Heavy investment in Kuwait’s energy industry to move away from crude oil exports

 

With the sixth-largest proven oil reserves in the world, and an industry that dates back to the early days of oil and gas dominance in energy, Kuwait is among the world’s principal hydrocarbons powers. The Gulf country is also one of the top energy sector investors, with a range of mega-projects under way in refining, petrochemicals, new oilfield development and mature oilfield recovery.

Supporting such programmes is a range of government-owned companies that benefit from a well-resourced, financially robust and sound administrative foundation. While the sector is very much a national industry, Kuwait is also a destination for international private sector players, with a range of contract and tendering opportunities available, from the upstream to the downstream segment.

Because of its established nature, shifting the energy balance towards more sustainable sources is an ongoing challenge for the sector, as is fully utilising resources to promote economic diversification and boost value-added industries. Nonetheless, Kuwait has made advances on some key projects to meet these challenges, securing a new generation of facilities and methodologies through an ambitious sector development programme.

Structure & Oversight

The Supreme Petroleum Council (SPC) is the highest body overseeing oil and gas policy in Kuwait. The SPC, whose members are appointed by the emir, is headed by the prime minister and includes the minister of oil. Since a reorganisation took place in 2013, the council has included six ministers, six representatives of the private sector, the head of the central bank and the leader of the national oil company, the Kuwait Petroleum Corporation (KPC).

Fully owned by the government, KPC was established in 1980 and is widely recognised as one of the world’s top-10 oil energy conglomerates. Its formation brought together a range of public outfits that had been operating in the sector since Kuwait nationalised its oil industry in 1975. In 1981 KPC took over responsibility for marketing Kuwaiti oil outside the country and for exploration interests overseas – tasks previously handled by the Ministry of Oil.

KPC

In the upstream segment of its business, KPC is the parent company of Kuwait Oil Company (KOC), which manages development of both oil and gas. KOC also has responsibilities for crude oil storage and transport to tankers. The firm divides operations regionally, with deputy CEOs for south and east Kuwait, north Kuwait and west Kuwait.

Another KPC subsidiary, the Kuwait Foreign Petroleum Exploration Company (KUFPEC), managed 47 overseas assets in 13 countries as of 2019. KUFPEC intends to expand its international investment programme in the year ahead, raising oil and gas production from 120,000 barrels of oil equivalent per day (boepd) in mid-2019 to 150,000 boepd by the end of 2020. The company’s CEO, Sheikh Nawaf Al Sabah, told Reuters in June 2019 that it is actively looking for more acquisitions in South-east Asia, Pakistan, Norway and Canada.

A third upstream subsidiary, the Kuwait Gulf Oil Company, works exclusively in the Partitioned Neutral Zone (PNZ) – an area that sits on the border with Saudi Arabia, where the two countries share the energy resources located there. Recent years have seen production in the PNZ halted, however, due to disagreements between the nations, environmental concerns and technical difficulties.

Regional press reports from late 2018 indicated that production might restart in the PNZ in 2019, with the US attempting to mediate a new joint-production agreement. However, operations had not resumed as of September 2019. Prior to the suspension of production in the PNZ, the fields there accounted for some 500,000 barrels per day (bpd) of output. Global industry monitor Kallanish Energy estimates resumption could add 100,000-125,000 bpd to Kuwait’s annual production. KOC also has partnerships with Saudi Arabia’s Aramco Gulf Operations Company and Saudi Arabian Chevron for work in the PNZ, at the Khafji and Wafra fields, respectively.

Downstream, two main companies control the segment: the Kuwait National Petroleum Company (KNPC) and, since 2016, the Kuwait Integrated Petroleum Industries Company (KIPIC). The latter was formed to operate and manage the new Al Zour refinery and petrochemicals complex (see analysis), while KNPC has a similar role in the existing refinery and petrochemicals hubs of Mina Abdullah and Mina Al Ahmadi. KNPC also has a subsidiary, Kuwait Petroleum International (KPI), which is responsible for overseas refining and marketing. KNPC owns and operates a portfolio of petrol stations, while KPI operates retail outlets internationally under the name Q8. The segment is also home to KPC subsidiary Petrochemicals Industry Company, which takes feedstock from KNPC and KIPIC to manufacture and market products such as ammonia, urea and polypropylene.

