Hydrocarbons wealth has been the central pillar of Kuwait’s economy for nearly a century, and proven oil reserves of around 101bn barrels underwrite the nation’s future economic wellbeing. The Kuwaiti government derives 95% of its budget from oil revenue, and the oil sector accounts for around 52% of the nation’s GDP. However, the days of easy oil in Kuwait are limited. The famous Greater Burgan area has been worked for more than 60 years and will require an increasing amount of well interventions in the future. In the meantime, supply of non-associated natural gas, which the country discovered in 2006, has fallen behind demand, as domestic electricity generation infrastructure struggles to keep pace. Still, Kuwait has many options when it comes to resolving the challenges facing its energy sector: new fields and new technologies abound, and a new strategy has been developed to exploit them. What is of most interest to industry observers in 2013 is how the nation’s ambitious energy plans will make the most efficient use of resources, and how Kuwait’s robust political process will affect their implementation.

HYDROCARBONS SECTOR STRUCTURE: Kuwait’s oil and gas sector, like those of its regional neighbours, has undergone significant structural changes since prospecting for commercially exploitable oil was begun in 1913 by a British Royal Naval exploration mission. A number of surveys over following decades led to increased foreign interest in the nation’s hydrocarbons reserves, which culminated in 1934 with the granting of a drilling franchise to the Kuwait Oil Company (KOC), a joint venture between British Petroleum and the Gulf Oil Company of the US. The first commercial discovery came in the Burgan area – today one of the world’s most famous oil fields – at a depth of 1120 metres. More productive wells quickly followed, although Kuwait’s first export of oil was delayed until 1946 as a result of the Second World War. Production levels mounted steadily thereafter, rising from 16,000 barrels per day (bpd) in 1946 to 1.8m bpd by the beginning of the 1960s, while alongside it Kuwait established a refinery infrastructure capable of supplying the domestic market with refined products as well as serving the export market. In 1975, during an era of oil company nationalisations across the globe, the KOC was taken over by the Kuwaiti government and the structure of today’s oil and gas sector was formed.

The government maintains ownership and control of all development of the industry, and directs and oversees it via the Supreme Petroleum Council (SPC), headed by the Prime Minister. The implementation of the policy set by the SPC is undertaken by the Ministry of Petroleum, which manages both the upstream and downstream sectors. The Kuwait Petroleum Corporation (KPC) is charged with managing all domestic and foreign oil investments, and the KOC is now its subsidiary and oversees the upstream oil and gas sectors. Further KPC subsidiaries control other parts of the sector: the Kuwait National Petroleum Company (KNPC) oversees the downstream segment; the Petrochemical Industries Company (PIC) is in charge of petrochemicals; KNPC and the Kuwait Oil Tanker Company (KOTC) both oversee the nation’s export operations; responsibility for Kuwait’s international operations falls to the Kuwait Foreign Petroleum Exploration Company (KUFPEC); and international upstream and downstream developments are controlled by Kuwait Petroleum International (KPI).

OIL LOCATIONS: According to the BP “Statistical Review of World Energy 2013”, Kuwait held 101.5bn barrels of proven reserves at the end of 2012, representing 6.1% of the world total. Kuwait’s oil wealth is largely dispersed across a number of onshore fields. The largest is the Greater Burgan area, comprised of the Burgan, Magwa and Ahmadi fields, which is estimated to hold 70bn barrels. The area was first discovered in 1938 and, as the second-largest field in the world, Greater Burgan is the subject of much interest to the global oil and gas market. Spanning some 60 km by 20 km just south of Kuwait City, as of 2013 it contains five giant reservoirs, 2000 completed wells and 14 processing facilities with two centralised disposal plants. Production at the field commenced in 1946, and since the Iraq War of 1991 production levels at the field have been maintained at around 1.4bn bpd, although this period has seen a gradual rise in water production, which in 2012 reached 23%. The field generally produces medium to light crudes, showing API gravities within the 28°-36° range.

