half of the total national output. Real gross domestic product (GDP) increased at an average annual rate of 8.5 per cent over 2003-04, “its highest pace in the preceding decade and a half,” according to the International Monetary Fund (IMF) Executive Board 2005 Article 1V Consultation report.

Besides terms of trade gains, the removal of the security threat from Iraq after the US-led invasion has lifted the confidence of private investors and project financiers. Hence, investors are more inclined to take on long-term Kuwaiti risk.

The recently passed ‘Foreign Investment Law’ allows foreigners to acquire 100 per cent equity ownership in listed Kuwaiti companies. An amendment to the tax law [awaiting Parliamentary approval] will reduce the corporate income tax on foreign companies from 55 to 25 per cent.

Substantial oil windfalls have underpinned ‘twin surpluses’ on the state budget and balance of payments, as well as substantial reserve accumulation – including foreign portfolio investment. The IMF expects Kuwait to record the world’s highest current account surplus-to- GDP ratio this year and next, averaging 37.8 and 34.7 per cent, compared with 29 per cent of GDP in 2004. The central government budgetary position, too, remained healthy in 2003/04 and 2004/05 due to significantly higher oil-receipts, with annual fiscal surpluses at about one-fifth of GDP, the IMF report said.

Most of the fiscal surplus was used to boost assets of the Reserve Fund for the Future Generation and the General Reserve Fund-both managed by Kuwait Investment Authority (KIA). The US Energy Information Administration projects Kuwait’s oil earnings for 2005 and 2006 at $36.9 billion and $40.3 billion, respectively, up from $27.4 billion in 2004. The price for Kuwaiti Export Crude averaged $46 per barrel in the first seven months of 2005, an increase of 44 per cent on the previous year.

Therefore, soaring export revenues have boosted state funding for modernising the ageing upstream and downstream infrastructures. The government has unveiled a massive investment programme costing $55 billion over the next 15 years aimed at expanding output and processing capacities of energy sector, thus ensuring Kuwait’s future status as a major global producer. Sheikh Ahmad Fahd A-Sabah, the energy minister, said: “We look forward to seeing the Kuwaiti oil industry achieve more success and prosperity, and attain the position of prominence that it aspires to in the Gulf region and in the world.”

Key projects in the pipeline include new refineries, oil export terminals and several large petrochemical facilities in joint ventures with foreign companies. Though Kuwait boasts the world’s fourth-largest proved oil reserves [101.5 billion barrels] after Saudi Arabia, Iran and Iraq, but it currently produces under three per cent of global output. By contrast, Russia with [reserves of 69.1 billion barrels] accounted for 11 per cent of total output in 2004. There are some 1,600 producing oil wells across the small emirate [6,900 sq miles]. The Greater Burgan area comprising (Ahmadi, Burgan and Magwa reservoirs) holds three-quarters of Kuwait’s recoverable reserves or 76 billion barrels. The super-giant ‘Greater Burgan field’-discovered in 1938, started production in 1946 — holding proven reserves of 50 billion barrels, ranks as the world’s secondlargest after Saudi Arabia’s Ghawar field [70 billion barrels].

After more than 45 years of maximum production [1.6-2.0mn barrels per day], the field is now probably two-fifths depleted. Therefore, Kuwait Oil Co (KOC), in charge of the upstream hydrocarbons industry, wants to extend the lifespan of the Greater Burgan field by reducing its average production to 1.2mn bpd and to allow reservoir pressure to recover in coming decades. Other major fields are Raudhatain, Sabriyeh and Minagish, boosting combined remaining reserves of 14 billion barrels. These onshore fields have been productive since the 1950s. The South Magwa field, discovered in 1984, contains around 25 billion barrels of light crude oil – surpassing China’s entire reserves of 23.7 billion barrels. In September 2003, Kuwait struck one billion barrels of very light crude at the Kara Al-Marou field and discovered new light oil deposits at Sabriyeh. Overall, two-thirds of total production, averaging 2.1million bpd over 1995-2004, came from southeast Kuwait, with about one-fifth and one-tenth, respectively, from northern and western areas.

This year, KOC’s productive capacity has risen to 2.8mn bpd, following the restart of a major Oil-Gathering centre No 15 (which separates crude oil from water and associated gas) at northern Raudhatain field. The International Energy Agency reckons total sustainable capacity could hit the three million bpd mark by 2007 even without Project Kuwait. Exploration & production (E&P) costs, averaging [$1.5-2/barrel] are among the lowest in the world.

