Investments aim to exploit Kuwait's rich heavy oil deposits

While generally well-endowed with oil of a variety of grades, Kuwait’s Greater Burgan field in the southeast is the world’s second-largest after Ghawar in Saudi Arabia. Consisting of the Burgan, Magwa and Ahmadi reservoirs, Greater Burgan makes up the lion’s share of Kuwait’s production, with average output of 1.1m-1.3m barrels per day (bpd), according to figures from the US Energy Information Agency (EIA). However, the area’s capacity has been as high as 1.7m bpd in the past. Through the use of enhanced oil recovery methods, production could reach such levels again, according to the EIA.

In a race to meet the government’s stated goal of raising production to 4m bpd by 2020, however, the country’s oil stakeholders are ramping up production elsewhere. Apart from the Greater Burgan and other fields in the south of the country, there are major onshore reserves in the north, including Ratqa, Abdali, Raudhatain and Sabriya. Kuwait also shares production from fields in the 16,000-sq-km Partitioned Neutral Zone (PNZ) with neighbouring Saudi Arabia, according to an agreement reached in 1922. The area contains an estimated 5bn barrels of oil and 1trn cu feet of natural gas, concentrated largely in the onshore Wafra and offshore Khafji fields, according to The Oil & Gas Journal.

Sweet & Sour

Unlike the Greater Burgan developments, which produce light oil, much of the production coming out of the northern and PNZ fields includes heavy oil. These grades matter significantly for the costs, time and infrastructure required to prepare and transport products from well to end user. As Kuwaiti stakeholders work toward their 4m bpd goal, therefore, they are making major investments to expand not only heavy oil production but also refining capabilities that will allow industries in the country to transform the crude into value-added products.

Grade variations affect several important oil characteristics, including density, viscosity, sulphur content and physical impurities like sand and metals. Heavy oil’s name comes from its density, which is measured in American Petroleum Institute (API) gravity, denoting the density of crude relative to water. Petroleum liquids typically fall in the range of 10-70° API. Denser liquids have lower APIs. Those falling below 10°, such as natural bitumen, sink in water. Crudes measuring below 23.3° are classified as heavy, while those above 31.1° are classified as light.

Much of Kuwait’s heavy oil also has high sulphur content, which is called sour oil because of its pungent odour. Oil with sulphur content of greater than 0.5% by weight falls into the “sour” classification, while “sweet” oil contains 0.5% or less sulphur by weight. Sour oil’s high sulphur concentrations must be removed to meet safety and environmental standards for handling, shipping and burning. High concentration of certain sulphur-bearing compounds can also make sour crude more corrosive than sweet, meaning refiners must take preventative action to protect their equipment from long-term wear.

Untapped Fields

While the Great Burgan field and other areas producing light crude have been Kuwait’s main source of export revenues, the government acknowledges that heavy oil development will be needed to meet its 4m bpd benchmark by 2020. To that end, its reserves in the southern PNZ shared with Saudi Arabia and northern fields of the Lower Fars deposits will both be crucial. Two central and active fields in the PNZ are Khafji and Wafra, which together reached a capacity of 600,000 bpd in 2011. Production at the offshore Khafji field was stopped in October 2014 amid environmental concerns. In early 2016, however, both Saudi and Kuwaiti authorities indicated that oil output may resume in coming months. “An agreement has been reached with the Saudi side at Aramco to resume production at Khafji field in small quantities,” Anas Khaled Al Saleh, the acting oil minister, announced in March 2016. He indicated that the production ramp-up would be piecemeal, progressing in step with maintenance work and the resolution of environmental issues that prompted the field’s closing. At that time, the field, jointly operated by Kuwait Gulf Oil Company and Saudi Aramco Gulf Operations, produced 300,000 bpd. The onshore Wafra field, meanwhile, was closed in May 2015 for maintenance, but the closure was extended while Kuwaiti and Saudi stakeholders conclude the terms of restarting production there. The field had an output capacity of 220,000 bpd of heavy crude.