In the north of the country, the Raudhatain and Sabriya fields contain significant proven reserves, with 6bn and 3.8bn barrels, respectively, while west of Greater Burgan the Minagish field has a proven reserve of 2bn barrels. The frontier fields of Al Ratqa (actually the southern extension of Iraq’s giant Rumailia field) and Abdali were both secured for Kuwait by the border agreement following the Iraq War of 1991 and add around 75,000 bpd to production capacity.

Additional reserves of around 5bn barrels are contained within the boundaries of the Partitioned Neutral Zone (PNZ), alternately described as the Divided Zone, which Kuwait shares on a 50-50 basis with Saudi Arabia. The PNZ was established in 1922, and oil production within the 16,060-sq-km area stood at around 600,000 bpd in 2011. With approximately 3.4bn barrels of proven reserves, the Wafra field is the largest in the PNZ, and it accounts for the bulk of the zone’s current onshore production capacity of 240,000 bpd. The PNZ also contains a considerable offshore resource in the Khafiji field, which in 2011 accounted for 90% of the PNZ’s capacity of 350,000 bpd.

OIL EXPLORATION & PRODUCTION: Kuwait has managed to increase its oil production level over the past decade, growing it from 2.2m bpd in 2001 to 2.9m bpd in 2011, narrowly missing the targeted 3m bpd due to an early production facility (EPF) not reaching maximum capacity while another EPF was closed earlier than expected due to a technical problem. Nevertheless, the 2011-12 year was a good one, with 529 new wells successfully completed against a targeted number of 460. In all, about 508,000 bpd was added through drilling, workovers and electrical submersible pumps deployed to maintain production rates. In the longer term, Kuwait’s production strategy is more ambitious: by 2020 it aims to increase its crude output to 4m bpd and is planning on investing around $90bn in exploration, applying new technologies to ageing fields and enhancing downstream infrastructure. Just over half of current production comes from the Greater Burgan field, and secondary recovery via low salinity water injection has already been achieved at this ageing formation (see analysis). Much of the new capacity that Kuwait will need to add if it is to reach its 2020 target will be derived from the more recent finds in the northern part of the country, such as the Sabriya and Umm Niqa areas, which were discovered in 2005 and 2006, respectively. The heavy and sour nature of these finds has led to speculation that Kuwait will loosen its limitations on the activity of international oil companies (IOCs) within its borders.

FOREIGN PARTICIPATION: While the profile of Kuwait’s oil resource shows ever-greater complexity, harnessing the expertise of IOCs has been made difficult by an article of the constitution, that prevents the use of production sharing agreements (PSAs), which allow for IOCs to take an equity stake in development projects. The government has made a number of attempts to resolve this issue, starting in 1998 with the concept of Project Kuwait, which introduced an incentivised buy-back contract (IBBC) by which IOCs are paid a per-barrel fee and recovery costs in return for their services. This construct has, however, faced considerable opposition in the National Assembly, and the potential of a political challenge remains the largest obstacle to its successful deployment. In 2010 the government introduced a new framework under which foreign expertise and investment might be tapped by signing an $800m enhanced technical service agreement (ETSA) with Royal Dutch Shell to provide services to the difficult heavy oil projects in the north. Although a parliamentary probe regarding the deal has yet to be concluded, the nation’s Natural gas production and consumption, 2007-12 first ETSA has been broadly welcomed as a possible route to IOC involvement without contravening the precepts of the constitution (see analysis). “Discussions need to take place to involve IOCs,” Ahmad Atallah, the chairman and managing director of Shell Companies in Kuwait, told OBG. “There needs to be an alignment between legislation and the specific needs of IOCs and national oil companies.”

The separate legal entity of the PNZ, which Kuwait shares with Saudi Arabia, has in the past afforded more opportunities for inward investment. The PNZ’s onshore fields of Wafra, South Umm Gudair and Humma have been developed by Chevron, which remains a participant in their exploitation with KPC. A Japanese firm had a major role in developing the offshore fields of Khafji, Hout, Lulu and Dorra in the 1960s, although its concessions with Saudi Arabia and Kuwait expired in 2000 and 2002, respectively.

