New horizons: Local players are looking to expand their global operations

Management of the external operations of the state oil company, Kuwait Petroleum Corporation (KPC), is delegated to various subsidiaries, which are particularly focused on expanding the state’s assets abroad.

Kuwait Petroleum International has a major stake in refining and marketing operations internationally. The company, which operates under the Q8 brand name, entered the European market with the acquisition of Gulf Oil’s retail operations in six countries in 1983 and expanded further four years later by adding BP’s operations in Denmark to its portfolio. The company’s holdings have grown at a tremendous pace since then. Q8 now operates approximately 4000 retail stations across six countries and owns a dedicated aviation arm that provides fuel to over 200 airlines across more than 60 airports globally. Q8’s aviation arm has expanded rapidly with annual sales increasing by 400% from 300m gallons to 1.5bn gallons over the last 10 years.

GROWING FOOTPRINT: In 2014 Q8 announced plans to expand its presence in Europe through an agreement with Shell to acquire a stake in the oil giant’s retail, aviation, and supply and distribution logistics businesses in Italy. Shell’s Italian network consists of more than 800 petroleum marketing and distribution outlets that have already established an efficient supply chain. Q8 is expected to rebrand the outlets under its own name, adding them to its existing network of some 2700 outlets in the country, representing approximately 11% of the local market. The acquisition will make the company the second-largest petroleum retailer in Italy.

Shell’s operations in Italy’s aviation industry include supplying fuels to some of the country’s largest airports. The overall deal with Shell, which is expected to be in the region of $650m, will give the company a significant boost in the local and regional market. The European Commission approved the acquisition in June 2014, paving the way for the agreement to be finalised.

REFINERIES: In addition to marketing and supplying services to commercial and retail customers, Q8 has also invested in refineries abroad including a wholly owned, 80,000-barrel-per-day (bpd) refinery in Rotterdam, Netherlands and a joint venture with Italy’s ENI in the 240,000-bpd Milazzo refinery. More recently, the company has made significant inroads into Asian markets with deals to establish refineries in Vietnam, India and China at varying stages of development.

Q8 is a major investor in Vietnam’s $9bn Nghi Son Refinery, located about 200 km south of Hanoi. The project broke ground in 2008 with construction ongoing since October 2013. The 200,000-bpd refinery is expected to start operating in 2017. The refinery will more than double Vietnam’s refining capacity. Q8 will hold a 35.1% stake in the joint stock company that will own the facility and is expected to provide all the crude oil required by the refinery. Japan’s Idemitsu Kosan will also have a 35.1% stake in the company, while the Vietnam Oil and Gas Group (PetroVietnam) and Mitsui Chemicals will hold 25.1% and 4.7%, respectively.

The refinery has required clearing an area of about 400 ha of onshore land. The project includes the construction of a main refinery and petrochemicals complex, an onshore pipeline network and a harbour. Offshore installations include constructing a breakwater, access channel and a turning basin, and a crude oil pipeline. The 30,000-deadweight-tonne harbour will provide four berths to export the different products. The World Bank Group’s International Finance Corporation approved a $300m loan for the venture in 2011 and is supporting its development. The facility will produce a range of refined products. Liquefied petroleum gas, gasoline, diesel and jet fuel output will be sold to PetroVietnam for its operations in the domestic market, while Q8 and its other partners will have the rights to export petrochemicals products such as paraxylene, benzene and polypropylene to their regional operations.

NEW PARTNERS: Kuwait has additionally signed an agreement with the China Petroleum and Chemical Corporation (Sinopec) to build a major refinery and petrochemicals complex in southern China’s Guangdong province. Q8 and Sinopec would each hold a 50% stake in the project, which is valued to be in the range of $9bn. When fully operational, the proposed plant will get its crude oil feedstock from KPC and have a total refining capacity of 300,000 bpd. An accompanying planned ethylene petrochemicals plant will also add an annual production capacity of 1m tonnes.

The deal has been under negotiation since KPC and Sinopec signed the agreement in 2011. There were indicators that both parties had revived the discussion in 2014, when KPC and Sinopec inked a corporation pact to deepen trade in crude oil, storage and refinery projects. The refinery is already under construction, although KPC and Sinopec are yet to finalise the project’s equity structure. Sinopec has delayed the commissioning date to 2017. The deal would make Kuwait only the second Arab oil producer to have a major downstream facility in China, after Saudi Arabia.

