Substantial energy investment set to drive renewed hydrocarbons production in Kuwait

 

The decision to invest $500bn in Kuwait’s energy sector by 2040 is part of the government’s drive to pursue significant increases in hydrocarbons production. Long-term goals include boosting domestic refinery throughput to 2m barrels per day (bpd) by 2035, and increasing crude oil production and non-associated natural gas output to 4.75m bpd and 2.5bn standard cu feet per day (scfd) by 2040, respectively. Included in the long-term strategy is a more immediate five-year $114bn capital expenditure plan starting in 2018, and medium-term goals of raising oil production capacity to 4m bpd by 2020, according to Nizar Al Adsani, CEO and deputy chairman of Kuwait Petroleum Company (KPC).

Track Record 

The decision to optimise the value of Kuwait’s natural resources came in 2016, during which time the government was managing a 4.5% current account deficit. Lower global oil prices beginning in 2014 have played a key role in lower production volumes, and over the previous decade the country’s track record in raising the production of oil, gas and refined products had been modest. According to the “BP Statistical Review of World Energy 2018”, Kuwait registered a 13.9% increase in oil production (including crude, shale and oil sands), from 2.66m bpd in 2007 to 3.03m bpd in 2017, compared with a 12.5% rise in global oil production to 92.7bn bpd over the same period. Meeting production goals of 4m bpd will require an increase of 32% from 2017 to 2020, while meeting 2040 targets of 4.75m bpd will necessitate a 57% rise.

As for throughput goals, delays in building and upgrading the country’s refineries have seen output of petroleum products decrease by around 0.7% per year in the 2006-16 period, to 841,000 bpd. With the closure of Shuaiba refinery in May 2017, output fell again to 701,000 bpd in 2017 marking a decline of 16.6% on the previous year. The Kuwait National Petroleum Company’s Clean Fuel Project will see production at the Mina Abdullah and Mina Al Ahmadi refineries rise from 736,000 bpd to 800,000 bpd once expansions and upgrades are complete in the fourth quarter of 2018. Still, with plans to boost figures to 2m bpd by 2035, refineries will need to increase output by over 185% over the next 15 years. The Clean Fuel Project and the transformation of Kuwait’s refining operations will also involve complying with global standards (see overview).

Meanwhile, the government expects non-associated natural gas production to reach 500m scfd by the end of 2018. Most natural gas in Kuwait is associated: in FY 2016/17 combined associated and non-associated gas production registered 1.6bn scfd, of which around 8%, or 129m scfd, was non-associated. Plans to boost non-associated natural gas to 1bn scfd by 2023 will require a doubling of output over the next five years, while expanding output to 2bn scfd by 2040 will require an increase in production volumes of 400%.

Step Change

It is clear that if KPC and its subsidiaries are to achieve these ambitious targets over the next two decades, a sharp change in both the pace and scale of projects will be required. In more than 40 years of state ownership KPC has never surpassed the 3.7m-bpd production levels achieved by the then privately run Kuwait Oil Company (KOC) in the early 1970s. Hitting new production targets will require expanding production and further developing the country’s natural resources.

“KOC’s targets are ambitious, but achievable. To reach them, the company will be depending on an increase in the production of heavy crude oils from the Lower Fars reservoir and lighter crude ( condensates) from the Jurassic fields, both of which are situated in the north of the country,” Omar Al Nakib, senior economist of economic research at National Bank of Kuwait (NBK), told OBG. “By the end of 2018 they should be able to produce 60,000 bpd of heavy crude and 120,000 bpd of condensate. KOC goals include increasing heavy crude production up to a final plateau of 270,000 bpd by 2030.”

Jurassic Gas

As part of its Jurassic Gas Facility Project (JGF-1), KOC was hoping to see three new interim facilities, each capable of handling 40,000 bpd of oil and 100m scfd of gas, come on-stream by the end of 2018 to process light oil and non-associated gas in the Jurassic fields in northern Kuwait. The KOC first began non-associated gas production in the Jurassic fields in 2008 with the commissioning of an early production facility, or EPF-50. In the 10 years since, six major tight gas fields have been found in northern Kuwait’s carbonate reservoirs covering an area of 1800 sq km.