An additional challenge to foreign involvement is the state of the global market. “Margins in developed markets are lower than in emerging markets,” Abdulaziz Al Gharabally, the vice-chairman and managing director of Safat Energy, told OBG. “For example, operations in Sudan, Iraq, Libya, and Pakistan are more lucrative now.” However, despite the margins, Kuwait is a significantly more stable investment than other nations, and it is this feature that lends the nation to greater international involvement.

NEW TECHNOLOGY: Technological development is particularly important to achieving the government’s goals. According to Nouf Al Abdulrazzaq, the general manager of BP in Kuwait, “Kuwait will struggle in the long term to maintain output and will definitely not achieve the goal of 4m bpd without the technology and expertise that IOCs bring to the table.” The opportunities available to IOCs involve a range of new technologies, four of which have been selected for application in the short term: advanced 3D seismic surveying; horizontal and multiple lateral drilling, enhanced oil recovery (EOR) and “smart” fields. In 2011 and 2012 the KOC achieved a number of milestones in its application of new technology and processes in the field, including the commissioning of the first smart field in the Burgan formation, a pilot smart field in Minagish where a flow control tool was installed that increased production from 2000 bpd to 11,768 bpd, the introduction of Cycle Steam Stimulation (CSS) at the lower Fars reservoir, and the drilling of six horizontal wells, including one of the shallowest horizontal wells in the Middle East.

A contract for the Kuwait Land 3D Single Sensor Seismic Survey project was also signed in 2012. Worth around KD51m ($182m), the project will use the latest seismic techniques and is considered to be one of the largest of its kind in the world.

NATURAL GAS NEWCOMER: Kuwait’s history of natural gas extraction is shorter than that of its oil production. For many decades after the oil discoveries in the 1930s, the gas associated with oil production was simply flared. Prior to the 1970s only a negligible amount of natural gas was used in producing electricity, but its input rose steadily over subsequent years (see analysis) and its value as a commodity has risen with it. Kuwait’s first finds of non-associated natural gas came in 2006 with the discovery of the deep Jurassic reservoirs at Rahiya, Mutriba, Um Niga, and a number of other areas. Commercial production of natural gas began in 2009, and by 2011 Kuwait had raised its gas output to around 570m cu feet per day, while proven reserves stood at 63trn cu feet. The discovery of non-associated gas has created the potential for a new industry centred on production and processing, and Kuwait plans to increase the role it plays in the economy by raising output to 4bn cu feet per day by 2030, including 1.5bn cu feet per day of gas not tied to oilfield output. While the non-associated gas of north Kuwait’s Jurassic structures still drives the natural gas segment, which now incorporates electricity generation, water desalination, petrochemicals and is an agent in EOR processes, much of the nation’s gas output is still of the associated variety. In 2010 about 1bn cu feet per day was produced from associated gas, while non-associated gas production ran from 150m-200m cu feet per day.

GAS EXPLORATION & PRODUCTION: In seeking to boost its levels of natural gas production, the estimated 35trn cu feet of reserves of the Jurassic non-associated gas fields discovered in north Kuwait present considerable opportunity. However, raising production from what has been described as one of the most complex formations in the world has proved difficult.

A first developmental phase with a production target of 175m cu feet per day resulted in a 140m cu feet per day output. A second phase due for completion in 2013 aims to bring new capacity of 500m cu feet per day and is being developed with the assistance of Kharufi National and Saipem. Shell, however, is the most significant source of foreign expertise that Kuwait has turned to in its efforts to exploit its challenging northern fields, where it is working on the Jurassic project through the ETSA signed in 2010.

Further potential for boosting gas output lies in the offshore gas reserves in the divided zone, Dorra gas field and Khafji field (see analysis). Another way in which the country has sought to further increase gas output is to reduce the flaring of gas associated with oil production. In 2012 the country officially joined the World Bank’s Global Gas Flaring Reduction (GGFR) partnership, having already managed to reduce the level of flaring from 17% to 1.75% of its gas production over the 2005-11 period. In addition to the environmental benefits brought on by this reduction it has, according to KOC officials, increased revenues by $2.7bn and led to a reduction in liquefied natural gas (LNG) import volumes.