At the other end of the country, along its northern border areas, lie the heavy oil deposits of the Lower Fars fields. Development there received a boost in January 2015, when KOC awarded a contract to begin drilling up to 900 wells in the area. The KD1.2bn ($4bn) contract went to a consortium made up of UK-based Petrofac and Greece’s Consolidated Contractors Company. Construction started in February 2015 and is scheduled to last until the middle of 2019, by which point the refinery is set to have a production capacity of 60,000 bpd. The engineering, procurement and construction (EPC) contract includes a steam injection facility, production facilities, a support complex and a 270,000-bpd pipeline to move heavy crude to southern Kuwait for refining. The project’s second stage, meanwhile, is expected double the area’s production capacity to 120,000 bpd by 2020.

Developing Downstream

Because heavier, sourer oil calls for higher refining costs, these grades have tighter margins than their lighter, sweeter counterparts. Heavy oil costs around $47 per barrel to develop, according to Rystad Energy consultants, well above the average $27 price tag for producing other grades of Middle East oil. Although these differences were less significant when Brent crude, the global benchmark, was trading at over $100 per barrel, lower oil prices could now affect the viability of heavy oil projects. In 2015 Brent crude prices averaged $52 per barrel, according to the EIA, pressuring the potential margins of heavy-oil projects.

Still, energy stakeholders in Kuwait are pressing forward with plans to expand production and making significant investments in the downstream capacity required to transform heavy crude into value-added exports. Heavy oil from the newly developed fields is set to be processed in the Al Zour Refinery. Kuwait National Petroleum Company (KNPC), the downstream subsidiary of KPC, has been making progress on contracts toward completing Al Zour, which has an estimated total cost of KD4.8bn ($15.9bn). In October 2015, KNPC awarded a KD1.3bn ($4.3bn) EPC contract to a consortium led by Spain’s Técnicas Reunidas and including China-based Sinopec, and South Korea’s Hanwha Engineering and Construction. The refinery is expected to come on-line in mid- to late 2019. With a 615,000 bpd capacity, the project is set to raise Kuwait’s total refining capacity to 1.4m bpd. Current plans call for heavy oil supplies from new fields to serve as feedstock for the production of 340,000 bpd of low-sulphur diesel, 340,000 bpd of high-value light products and 225,000 bpd of fuel oil for domestic power generation, Mohammad Ghazi Al Mutairi, CEO of KNPC, said at the contract signing ceremony. Té cnicas has also won the KD450m ($1.5bn) EPC contract for a fifth gas fractionation train at the existing Mina Al Ahmadi refinery, the Spanish firm has announced.

Heavy Competition

The authorities’ plans to expand an existing refinery and add a new one make sense in light of recent heavy crude developments in the region. Neighbouring Iraq has begun exporting from its Basrah heavy crude deposits, which have been popular among Asian refiners, whose equipment is built to handle its high sulphur content. The government said it had bold plans to raise output of Basrah crude by some 26%, Bloomberg reported in September 2015. The area had produced just under 900,000 bpd of Basrah heavy at the time of the announcement. The National Iranian Oil Company likewise plans to export its heavy crude oil from its Yadavaran, South Azadegan and North Azadegan oilfields in the West Karoun region, but is fighting an uphill battle. “It will be challenging,” Victor Shum, head of oil market research at US-based consultancy IHS, told Bloomberg in January 2016. “It’s a new grade coming into an oversupplied market. It will have to be discounted.” Iran aims to boost production by 500,000 bpd and start shipping by June 2016, local media reported officials as saying.

With downstream investments on the way, Kuwait’s current investments could offer the country significant flexibility in the utilisation of its heavy crude resources. While other producers would be restricted by outsider refiners’ demand and capacity for processing feedstock, KPC could utilise projects like the new Al Zour refinery and expansion of Mina Al Ahmadi to export finished products. If both upstream and downstream aspects of the projects move ahead on schedule, they could provide higher profit margins as Kuwait faces new players in the global energy market.

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The Report: Kuwait 2016

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