Income from Kuwait’s hydrocarbons sector looks set to rise this year as the country ramps up oil production on the back of growing demand both locally and overseas, particularly from Asia.
Oil revenues reached an all-time high of KD30bn ($104.9bn) in August, according to figures from the National Bank of Kuwait (NBK), buoyed by consistently high prices.
Planned infrastructure upgrades, new finds and a focus on human resources are set to support the state’s efforts to meet higher production targets, although foreign ownership laws continue to slow sector development.
Crude oil prices hit a six-month high in August 2013, according to the NBK’s review for the month. While prices were slightly down for the month in a year-on-year (y-o-y) comparison, averaging $106 per barrel, the state was able to offset the impact by increasing production by 5% to 2.9m barrels per day (bpd). Output averaged 2.8m bpd in 2012, according to the US Energy Information Administration.
Increased production has enabled Kuwait to significantly boost its oil exports to key Asian countries this summer.
Exports of crude to China hit a six-month high of 224,000 bpd in July 2013, up 52.2% on the previous month, according to Kuwait’s state-owned news agency, KUNA. Data from the Korea National Oil Corporation showed that Kuwait’s oil exports to South Korea also increased in July to reach 518,000 bpd, marking a rise of 45.1% on the same month last year. The country exported 224,000 bpd to Japan in July, up 34.4% y-o-y.
With international demand rising, the Kuwaiti government plans to increase oil production to 4m bpd by 2020, while also targeting 4bn cu feet of gas output per day by 2030.
Much of Kuwait’s oil comes from a small number of mature fields dominated by Greater Burgan which, at 1.3m bpd, accounts for almost half of production. However, the discovery this summer of new fields in western Kuwait containing reserves of commercial-grade oil and gas will bolster plans to expand output. The government also hopes to increase production at the four northern fields of Raudhatain, Sabriya, Al Ratqa and Abdali from 525,000-575,000 bpd to 1m bpd by 2015.
Planned upgrades to Kuwait’s oil infrastructure will play a key part in helping reach production goals. In November 2012, the state-owned energy company, the Kuwait Petroleum Corporation (KPC), announced plans to channel $100bn into the oil and gas industry over a five-year period for upstream and downstream upgrades, renovations and expansion programmes.
Efforts are also being made to develop human resources. The government announced in September 2013 it had signed a KD10.8m ($37.8m) training contract with National Technology Enterprises Company, part of the Kuwait Investment Authority. The deal is aimed at equipping management in the oil sector with new skills.
Foreign ownership and investment laws
However, the constitutional ban on foreign ownership of natural resources remains a stumbling block for the state as it looks to attract foreign investors, particularly when it comes to developing technically challenging gas and oil fields, such as the Ratqa heavy oilfield and Jurassic gas reserves in northern Kuwait.
Sheikh Meshaal Jaber Al Ahmad Al Sabah, head of the Kuwait Foreign Investment Bureau, told Reuters in April 2012 that Kuwait was working to reform its foreign investment laws, paving the way for the country to attract private investment for major projects, including the $14.5bn Al Zour refinery.
In December 2012, Kuwait took a step forward when it introduced new corporate legislation, including the creation of a “one stop shop” for incorporation and licensing. The reform will also allow single shareholders to establish businesses and permit share transfers within companies.
In the oil and gas sector, Enhanced Technical Service Agreements (ETSAs) are one way for international oil companies to enter the market. ETSAs, which satisfy Kuwait’s constitutional requirements, offer a fee, commonly combined with performance-based payments, in exchange for technical expertise.
While ETSAs could prove useful in attracting investors, questions about their legality will need resolving.
Shell’s plans to develop Kuwait’s Jurassic gas fields on the back of an $800m ETSA it signed with the KPC in February 2010 have been delayed. In May 2012, Kuwait’s public prosecutor began investigating the ETSA following questions raised by several members of parliament about the legitimacy of awarding the contract without opening the project up to competition. The Jurassic fields are estimated to hold 35trn cu feet of natural gas reserves.
Kuwait has set ambitious production targets for its hydrocarbons sector. While ETSAs mark a step in the right direction to boost output, more extensive reforms to foreign ownership legislation could be a surer long-term route. However, Kuwait is not alone in having much domestic support for a refusal to allow foreign ownership of its natural resources. Mexico’s current proposed reforms to the energy sector left untouched a ban on foreign ownership of oil and gas.