Kuwait has ambitions to double output capacity to four-five million bpd within 15 years. The longer-term goal is 10mn bpd by 2025 – equivalent to eight per cent of projected world demand [125.5million bpd]. But unless the oil multinationals are granted access to major fields and expansion projects, KOC may be unable to achieve such ambitious production goals from its own technical expertise and resources.

The complex northern fields also require advanced reservoir recovery techniques of the international oil companies (IOCs). Industry analysts estimate that hiking output to four million bpd level will produce as much as 10mn bpd of water. This increased ‘water cut’ must therefore be processed and disposed of. Kuwait is also expanding its crude and refined product export facilities in line with an upstream expansion programme. It will invest $900mn on Mina Al-Ahmadi, the main oil terminal in order to increase total export capacity to 3.5mn bpd in the coming years, up from currently two million bpd. Furthermore, a new terminal is envisaged for Bubiyan Island – for handling additional output from northern/western areas.

The controversial ‘Project Kuwait’ will represent a major landmark in the state’s oil history, leading to active participation of oil majors, assuming however, the National Assembly (Parliament) gives its final approval. Bureaucracy and politics have hindered the scheme, first formulated in 1997 by the Supreme Petroleum Council. The constitution stipulates that ‘natural resources must remain in Kuwaiti ownership’, and forbids the award of concessions, production-sharing agreements (PSAs), and the [booking] of hydrocarbons resources by foreign entities. Since the industry’s nationalisation in 1975, the Kuwait Petroleum Corporation’s relations with IOCs are limited to technical advice, construction and general maintenance services under specific contracts. The government has, however, structured future contractual ties with IOCs, based on ‘operating service agreements,’ (OSAs), whereby Kuwait retains absolute ownership of reserves, control over oil production and strategic management of the venture.

Ahmed Al-Arbeed, managing director of Project Kuwait, remarked: “It seems to us there’s tangible progress and positive indications as a result of the changes undertaken on the project plan to make it more in line with parliament’s orientation. We hope this project will be approved soon.” The long-delayed project aims to hike output from four northern fields – holding proven reserves of 10 billion barrels [the same as Norway’s total reserves] to 900,000 bpd within three years. The IOCs’ technologies are essential to rehabilitate the ageing fields-Abdali, Ratqa, Raudhatain [largest] and Sabriyeh – which are currently producing about 530,000 bpd. Kuwait Petroleum Corp.; (KPC) will grant 20-year technical/operating service licences, renewable by a further 10 years. Foreign operators will bring in high-tech skills, project finance and manage the wells, but IOCs are [not] entitled to ownership rights over oil reserves and production levels. Al-Arbeed said: “The IOCs should provide the required capital estimated to be $9 billion or the equivalent of 2.8 billion Kuwaiti Dinars, during the contract’s life which is 20 years.” In return, IOCs will receive annual ‘per barrel fees’ covering 100 per cent capital/operating costs, plus allowances for capital recovery, cost reduction, and additions to the fields’ reserves.

A Kuwait official explained: “The companies… will receive specified wages for each [oil] barrel produced as well as other cash wages for operational services to be provided by these firms. The wages will not be impacted by oil prices.” Projected returns over the investment period should be US$3.2 billion, according to Sheikh Ahmad Al-Fahd Al-Sabah.

The bill sets the rate of corporate tax payable by local and foreign companies on the project at 25 per cent. Three consortiums of IOCs are keen to lead the project that should produce five billion barrels of crude oil over a 20-year period. The group leaders are BP, heading Occidental Petroleum (US), ONGC Videsh and Indian Oil Corp.; ExxonMobil – Royal Dutch/Shell, ConocoPhillips (US) and Maersk Oil & Gas (Denmark); and ChevronTexaco – France’s Total, Russia’s Sibneft, Petrol- Canada and China’s Sinopec.

From KPC’s perspectives, the project offers distinct strategic/ commercial benefits. These include gaining access to supermajors’ global marketing networks; sophisticated techniques for reservoir management and enhanced recoveries of untapped oil/gas reserves; efficiency gains from costsavings; and up-to-date industrial training and job opportunities for nationals. Under the contract, fourfifths of the workforce must be Kuwaiti nationals. Also, the IOCs are expected to build a new infrastructure, including housing and an export terminal at Bubiyan.