KPC has its own transport arm, called the Kuwait Oil Tanker Company (KOTC). The company has a fleet of 28 vessels that includes 12 very large crude carriers (VLCCs), four liquefied petroleum gas (LPG) carriers, two bunker ships and 10 petroleum product carriers. In addition to the fleet, KOTC has a marine agent arm and an LPG filling plant.

Additional Players

When it comes to non-government-owned companies, several outfits exist in Kuwait, but their operations are primarily abroad. Kuwait Energy, for example, is a subsidiary of Hong Kong-based United Energy Group and operates upstream assets in Iraq, Egypt and Yemen. Energy House Holding, previously AREF Energy Holding, is an arm of Kuwait Finance House with assets in Sudan, the UAE, India and Saudi Arabia. A third player, the Independent Petroleum Group, has interests in petroleum product marketing and trading, with associate companies in seven countries, a joint venture in Lebanon and a subsidiary in the UAE.

Reserves & Production

The “BP Statistical Review of World Energy 2019” report measured Kuwait’s proven oil reserves at 101.5bn barrels in 2018, or 5.9% of the global total. Production, meanwhile, stood at 3.05m bpd, or 3.2% of the total. This equates to a reserves-to-production ratio of 91.2 years. Most of Kuwait’s natural gas comes from associated fields, strongly tying it to oil production figures. Kuwait had proven reserves of 1.7trn cu metres, or 59.9trn cu feet, at the end of 2018, representing 0.9% of the global total. With annual production at around 17.5bn cu metres, the reserves-to-production ratio is 97 years. UK research firm Fitch Solutions estimates that 15bn cu metres of yearly output is associated sour gas, and the remainder non-associated gas is primarily from the northern Jurassic fields.

There has been very little change in Kuwait’s total proven oil and gas reserves over the years: the BP report calculated them at 101.5bn barrels and 1.7trn cu metres, respectively, at year-end 2008 as well. However, these figures are notably up from 1998, when proven oil reserves stood at 96.5bn barrels and gas reserves totalled 1.4trn cu metres.

As a member of the Organisation of the Petroleum Exporting Countries (OPEC) since 1960, Kuwait has participated in coordinated production cuts to stabilise global prices when necessary. It has also supported efforts for a long-term cooperation agreement between OPEC and non-OPEC members. The OPEC+ pact among many of the world’s hydrocarbons producers was an agreement to cut oil production in the first half of 2019, but during the G20 Summit in Japan at the end of June 2019 Saudi Arabia and Russia agreed to extend production cuts at the same rate for another six to nine months.

Consumption

In terms of domestic consumption, the BP report estimates a total of 451,000 bpd for 2018, down slightly from 455,000 bpd in 2017. Domestic consumption has remained below the 500,000-bpd mark for the last decade, with the exception of 2013. Local use consumes roughly 15% of output, demonstrating the size and importance of the industry’s export operations. Most output is targeted at nations in the Asia-Pacific region, and Kuwait is one of China’s most important oil suppliers.

Meanwhile, local oil refinery throughput in 2018 was 679,000 bpd – around 22% of production – showing the significant amount of Kuwaiti crude that is exported unrefined. Boosting the amount that is refined domestically – or by Kuwaiti refinery projects overseas – is therefore a major part of the government’s hydrocarbons programme.

Kuwait consumed around 21.8bn cu metres of natural gas in 2018, up slightly on 21bn cu metres the previous year. Domestic natural gas use has been steadily rising since 2008, growing from just 12.1bn cu metres that year. The feedstock has increasingly been used for power generation and water desalination. This is broadly in line with the government’s long-term strategy, which places an emphasis on natural gas for domestic power and desalination needs in order to free up more oil output for export. Although fossil fuel-fired power continues to generate almost all of the country’s electricity and desalinated water, renewables are receiving greater attention in energy mix targets (see analysis).