While Kuwait’s efforts to ramp up natural gas production move forward, the nation continues to consume more gas than it produces. In 2011 it consumed 572bn cu feet of natural gas against a total production of 459bn cu feet, continuing a trend established in 2008 of consumption exceeding production. This has compelled Kuwait to import LNG during the summer months when domestic demand for gas peaks as a result of its role in electricity production. The nation commissioned its first LNG import terminal in September 2009 at Mina Al Ahmadi, and in 2010 the country signed a four-year supply contract with Royal Dutch Shell and the Vitol Group.

With limited onshore LNG facilities, Kuwait has boosted its import capacity through the use of regasification ships during times of peak demand. The nation is also considering the construction of a large-scale onshore facility capable of processing as much as 400m cu feet per day. Yet this approach has been met with criticism from local players. “The country’s energy and gas needs are growing, but the solution is not to import more,” Saedeldeen Akashah, the chairman of Kuwait Catalyst Company, told OBG. “The solution is to work on conservation.”

DOWNSTREAM: Kuwait currently has three crude refineries which have a combined processing capacity of 936,000 bpd, all of which are operated by the Kuwait National Petroleum Company (KNPC): Mina Al Ahmadi, with a capacity of 466,000 bpd; Shuaiba, with a capacity of 200,000 bpd; and the 270,000-bpd facility at Mina Abdullah. Some of the light naphtha, heavy coker naphtha, kerosene, light and heavy diesel, gas oil, green coke, liquefied petroleum gas (LPG), and natural gasoline that they produce is absorbed by the domestic market, but a large proportion of the nation’s refined products is exported.

The nation’s downstream infrastructure is due to be significantly expanded by two large projects, both of which have been delayed by the political process. The Clean Fuels Project (CFP) will see the upgrade of the Mina Abdulla and Mina Al Ahmadi refineries to increase their output to around 800,000 bpd, and the closure of the refinery of Shuaiba. The two upgraded refineries will operate as an integrated merchant complex, and their refurbishment with 39 new units and seven overhauled units is a response to increased demand for higher quality products from Kuwait’s established export markets. Construction at the sites is expected to start in December 2013, with a slated completion date in 2017. The capacity lost with the closure of Shuaiba will be replaced by the second major project taking place in the downstream sector: a new refinery planned for the Al Zour area will add a further 615,000 bpd of refining capacity to the national total to bring it to 1.4m bpd of high quality petroleum products. The SPC granted approval for the KD4bn ($14.3bn) project in June 2011 after nearly three years of political deadlock, and in December 2012 international engineering and project management company AMEC was awarded the $528m Project Management Consultancy (PMC) contract. When completed in 2018, the refinery is expected to be the largest in the Middle East.

Downstream activity connected to the country’s gas production is concentrated in its use as fuel in electricity generation. The generally low quality of the associated gas from Kuwait’s oil production activities means that the nation’s petrochemical sector has largely been built on oil as a feedstock, but the discovery of significant quantities of non-associated gas in 2006 has resulted in more interest in gas as a fuel for downstream industries. While the majority of LNG imported each year to Kuwait is utilised in energy production, some is received by petrochemical producer Equate, an international joint venture between PIC, the Dow Chemical Company, Boubyan Petrochemical Company and Quarain Petrochemical Industries Company, which commenced production in 1997.

More depth is expected to be added to the downstream gas sector with the addition of a new olefins cracker plant, which is being developed by PIC. The unit will be the third olefins cracker in the country and will produce ethylene from a mixed ethane-naphtha feed. In April 2012 PIC stated that it was close to making a decision on an international partner for the project which is expected to start production in 2017.

EXPORTS: With refining capacity standing at about three times the level of domestic demand for petroleum, Kuwait’s refined products make a useful addition to the nation’s crude export business. In 2011, crude and refined exports combined to give a petroleum product export total of 629,000 bpd, establishing Kuwait as one of the largest hydrocarbons exporters in the world, and second in the Middle East only to Saudi Arabia. It also has a considerable tanker fleet, comprised of 16 vessels with a combined dry weight of 2.2m tonnes – the fourth largest in OPEC. Kuwaiti exports of crude oil and its products are shipped to a wide variety of destinations, with the Consumption by fuel, 2009-12 largest recipient being Mexico, followed by Canada, Brazil, the Netherlands and Venezuela. Other significant importers of the nation’s petroleum exports include Colombia, Chile, China and Japan.