BUILDING ON TRADE: Kuwait has also indicated an interest in investing in India’s downstream refining capacity to help develop the market for its crude oil exports. KPC is in discussions with the Indian Oil Corporation (IOC) for a stake in the $4.66bn Paradip refinery. Kuwait has reportedly sought a 50% stake in the refinery and the proposed petrochemicals plant, though IOC is not offering more than 26% of the project up for bid. The deal could include a crude oil supply deal with IOC, but the discussions are still in preliminary stages.

KPC has also expressed an interest in buying a 26% stake in the $3.3bn petrochemicals plant at the special economic zone at Dahej which is owned by India’s Oil and Natural Gas Corporation (ONGC). Kuwait is also eying a stake in a smaller ONGC petrochemicals plant in Mangalore as well as the Bharat Petroleum Corporation’s proposed chemical unit in South India.

Kuwait has a broad interest in investing in India’s oil and gas sector. Bilateral trade between the two countries grew by 2.2% from $17.6bn in the 2012/13 fiscal year to an estimated $18bn in 2013/14, according to India’s Ministry of External Affairs. The vast majority of this represented Kuwait’s oil exports, which were estimated to be worth approximately $16.1bn in 2014. KPC strengthened these ties further in 2014 by signing a supply contract with Bharat Petroleum for a total of 4.2m tonnes per annum of crude. The deal will cement Kuwait’s status as the third-largest supplier of oil to India, providing an estimated 10% of India’s energy imports.

UPSTREAM INVESTMENTS: In addition to developing its global downstream supply chain, Kuwait is also eyeing upstream investments to expand its crude oil output internationally. KPC operates its foreign exploration and drilling operations through its subsidiary, Kuwait Foreign Petroleum Exploration Company (KUFPEC). KUFPEC already has significant global operations with the long-term goal of producing 200,000 barrels of oil equivalent from its foreign operations by 2020. The company is currently active in 15 countries, with major projects across Asia, Australia, Africa and Europe.

More recently, the company has turned its eye towards opportunities in new markets, including the US and Canada. The company entered a joint venture with Chevron to explore opportunities in Canada’s shale gas market. KUFPEC announced a $1.5bn deal with Chevron’s Canadian unit in October 2014 to develop shale gas resources in Western Canada. This transaction is seen as KPC’s “anchor project”, paving the way for greater participation in North American oil and gas projects.

In addition to expanding KUFPEC’s global reach, the project is also part of a broader strategy of enhancing Kuwait’s access to emerging oil and gas technology, particularly in the heavy crude oil sector. The deal in Canada, which holds some of the largest reserves of heavy crude oil, offers the company a number of opportunities for technology transfer that are important to Kuwait’s domestic production targets.

KUFPEC saw its revenues increase but profits fall slightly between 2012 and 2013. This was due in part to a number of acquisitions and a reduction in the daily average production across its global entities from 75,765 bpd in 2012 to 74,778 bpd in 2013. While total profits dropped by 15.4% from $201m in 2012 to $170m in 2013, total revenues in the same period increased by 7.6% from $1.3bn in 2012 to $1.4bn in the following year. Profit for financial year 2014 was KD11.1m ($38m), with revenue reaching KD424m ($1.46bn) according to the company’s 2014 annual report.

INDEPENDENT INROADS: While KPC dominates Kuwait’s local and foreign oil and gas investments and operations, Kuwait Energy, an independent oil and gas company actively engaged in the exploration, appraisal, development and production of hydrocarbons, has also made rapid inroads in the regional market. Kuwait Energy’s proven and probable reserves were estimated to stand at 165.7m barrels of oil as of May 2014. Established in 2005, the company has focused its operations in the Middle East and North Africa, with a particular focus on developing its footprint in Iraq.

In 2014 Kuwait Energy and the UAE’s Dragon Oil made a second discovery in Iraq through their joint venture in Iraq’s Block 9 field. The Kuwaiti company is a majority shareholder in the project with a 70% stake in the block with Dragon Oil holding the remaining 30%.