As Kuwait consumes all the gas it produces, imports are important to the country, arriving largely in the form of liquefied natural gas (LNG). Three major sources of this are BP, Shell and Qatargas, which sold a total of 7.5m tonnes of LNG to Kuwait in the three years leading up to April 2019, according to KPC. Plans for an LNG import terminal at the new Al Zour complex show that this trade is expected to continue for many years to come.

Performance

In terms of the sector’s contribution to the overall economy, in 2018 oil and gas accounted for $65.7bn worth of exports, according to the IMF. This was significantly higher than the $49.6bn recorded in 2017. The sector was responsible for 43.7% of GDP in 2018, up from 38% the year before, with the change mainly due to higher oil prices. Recovery has been a slow process for all major hydrocarbons producers since global prices tumbled in mid-2014. The sector accounted for 51.9% of Kuwait’s GDP that year and fell to 34.5% in 2016. While oil prices rose significantly in the second half of 2018 – reaching $85 per barrel in early October – underlying instability remained due to concerns over sluggish global growth, robust inventories and the large supply of US shale, all of which served to suppress international benchmark prices.

Regional security concerns also affect oil prices. A series of attacks on oil tankers in the Strait of Hormuz and a growing US military presence in the area led to renewed tensions between Iran and the US in the summer of 2019. This led to trading volatility as well as a couple of price spikes. Brent crude moved from a monthly high of $66.55 per barrel on June 28 to $62.40 on July 2, before climbing back up to $67.01 on July 10. Per barrel prices were holding at just under $60 as of mid-October 2019.

2040 Goals

KPC is working to implement its strategic plan for 2040, for which each of its subsidiaries was given the task of drawing up its own chapter in accordance with overarching guidelines. The new strategy is an update to the previous 2030 plan that was formulated in 2008. After beginning the revision process in 2017 KPC announced in January 2019 that it had begun the task of selecting a consultant to review the new 2040 roadmap.

In the upstream segment, goals for the domestic sector – including the PNZ – encompass achieving a sustainable crude oil production level of 4.75m bpd by 2040. Planners are also targeting 2.5bn standard cu feet per day (scfd) in sustainable, non-associated natural gas production. Downstream, domestic refining capacity is hoped to grow to 2m bpd by 2035, with local refining and petrochemicals operations fully integrated. The core petrochemicals business is to be expanded both at home and abroad, while the plan also calls for an expansion of downstream derivatives and speciality chemical production.

KOTC, meanwhile, aims to increase its fleet size to 60 vessels by the end of the 2040 plan period. As part of this, in the first quarter of 2018 the company ordered three new LPG carriers from South Korea’s Hyundai Heavy Industries and one VLCC from China’s Bohai Shipbuilding Heavy Industry. At the same time, the 2040 plan looks for KOTC to improve its shipping operations through greater efficiency, lower costs and better environmental standards.

KPC has provisionally assigned a capital expenditure of $114bn for the five-year period of 2018 through to 2022, with $394bn more for the remaining years to 2040. Some 75% of the total will go to domestic upstream projects, 9% for domestic downstream operations, 6% to petrochemicals, 5% for the international upstream, 4% for the international downstream and 1% to midstream operations.

The strategy – which aligns with the New Kuwait 2035 vision, the overarching development plan – sees the private sector playing a greater role. In the downstream segment, the growth of refining and petrochemicals capacity aims to open opportunities for private manufacturing, while local suppliers and contractors have been reserved a 30% share of spending. At least four opportunities for private sector involvement in KPC activities or investments are targeted by 2020, with at least five more by 2025.

At the same time, the country’s ongoing localisation drive aligns with plans to boost Kuwaitisation: the hiring of Kuwaiti citizens to replace expatriates in the workforce in line with industry quotas. In July 2018 local media reported that Kuwaitis accounted for 85% of workers in the oil sector, yet continued pressure to increase this figure has raised some concerns over the impact it could have on expertise and experience among the workforce. Still, the Kuwaitisation drive continues to enjoy considerable political support given its perceived long-term benefits for the country and young graduates.