Kuwait’s export activity is augmented by its foreign interests in the areas of marketing and refining, which are managed by KPI, alternately known as Q8. The company operates around 4000 retail service stations across Belgium, Spain, Sweden, Luxembourg and Italy, and is a partial owner of two refineries in the Netherlands and Italy.

More recently, Kuwait has shown an interest in increasing its access to growing Asian economies. In China’s Guangdong Province, for example, building work has begun on a new refinery and petrochemical joint venture with Sinopec. The 300,000-bpd refinery and 1m-tonne-per-year ethylene cracking unit is scheduled to come online by 2015, although some observers predict that a later start-up date in 2018 or 2019 is more likely. In Vietnam KPI has entered into a joint venture with Idemitsu Kosan and Matsui Chemicals of Japan and PetroVietnam to develop what will become that country’s largest refinery and petrochemicals complex. KPI has committed to providing 100% Kuwaiti crude oil for the refinery, which will have a capacity of 200,000 bpd. In January 2013 the joint venture awarded the engineering, procurement and construction (EPC) contract for the $9bn development to a consortium of French, Japanese, Malaysian and South Korean firms and announced that construction is to begin in September 2013.

ELECTRICITY & WATER: As with the nation’s hydrocarbons development, the Kuwait government retains direct control over its electricity generation and water supply, which is overseen by the Ministry of Electricity and Water (MEW). The MEW owns and operates all existing power and water production facilities, transmission networks and distribution systems, in addition to selling electricity and water to industrial, commercial and domestic consumers. Kuwait’s upstream activity in the hydrocarbons sector has a direct bearing on its ability to meet its rising electricity demand as well as the need for desalinated water, which is produced via power-hungry distillation processes. Since the 1970s, an increasing amount of the nation’s generated capacity has been derived from natural gas sources, reaching a high in 2008 when it accounted for 35.7% of the total. But while it continues to contribute around a third of total supply, gas shortages have hampered the nation’s ability to generate enough power to meet peak demand.

SOURCE OF POWER: Electricity in Kuwait is generated from five power plants: Doha East, Doha West, Shuaiba North, Sabiya, and Al Zour South, which between them grant the nation an installed generating capacity of 12,500 MW. In 2010 peak demand during the summer months – traditionally the heaviest period of power usage due to the air conditioning of homes and businesses – climbed uncomfortably close to the installed capacity at that time of just over 11,000 MW. Similarly, the 1.5bn cu metres of desalinated water consumed daily stood close to the national production capability. The government estimates that power demand will increase at a rate of between 7% and 10% each year to reach a peak load demand of 25,000 MW by 2025, and it has therefore formulated an ambitious plan to boost capacity that calls for a further 10,000 MW to be added to the system by 2015. In 2012 it provided itself with a degree of spare capacity with the commencement of Phase 2 of the Sabiya combined-cycle plant, which is the largest in the country. The first phase of the facility, which was developed in partnership with Korea’s Hyundai Heavy Industries and GE, became operational in 2011, when the plant added 1400 MW to the grid in single-cycle mode. The completion of the second phase has brought its capacity to 2000 MW.

SOLUTIONS: The challenge of meeting the rapidly rising demand for electricity has encouraged the government to boost private sector involvement in the field of energy provision. Since 2008 it has been assiduously establishing a legislative and regulatory framework by which it can establish independent water and power projects (IWPPs) in the country, which culminated in an IWPP Law (No. 39/2010). Phase 1 of the nation’s first IWPP project is currently being implemented at Al Zour, where the government plans to establish a power and desalination plant with a capacity of at least 1500 MW and 102m imperial gallons per day (MIGD). Kuwait’s new investment model has proved popular with global design and construction firms: 11 consortiums comprising 23 companies had applied for the tender as of March 2011, and in February 2012 the Partnerships Technical Bureau (PTB) selected a consortium consisting of the UK/French IP-GDF Suez, Sumitomo of Japan and local firm AH Sager & Brothers as the preferred bidder for the project. In 2013 Kuwait announced that it is seeking expressions of interest of the second phase of the Al Zour IWPP, and has started the tendering process for its second IWPP project, to be developed at Al Khiran and which will bring another 2500 MW to the grid along with 125 MIGD of desalinated seawater. Both projects represent important milestones in Kuwait’s new IWPP programme, but the development has met with political resistance. Despite Kuwait being the last country in the Gulf region to adopt the investment model, some parliamentarians have objected to the fact that IWPP deals leave the operation of facilities under the control of foreign firms (see analysis).

