Fired up: Using abundant natural gas reserves to generate power

For years the availability of cheap and abundant oil has meant that the development of the country’s natural gas reserves has only recently come to the fore. However, growing demand for power and water generation, environmental concerns, advances in technology and the rising price of oil have combined to make the extraction and processing of this alternative hydrocarbon a primary item on Kuwait’s agenda.

CONVERSION TO GAS: At present the country relies on oil and natural gas to fire its power and desalination plants. According to the Kuwait Petroleum Corporation (KPC), Kuwait consumes some 200,000-300,000 barrels of oil per day for generating power. Converting oil-fired plants to natural gas is a simple and, if needed, reversible process. Gas-fired plants are more efficient, produce fewer emissions and, for oil-producing countries, offer a solid value proposition by freeing up additional oil for export. Indeed, Kuwait has joined a growing list of countries that have announced plans to switch to natural gas-fired generation.

However, sourcing a sufficient quantity of natural gas to supply its existing and potentially new power and water plants will be challenge. While Kuwait has an estimated 63trn cu ft of proven natural gas reserves, the country currently extracts less than 1% of these reserves annually. With peak demand for electricity expected to grow by 6-8% annually for the foreseeable future, there is a pressing need to expand natural gas supply. In the short term, this increase will come primarily from imports but Kuwait is also looking to unlock the potential of its domestic reserves.

IMPORTS: Since 2009 Kuwait has been importing liquefied natural gas (LNG) during the summer months, when demand for electricity peaks. While initially these imports occurred between the months of April and October, this period was expanded in 2011 to run from March to November, according to comments by Abdullatif Al Houti, managing director of international marketing at KPC, in early 2011. The extension of the LNG importing season is expected to continue for the next three years, he said. By importing natural gas, the government has freed up oil for additional sale, saving about $300m in 2010, according to Al Houti.

Although LNG technology provides a useful way to transport natural gas, it is not as efficient as pipeline gas: supercooling gas for transport and reheating it on arrival is an expensive process and it also has environmental impacts. Importing natural gas via pipeline is another option, at least in purely economic terms.

Potential sources include Iran, which signed a $10bn pipeline deal with Iraq and Syria in July 2011.

Neighbouring Iraq may be a more promising supplier, however. In July 2011, Iraq signed a $12bn agreement with Royal Dutch Shell and Mitsubishi to build facilities to capture flared gas in its southern oil fields. As part of the 25-year joint venture, Iraq hopes to enter the natural gas export market, both via pipeline and through the construction of an LNG terminal.

Prior to the 1990-91 invasion, Kuwait imported approximately 200m cu ft per day of natural gas from its northern neighbour. Reuters reported in April 2011 that Kuwait was in talks with various international oil companies (IOCs) to once again import gas from Iraq, which currently flares more than 1bn cu ft of natural gas per day, according to some estimates. Channelling this vented gas into pipelines would be a cost-effective way to secure natural gas supply for Kuwait.

EXPANDING PRODUCTION: While imports may be a solution to the natural gas shortage in the near term, the government would like to increase domestic production, thereby creating a secure supply for water and power generation. Kuwait hopes to increase its natural gas daily production to 4bn cu ft by 2030.

However, some challenges must also be overcome.

First, the complexity of the country’s largest known natural gas field makes extraction difficult and costly. Discovered in 2006, the non-associated Jurassic fields in northern Kuwait are estimated to have 35trn cu ft of reserves, accounting for more than half of Kuwait’s total known reserves. However, their exploitation requires advanced extraction methods. The first phase of the fields’ development plateaued with an output of around 140m cu ft per day in 2009, leading Kuwait to seek out partners for their continued development.

Demanding contract terms have discouraged some potential foreign investors who might have otherwise been interested in providing technical assistance. Kuwait prohibits production-sharing agreements (PSAs), as they violate the constitutional requirement that all proceeds from the production of natural resources accrue directly to the state. Instead of PSAs, Kuwait favours technical service agreements (TSAs), whereby Kuwait pays the IOC for advisory services. A political stalemate in the National Assembly, which acknowledges the desirability of technical assistance but is keen to protect the sovereignty of the country when it comes to natural resources, has also had an impact on progress.

BREAKING GROUND: However, an enhanced TSA with Royal Dutch Shell, signed in February 2010, may signal a turning point in the development of Kuwait’s natural gas resources. Under the terms of the TSA, Shell will work with Kuwait Oil Company (KOC) to monitor and develop the Jurassic fields. According to Ahmad Atallah, the chairman and managing director of Shell Companies in Kuwait, IOC participation is crucial in this region. “IOCs can add value in various forms of experience and technology transfer, including competence development, that are critical for the development of the gas fields in the north of the country,” he told OBG.

OTHER SOURCES: Thanks to their size, the Jurassic fields have attracted the most attention, but Kuwait has a number of other undeveloped natural gas sources. An exploratory well drilled in 2009 at the Mutriba oil field in southern Kuwait found associated natural gas in the same wells as light crude. KOC has reported that the field could generate 110m cu ft per day of associated gas, and production is expected to begin in 2014.

The “neutral zone”, an area Kuwait shares with Saudi Arabia, is estimated to contain around 1trn cu ft of natural gas, in addition to its 5bn barrels of oil reserves. Production from the neutral zone is overseen by Kuwait Gulf Oil Company, a subsidiary of KPC, in conjunction with Saudi Arabia’s Aramco Gulf Operations Company.

The offshore Dorra gas field, which is shared with Iran and Saudi Arabia, was discovered in the 1960s. It remains undeveloped due to a lack of agreement with Iran, but Al-Khafji Joint Operations Company (KJO), a 50:50 joint venture between Aramco Gulf Operations, a subsidiary of the Kingdom’s national oil firm Saudi Aramco, and Kuwait Gulf Oil Company, a subsidiary of KPC, has plans to develop the field. KJO has announced its intention to begin production at Dorra by 2017.

The country has also increased the number of gas-processing facilities. South Korea’s Daelim is constructing the country’s fourth, and largest, gas-processing plant, with a capacity of 800m cu ft per day. Currently expected to come on-line in 2013, it will lift Kuwait’s daily gas processing capacity to 2.3bn cu ft. With additional supply, both domestic and international, Kuwait should be able to reduce or even eliminate its use of oil for power and water generation in the coming years.

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The Report: Kuwait 2012

Energy chapter from The Report: Kuwait 2012

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