Kuwait continues to undermine its ability to fully tap obvious potential

Jul 10, 2001 02:00 AM

Despite its vast hydrocarbon reserves, Kuwait -- through a myriad of issues including political deadlock -- continues to undermine its ability to fully tap its obvious potential. There is no doubting how vital oil production is to Kuwait's economy. Last year the sector's revenues earned the country a surplus of more than K$ 1 bn compared to a projected deficit of K$ 1.577 bn. This came from an average oil production of 2.1 mm bpd.
Kuwait contains 96.5 bn barrels, or 9 % of the world's oil reserves. This year production has been running at 1.9 mm bpd, 400,000 bpd below full capacity. More than half of the production is taken from the Greater Burgan field, including Burhan, Magwa and Ahmadi. In the north of the country, Raudhatain, Sabriyah, Ratqa and Abdail together produce around 400,000 bpd and Minagish and Umm Gudair in the west are the other principal fields. There is also 700,000 bpd production from the neutral zone shared with Saudi Arabia.

Valuable as its crude oil reserves of 96.5 bn barrels are (providing a reserve-production ratio of over 140 years), Kuwait possesses almost no proven reserves of non-associated gas. And, for a state that is keen to expand and develop petrochemical production and other industries (as well as increase power generation capacity) therefore, this is a serious problem. This is particularly true because the level of gas production is determined by how much oil is produced and that in turn is dependent on negotiation with OPEC on Kuwait's quota.
A shortage of available gas supplies, for example, meant that as a result of providing promised gas supplies to the Equate petrochemical complex, the Ministry of Water and Electricity had to resort to much more costly fuel oil consumption in some of its facilities. Compared to the past, Iraq is no longer a viable source of gas supplies for Kuwait and new sources have had to be found. (A memorandum of understanding has been signed by Kuwait Petroleum Corporation and Qatar. Arthur D. Little is carrying out a feasibility study on a pipeline from Qatar's North Field and its possible cost.)

Although in terms of gas, Kuwait is not the master of its own destiny, in oil production terms it is. Kuwait Petroleum Corporation has set out plans to increase production capacity to 3 mm bpd by 2005 and 3.5 mm bpd by 2010.
The quickest and surest way to achieve this is probably to invite foreign participation. Even though the national constitution forbids any foreign ownership of mineral resources, the government has for some time been slowly moving towards allowing outside investment in its oil production. This is to be in the form of operating service contracts that would leave the government still in full ownership of the country's reserves.
However, in comparison with its Saudi neighbour, Kuwait has been positively leaden footed in pursuing negotiations with international oil companies on allowing their re-entry into the country's upstream, even though in Kuwait's case the debate essentially focuses on oil ratherthan gas development.
Discussions with international oil companies started three years ago, but decisions have been held up by an ongoing antagonism to the scheme by Kuwait's National Assembly, some of whose members see it as an attack on national sovereignty and control of the state's most valuable asset. International oil companies have in fact been working for KPC's upstream subsidiary Kuwait Oil Company for most of the last decade under technical service agreements. BP signed the first of these agreements in 1992, another followed with Chevron in 1994 and a third with ExxonMobil in 1996.

The upstream work on offer involves development of oilfields in northern Kuwait near the Iraqi border in Raudhatain, Sabriyah, Ratqa, Abdalli and Bahra. The requirement for foreign participation is that the fields' combined production must be doubled to 900,000 bpd. In a second phase, Minagish and Umm Gudair, two fields in the west of Kuwait, would be opened for bids.
The overall suggested $ 7 bn-investment programme also calls for a new industrial community to be developed at Subiya. It is thought that a single consortium will eventually be selected to develop the northern fields, which will also be tasked with increasing oil reserves by 14 bn barrels.
The term service provider, however, is a euphemism for contractor and whether a role other than producer will be sufficiently attractive to foreign groups has yet to be established. While hydrocarbon reserves will have to remain legally in Kuwait ownership, the state will also demand retention of sovereign control over production and revenues and strategic management decisions regarding production levels, even though the consortium will be in charge on the ground.

Some argue that for oil companies, the operating service contract route has an advantage over the type of buy-back arrangements seen in Iran, for example, by offering longer-term arrangements (25 years) for companies, so they can plan revenue streams over many years. Contracts are also not price related and provide a fixed fee to the companies per barrel of oil, which is an advantageous arrangement at times of low prices.
While the consortium chosen will have to finance all capital expenditure and operating expenses, it will, in return, receive a mixture of fees and allowances to cover all outlays and costs rewarded for its performance against a set of specific targets. But the size of response is still to be measured.

Source: Motivate Publishing
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