ALTERNATIVES: Beyond its strategy for oil- and gas-fired plants, Kuwait is also considering a number of alternative power sources in a bid to diversify its energy base. In October 2011, Eyad Ali Al Falah, assistant under-secretary for technical services at the MEW, announced a plan to generate 10% of the nation’s electricity from renewable sources by 2020. Of the various renewable technologies emerging in the global energy market, Kuwait’s arid climate and a solar radiation peak of 8000 Wh/m2 renders it a particularly suitable location for solar processes (see analysis). Both Kuwait University and the Institute of Scientific Research have established research programmes that aim to convert solar theory to practice in the Kuwaiti context. In 2012 the MEW invited interested parties to apply for qualified bidder status for a power station with a capacity of 250 MW, 60 MW of which will be derived from solar power. The MEW has also indicated that it is to enter into a joint venture with the Kuwait Institute for Scientific Research (KISR) to build a 70-MW solar and wind plant, the construction contract of which will also be put out to tender in 2013.

Kuwait, like a number of other states in the region, has expressed an interest in developing a civilian nuclear power programme. Kuwait’s nuclear history extends as far back as the 1970s, when it commenced a programme with the support of the International Atomic Energy Association (IAEA) and the UK Atomic Energy Authority, which later fell into abeyance due to the Three Mile Island accident in the US, the Iraq-Iran War and the collapse in oil prices. The rising oil prices of recent years have rekindled interest in the new concept. In March 2009 the government set up the Kuwait National Nuclear Energy Committee (KNNEC) and charged it with developing the nation’s nuclear policy and acting as a conduit to the various international energy and security bodies that regulate the global nuclear industry.

TAKING STEPS: In September 2010 the government announced its intention to establish four 1000-MW nuclear reactors by 2022, and by mid-2011 it had signed memoranda of cooperation or understanding with the US, Japan, Russia, Jordan and France. As of 2013, similar treaties with the UAE and Korea were under discussion. Much of the KNNEC’s effort has been directed towards the creation of a roadmap to identify and prepare a detailed scope of work to be undertaken by the putative industry’s stakeholders. The roadmap, which is being developed according to IAEA guidelines, will address a range of concerns, including: government issues, such as new legislation and the creation of a decommissioning fund; regulatory development, such as licensing requirements, radiation protection, security and waste management; site certification and the preparation of early site works; project preparation management, which includes technology selection, contractual strategy and public relations; and training and education. To date, some 17 suitable sites within three large areas have been identified for the construction of Kuwait’s first nuclear power plant. In the meantime, the government is preparing the first draft of a new nuclear law for presentation to the National Assembly for review, and this next step may prove the most challenging for the proponents of nuclear power in Kuwait. In the wake of the Fukushima disaster suffered by Japan in 2011 the new law is likely to face opposition from some parliamentarians, despite the fact that the country is not on or near any significant fault lines.

OUTLOOK: Project Kuwait and the signing of the first ETSA in 2010 have demonstrated a desire on the government’s part towards some liberalisation of the oil and gas sector, and industry players will likely be watching how these develop. On the electricity and generation side, the progress of the nation’s IWPP programme to date is encouraging from a foreign investment perspective, although this instrument is just as vulnerable to the political opposition that has stymied other models that have gone before it.

However, regardless of the political challenges, the pipeline of major oil, gas, electricity and water projects that Kuwait has established in a bid to boost production vital to both the nation’s revenue and the task of supplying the power necessary to sustain an expanding population augur well for the private sector. International firms with the expertise in the advanced technology required to exploit Kuwait’s increasingly complex formations are particularly well placed to pick up new contracts in the short to medium term.