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2014-04-06 17:09:00



KDN. Kuwait may lay claim to more than 5% of the world's total oil reserves, but without the expertise and equipment needed to tap into the bulk of this, and with strict rules prohibiting foreign help, the country is struggling to realise its energy potential.

Kuwait's recently appointed minister of oil, Ali Saleh al-Omair, has assumed office at a challenging time for the country's hydrocarbons sector. Tasked with meeting ambitious medium- and long-term production targets for both oil and gas, his ministry is working closely with state-owned energy company Kuwait Petroleum Corporation (KPC) on a strategy designed to revitalise the country's energy industry by 2030.

These targets include increasing oil production capacity from the current 3.25 million barrels per day (bpd) to 4 million bpd by as early as 2020, with gas production set to increase from about 1.4 billion cubic feet (bcf) per day to 3bcf by 2030.

Yet the country faces significant obstacles in achieving these ambitions, both politically and technologically. While Kuwait's long history of oil exploration and production has generated an extensive energy infrastructure, much of it is geared towards the extraction and processing of conventional oil. Similarly, regulations surrounding foreign investment, coupled with a fractious political environment, have stalled a number of key development projects. Addressing these concerns will be paramount if the country is to meet its longer term national and energy development objectives.

In terms of oil, Kuwait's energy potential is vast. It holds proven reserves of 101.5 billion barrels, according to the 2013 BP Statistical Review of World Energy, or about 6% of the world total. This figure excludes additional reserves of about 5 billion barrels held in the Partitioned Neutral Zone, a contested territory, jointly operated with Saudi Arabia. Roughly half of Kuwait's current production comes from the super-giant Greater Burgan field, the second largest onshore oil reservoir in the world.

Drying up

Reservoirs such as Greater Burgan are rapidly maturing, however, and currently the majority of Kuwaiti production is sourced from a handful of these ageing fields. As reservoir depletion accelerates, huge levels of investment have been required to sustain production at existing levels. Accordingly, Kuwait's energy outlook is centred on the exploration of new reserves, the implementation of enhanced recovery techniques and unconventional production. This changing exploration and production landscape is leading to increased costs as well as a greater need to court foreign expertise.

"In terms of the upstream sector, Kuwait is increasingly looking towards unconventional sources of oil and gas, which are expensive to extract. It will therefore be vital to keep abreast of new technologies that will enable cost-effective exploration and production both in terms of time and money," says Abdulmajeed Al Shatti, a member of Kuwait's Supreme Petroleum Council.

As the authorities have pressed for increased production, the Kuwait Oil Company, a KPC subsidiary responsible for domestic exploration and production, is focusing on the potential of unconventional heavy oil in the north of the country. Though more expensive and technologically challenging to extract and refine into usable petroleum product, an estimated 13 billion barrels of heavy oil is located in the north of Kuwait.

Projects such as the Lower Fars heavy oilfield, involving cyclic steam stimulation techniques, are deemed to be the kind of longer term investments required to offset reduced conventional production in the country.

In conjunction with heavy oil developments, the Kuwait Oil Company has ambitious plans to upgrade production from the country's geologically challenging northern fields – Abdali, Sabriya, al-Ratqa and Raudhatain – from the current 700,000 bpd to 1 million bpd before 2020. This production increase will be achieved through an aggressive programme of enhanced oil recovery techniques, infill drilling and other advanced methods designed to stimulate total output.

However, many of these projects will require international expertise, a premise that has been problematic in Kuwait. "Historically, there has been a degree of political opposition to greater foreign investment in the oil and gas sector. Though attempts have been made to find suitable workarounds, more needs to be done to attract the expertise needed to meet production targets," says Daniel Kaye, head of macroeconomic research at National Bank of Kuwait.

Foreign input

At present, foreign ownership of domestic hydrocarbons resources is prohibited under the Kuwaiti constitution. This seems unlikely to change in the face of strong political opposition. However, international oil companies can enter into Kuwait's energy sector through an enhanced technical services agreement (ETSA). These agreements have been relatively successful in attracting interest from foreign entities, though many observers retain a degree of scepticism over their long-term efficacy.

Moreover, political and regulatory impediments continue to hinder the swift implementation of such contracts.

A 2010 ETSA agreement signed between Royal Dutch Shell and Kuwait Oil Company for $800m, covering the country's Jurassic gas fields, has been delayed pending a parliamentary investigation into the agreement. Parliamentary pressure was also blamed for the breakdown of a joint venture between Dow Chemical and KPC in 2008, although the former received $2.2bn in compensation in 2013.

Elections for Kuwait's National Assembly held last year, which were boycotted by the opposition, have delivered an ostensibly pro-government body which is expected to improve the investment climate. The approval of a $12bn clean refinery project in February this year, involving the upgrade and expansion of the country's two largest refineries by a US-UK-Japanese consortium, is seen as a positive reflection of this new political dynamic.

Improvements will need to be swift if Kuwait is to meet its stated production targets. In particular, ambitions to augment domestic gas exploration and production, in a country with 63,000bcf of proven reserves, will require greater investment incentives. The contract investigation into Shell's Jurassic gas fields deal has slowed the development of this important resource, which holds an estimated 35,000bfc of non-associated gas. Given that 1bcf of production per day is produced from associated gas, the need to explore and produce from non-associated fields is pressing.

Other sources of gas are expected to come from fields in the north, as well as the Dorra offshore gas field in the neutral zone shared with Saudi Arabia. However, a deal to develop this reservoir fell through in 2013 following disagreements on how to allocate the resource. The shelving of this arrangement was seen as a major blow to Kuwait's ability to improve domestic gas production.

Pipe dreams?

At present, Kuwait is a net importer of gas, receiving significant supplies of liquefied natural gas (LNG) from Qatar and Nigeria, according to the US Energy Information Administration. The demands of a growing population coupled with a power generation sector increasingly fuelled by gas-fired plants has led to power shortages at the start of 2014, and the shutdown of refining and petrochemical facilities in the country.

"Kuwait is still some way away from being self-sufficient in terms of gas production. Achieving this goal will be a major boon for the country's power generation and petrochemical sectors, while also freeing up more oil for export," says Mr Kaye.

Despite the challenges facing the country's oil and gas sector, the KPC's strategic directions, as well as the scale of the investment being used to meet these aims, are promising. In November 2012, Kuwait Oil Company announced spending plans totalling $40bn over five years to upgrade infrastructure aimed at boosting production capacity. Similarly, the Kuwait National Petroleum Company, KPC's downstream subsidiary, is investing $32bn in major refining and LNG projects by 2019.

These ambitions speak to the long-term vision and purpose of the country's energy industry. A similar mindset on the part of the political classes would go a long way to helping this vision become reality.

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