At the end of FY 2016/17 the front-end engineering design for the JGF-1 had been completed, and KPC’s board had approved funding for the KD1.1bn ($3.6bn) project. In September 2017 it was reported that engineering and construction firms had been given until February 2018 to submit proposals for the development of the facilities. JGF-1 will have the capacity around 600m scfd and is expected to take at least three years to build once the contract award has been announced.

Infrastructure Projects

Kuwait is also investing in infrastructure that will help integrate its upstream and downstream facilities. The NBK noted that in 2017 some KD1.1bn ($3.6bn) worth of projects were awarded in the oil sector. British company Petrofac won the KD390m ($1.3bn) contract to build GC-32, a sour gathering centre in the Burgan field to process crude oil and associated gas from the Arifjan, Marat, Minagish Oolite and Burgan Wara high hydrogen sulphide fields. The work is expected to be completed by 2020.

Italy’s Saipem was awarded the KD255m ($845.4m) project in August 2017 to construct a 450-km system of pipelines to transport crude oil and gas from KOC’s South Tank Farm in Ahmadi, some 40 km south of Kuwait City, to the new Al Zour refinery some 70 km further south. The project also includes a pipeline to carry refined products to storage areas at the Mina Al Ahmadi refinery where they can be used as feedstock for the northern power station. Meanwhile, Indian construction and engineering company Larsen & Toubro won the KD113m ($374.6m) engineering, procurement and construction (EPC) contract to build the TL-5 crude transit pipeline from north Kuwait to Ahmadi, with construction work expected to be completed by the end of 2020.

However, early predictions see the pace of contracts slowing in 2018. In May the NBK reported that contract awards in the oil sector had slowed in the first quarter of the year, with deals limited to KD70m ($232.1m), predicting that total investments for the year would not surpass KD500m ($1.7m).

Refinery Plans

While Kuwait may be focusing new oil and natural gas output on its northern Jurassic fields, its major downstream projects are taking place in the south. KPC launched its new subsidiary Kuwait Integrated Petroleum Industries Company (KIPIC) in 2017 to lead the development and operation of integrated refining and petrochemicals operations, as well as liquefied natural gas import facilities at Al Zour, which are expected to come on-stream at various dates between 2019 and 2024.

The EPC phase of the development at the Al Zour refinery is expected to be completed in 2019 with the operation of the plant commencing in stages. A joint venture including the US multinational Fluor and South Korean firms Daewoo Construction and Hyundai Heavy Industries was selected as the preferred bidder for major EPC packages for the refinery project. Upon completion the new refinery will have a capacity of 615,000 bpd making it one of the largest in the world. It will also be adapted to process different types of oil and expanded to refine up to 535,000 bpd of heavy mix Kuwait crude. Fluor is anticipating up to 17,000 workers will be involved in the construction and development of the facility.

When construction has been completed at Al Zour refinery, capacity is expected to reach 1.4m bpd. However, if the government is to meet its 2m-bpd refining target by 2035, another facility with the same capacity as Al Zour, or possibly two additional 300,000-bpd refineries, will need to be completed within the following decade.

Going Global

In addition to the investment in domestic refining, outsourcing refining has remained a primary focus. Kuwait is investing in joint ventures abroad that will soon enable its crude oil to be refined in Italy, Vietnam and Oman, with Kuwait Petroleum International (KPI) reportedly assessing the feasibility of entering the additional refining markets of India, China, Indonesia and the Philippines. In December 2017 KPI said it hoped to have developed overseas refining capacity of 800,000 bpd by 2023, meaning that after some delays Kuwait’s long-term ambitions may be met.

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The Report: Kuwait 2018

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