Upstream Oil

Kuwait’s Burgan field in the south is widely considered the world’s second largest, after the Ghawar field in Saudi Arabia. Burgan is also one of the world’s oldest commercially exploited formations, with the first test wells drilled in 1938 and 1946 seeing the first commercial exports. Today, Greater Burgan accounts for around 50% of oil production.

Other significant fields are Ratqa in the northwest, south of the Iraqi border; Umm Gudair, close to Burgan; and Wafra in the PNZ. The north is also home to the fields of Abdali, Umm Niqa, Raudhatain, Sabriyah and Bahra, with Mutriba and Ladira adjacent to Ratqa, Kra Al Maru in the centre, and Hout and Lulu offshore. Kuwait has a mix of light and heavy oils, which are blended into a single Kuwait Export Crude product. This has an American Petroleum Institute gravity of 31, an indication of its weight compared to water. The Raudhatain, Sabriyah and Umm Niqa fields also have natural gas deposits, as does the Minagish oilfield west of Burgan. Dorra, meanwhile, is the largest offshore natural gas field.

With the 2040 strategy demanding a substantial increase in output, KOC Exploration Group has been carrying out a full range of exploration activities, including 4D and multi-component seismic surveys, mapping and fracture detection, and pore pressure prediction both onshore and offshore. The company has also been boosting enhanced oil recovery (EOR) at existing fields. This poses many technical challenges, however, as the fields in question – particularly those in the north – generally contain sour oil and heavy oil. KOC has thus become a world leader in increasing production at mature formations, launching the first chemical surfactant injection project in the Middle East in its northern fields in 2017.

The Ratqa field is also where the first undertaking aimed at developing heavy oil is taking place. The $7bn Lower Fars Heavy Oil Project is one of the largest upstream initiatives in the Middle East, with an eventual production target of 430,000 bpd in 2040. Cyclic steam injection will be used to extract the sluggish heavy oil, thinning it for transport by pipeline to the Mina Al Ahmadi tank farm. Its final destination, however, will be the refinery at Al Zour, which is being built to specifically handle heavy oil. The crude will be extracted from more than 1300 different wells, given the size of the field. State-run Kuwait News Agency reported in April 2019 that first oil would be produced in August of that year.

KOC is working with a number of contractors on the project, rather than a single international major – although Shell Kuwait is involved in developing EOR projects in the north more broadly through an enhanced technical service agreement (ETSA). The Lower Fars contractors include Italian industrial company Sinergia, China’s Sinopec, the UK’s Petrofac, regional player Consolidated Contractors Company, local firm ABJ Engineering and Severn Glocon India.

At the same time, KOC is exploring using concentrated solar power to produce steam for oil well injection, with a tender out in April 2019 for such a scheme at Ratqa (see analysis). In the south, Burgan has EOR projects as well, with an ETSA for the giant field signed between KOC and BP in 2014.

KOC recently implemented the first two phases of its Kuwait Integrated Digital Field (KwIDF) project. This involved connecting all the wells in the north expansion project to the KwIDF project after the first limited pilot phase showed increased efficiency and a 5% hike in production in 2017. Working alongside the US’ Halliburton, KOC has developed a real-time information system that integrates surface and subsurface data, processing this to help oil well operators improve decision-making and optimise responses.

Upstream Gas

Exploration work has led to the discovery of new tight gas fields in the north, now being exploited via the North Kuwait Jurassic Gas Project. This was launched in 2010 with an early production facility (EPF) adding some 1.8bn cu metres of gas and 55,000 bpd of condensates to the total. This was expanded under phase two, raising output to 5.3bn cu metres and 175,000 bpd, respectively, in 2018 via three new EPFs. Two went to the US’ Schlumberger and the third to local firm SPETCO.