The bill was approved by the Finance and Economic Committee in June 2005, with amendments limiting its scope to four of the five fields. Final passage by the National Assembly is still pending, but is expected by the end of 2005. The Project Kuwait scheme could act as a catalyst for external participation in other upstream E&P projects, e.g., the western fields of Minagish and Umm Gudair. But the largest reservoir [Greater Burgan] will probably remain off-limits to foreign operators.

Kuwait National Petroleum Co (KNPC) operates three refineries in the southern area – with a combined capacity of about 930,000 bpd. The largest refinery is Mina Al-Ahmadi, followed by Mina Abdullah and Al-Shuaiba-1. More than two-fifths of oil exports comprise refined products, which are mostly exported to Asian countries. Robust global demand over the past two years has kept Kuwait’s refining sector running at almost full capacity.

KNPC plans to increase refining capacity to above 1.3mn bpd by 2010 by building a fourth refinery [Al-Shuaiba-11] and upgrading the current sector. A contract for an upgrade to the Mina Al-Ahmadi refinery (present capacity of 442,700 bpd) was signed with South Korea’s Hyundai in May 2005. The project [costing US$400mn] should produce from 2007 onwards lower-sulphur diesel/gasoline and reduce the proportion of fuel oil in its product mix. More importantly, work on a new ecologically-friendly plant, with a crude processing capacity of 615,000 bpd of cleaner fuels for power generation plants and export markets, should begin in 2007 and completed by early 2010.The plant situated at the Shuaiba industrial zone, will boast the capacities to process 225,000 bpd of sour crude for five power stations (Doha-East, Doha-West, Al-Subiya, Shuaiba-South and Al-Zour-South) and 375,000 bpd of high quality refined products (kerosene and diesel) for exports, according to Ahmad Al-Jeemaz, KNPC’ project manager. The US-based Fluor Corp; was awarded a contract last November for the initial design and engineering work and IOCs will be invited to bid for the construction of the Gulf’s largest ever grassroots refinery project, estimated to cost US$6.3 billion. The ageing 200,000 bpd Shuaiba plant is expected to ease operations in 2010 – hence the need for Al-Shuaiba 11.

Kuwait is seeking to develop a diversified economy [like Qatar and the United Arab Emirates], which can increase the value of hydrocarbons resources, and thus better withstand any future downward trends in world oil markets. The petrochemicals sector, too, offers potential for new investment worth KD1.8 billion ($6.1 billion). Petrochemical Industries Co (PIC) – in charge of production/ marketing of chemical products such as liquid ammonia, fertilisers, sulphur, urea and polypropylene for export markets in the Middle East, Asia, Europe and East Africa. PIC also owns a 45 per cent stake in Equate Petrochemical Co – Kuwait’s largest chemical project (costing US$2 billion). The Equate complex at Shuaiba, operates a 650,000 tonnes/ year (t/y) ethylene cracker, plus a 350,000 t/y ethylene glycol facility and two polyethylene units with an annual capacity of 450,000 tonnes.

The industry is now moving up market to produce higher-value products such as aromatics and olefins. PIC and Dow Chemical (US’s largest producer) are building an ethylene & derivatives complex modelled on Equate. The Energy Minister said: “The olefins and aromatics plants, which have a total cost of more than $3.5 billion, will be new additions to Kuwait’s petrochemicals industry. We will be among leading countries in petrochemicals industry.” Equate 11 facilities (expected online by 2007) should possess capacities of 450,000 t/y polyethylene; 600,000 t/y ethylene glycol/ ethylene oxide; and 850,000 t/y of ethylene. Saad Al-Shuwaib, chairman of PIC, said: “We will be ready to start production by 2008.” The projects have attracted substantial foreign direct investment. Kuwait, among the very few oil exporters with surplus capacity, has made significant progress in both upstream and downstream sectors during the past 13 years. Back in 1992, oil production was just one million bpd, whilst refining capacity plunged to 380,000 bpd.

Notwithstanding the achievements, today’s productive capacity is still incommensurate with the emirate’s optimal potential. Its petroleum industry is capable of ranking among the world’s top-five producers. Besides sustained capital spending, increased future production will require tapping into the technical and managerial expertise of oil multinationals.

Hopefully, the success of Project Kuwait should encourage the National Assembly to allow greater foreign intervention in upstream capacity expansion programmes in the coming years. In essence, rehabilitating the matured northern and western fields could prove quite difficult without external assistance.

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