Phase three of the project is now under way. In May 2019 KOC announced that it had pre-qualified 17 international firms for this ambitious stage, which will see construction of two production facilities for Jurassic gas, with an output of 160m cu feet and 50,000 bpd of light crude each. The eventual winner or winners will receive a build-own-operate contract, according to regional media reports from May 2019. Kuwaiti authorities have favoured this type of EPF contract in recent times, moving away from the engineering, procurement and construction model in the upstream segment. EPFs also mean that production can begin more quickly, helping Kuwait ramp up output in line with strategic goals.

Plans for offshore gas development, however, remain on hold. The Dorra gas field is one of the most promising prospects, but because it is located off the shores of the PNZ and subject to an Iranian claim, progress is unlikely in the foreseeable future. Nonetheless, in March 2019 Saudi Arabia’s Al Khafji Joint Operations outlined plans for Dorra’s development via six offshore platforms connected by flow lines.

Midstream

With KOC not only responsible for oil and gas exploration and production, but also transport and storage, the company is Kuwait’s midstream agency. It is the authority for pipelines, gathering centres (GCs), warehouses, and distribution and loading facilities. After Kuwait’s network of GCs was badly impacted in the 1990-91 Gulf War, KOC has engaged in a replacement, upgrade and expansion programme. Upstream expansion in north Kuwait has added to the need for more GCs, with GC 29, 30 and 31 the latest additions in 2019. Each of these is designed to hold up to 100,000 bpd of oil, 240,000 bpd of water and 240m scfd of associated gas. Companies involved in their construction included India’s Larsen & Tourbo (L&T), Bahrain’s Raymond International and the UK’s TechnipFMC.

TechnipFMC is also involved in the Strategic Gas Export Pipeline project. This is a 145-km, 48-inch-diameter link that will run from northern Kuwait to a central mixing manifold at the Mina Al Ahmadi refinery, where a major upgrade known as the Clean Fuels Project is ongoing (see analysis). In April 2019 the construction contract was awarded to L&T.

The Mina Al Ahmadi refinery is also where compressed gas and condensate are piped in for conversion to LPG. With the refinery and petrochemicals complex at Al Zour requiring major midstream distribution and transport operations, in 2017 KOC contracted Italy’s Saipem to build a system of onshore feed pipelines to the site. This involves laying some 450 km of pipeline linking Al Zour to facilities in south Kuwait. KIPIC, the new complex operator, declared in April 2019 that it expected the pipelines to be completed in October of that year.

The downstream is therefore setting the midstream agenda, which in turn is connected to upstream developments in the north, as well as EOR and EPF developments more generally. Al Zour and the Clean Fuels Project are slated to transform the downstream as Kuwait attempts to gain more added value from its hydrocarbons reserves and accelerate economic diversity. Additional refinery capacity will help produce petrochemicals products that Kuwait currently has to import – for example, automotive and industrial oil-based lubricants. “There is no refinery for base oil in Kuwait,” Mishal Al Refai, executive partner of Kuwait Dana Lubes Company, told OBG. “We must import this from Greece, the UAE, Germany and others. These imports account for about 90% of our budget, but it does not have to be that way.”

Outlook

As rollout continues on major projects over the next few years, Kuwait will see the energy sector transform from a crude oil export-dominated industry to one in which petrochemicals and fertilisers are joined by a range of associated industrial outputs, supporting and diversifying the economy, as well as Kuwait’s overseas earnings. Meanwhile, wider development plans, including the construction of new cities and a port at Mubarak Al Kabeer (see Transport & Logistics chapter), will see demand for energy rise. With the shift from oil to gas as the primary power generation source, its development is even more crucial. More investment in gas exploration and in securing associated gas will thus dovetail with expanded LNG import capacity at Al Zour.

Externally, rising tensions between the US and Iran impacted the sector negatively, with Kuwait moving to secure alternative outlets for its exports. A route through Iraq and Turkey was being explored in mid-2019, with implications for the sector’s future development not yet clear. At the same time, concerns over global economic sluggishness continue to weigh on oil prices. Kuwait, however, is in a strong position to ride out a short-term slowdown, with sufficient financial reserves to ensure necessary investment.

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The Report: Kuwait 2019

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