Kuwait Jurassic Gas: Kharafi Seeks Finance, Shell Faces Second Probe

As Kuwait prepares to tender a $1.2bn gas fractionation train at Mina al-Ahmadi refinery, it faces a growing gas crisis caused by upstream project delays. Key to success is Kharafi Nationals kick-starting the 1bn cfd Jurassic gas fields project, where Shell has an advisory role. Shell faces an oil ministry investigation in parallel to a parliamentary probe into its contract.

Kuwaiti firm Kharafi National (KN) is seeking finance to develop its phase of Kuwaits 1bn cfd Jurassic non-associated gas fields project, which is key to solving the countrys growing gas crisis. KNs $1.56bn early production facility (EPF) contract aims to lift output from the current approximately 150mn cfd of gas and 50,000 b/d of liquids, to 600mn cfd and 150,000 b/d by 2013.

However, it faces the challenges of: undoing the damage caused by a previous EPF operator; requirements by international banks to provide financing that does not necessarily conform with Kuwait Oil Companys (KOCs) standard contracts; an Italian investigation into alleged bribery involving its sub-contractor Saipem; and two investigations one each by Kuwaits Ministry of Oil and parliament into state-owned KOC allegedly over-reaching its authority in awarding Shell an advisory service deal on the project. The projects geological challenges include extremely dangerous and difficult sour, high-temperature, high-pressure deep gas.

It is not clear if KN factored in the cost of replacing a faulty gas processing plant when it put in its project bid. The problematic plant was built by Kuwaiti construction firm Safwan, which lacked experience in handling sour gas, in the first EPF phase. Shell has recommended building a new one to replace it (MEES, 27 June).

Finance Talks

KN is in advanced talks with two major international banks to finance the project, a KN official tells MEES. Banks are very keen to get a foothold in Kuwait and in the regions upstream sector. But if repayment of loans is dependent on a projects success any cloud cast over it could make lenders less enthusiastic.

KNs parent firm, Kharafi Group, is restructuring debts, triggering much speculation about its future. Theres no definitive amount for Kharafis debtsbut direct and indirect liabilities are at least $5bn, Vice-Chairman Badr Nasir al-Kharafi told Arabian Business magazine in early July. KN, however, says this will not affect the project. The KN official tells MEES: The financing challenges are not due to financial difficulties. In fact we have signed term sheets  how can you sign a term sheet with world-renowned international banks if you have financial difficulties?

To gain technical expertise for a project considered by many to be the worlds most difficult gas project, KN contracted engineering firm Saipem, a subsidiary of Italys state-owned Eni. Italian authorities are investigating employees of Saipem, for allegedly taking bribes during sub-contractor work at the project. On its website Saipem says it took immediate disciplinary and precautionary action against the individuals involved, who have also been described as non-loyal employees of the Eni Group by the Public Prosecutors Office. In the second week of July Saipem cancelled a $70mn order for power turbines for the project, MEES learns.

Shell did not select the companies and has no operational control over the project its Enhanced Technical Services Agreement (ETSA) is purely advisory and involves seconding staff. Nonetheless, Kuwaits parliament and oil ministry have launched investigations into the $800mn deal, according to a Supreme Petroleum Council (SPC) member. A former head of the Kuwait Petroleum Corporation (KPC) tendering committee Kamil Harami tells MEES. In my opinion Shells deal is within the authority of KOC and KPC the tendering committee had approved it.

Contractors and former KPC officials tell MEES that in bidding processes it is common for rival Kuwaiti interests to hire consultants and lawyers to pick holes in contracts, creating a public controversy an investigation does not automatically mean there is impropriety. This is a major reason, they say, that delays Kuwaits projects and has made it one of the Gulfs least attractive places for foreign investment. Lack of transparency also hinders doing business there. One of the latest big foreign companies to be engulfed in controversy in Kuwait is German engineering firm Siemens. In June Munich authorities arrested several former managers for allegedly attempting to bribe officials of Kuwaits energy and water ministry with 1.25mn ($1.8mn) for a gas powered turbine contract. Now only the cheapest foreign companies will come to Kuwait to work in the oil sector, an industry insider said.

Formal Investigation

To clarify media reports, the SPC member tells MEES: Parliament is conducting a formal investigation into the [Shell] deal. The SPC authorized a different investigative inquiry into the deal to be conducted by the minister. Both aim at checking for consistency with laws and regulations. The investigating parliamentary committee will be headed by 'Ali al-'Umair, an Islamist who has helped question a former health minister and member of the royal family during one of the oppositions many fights with the government. The committee will have up to five members, including Rola Dashti, an economist who has worked as a consultant for the World Bank. A campaigner for democratic reform and gender equality, in 2009 she became one of the first women members of parliament. It is not clear if the government investigation is a defensive one that aims to head off the parliamentary inquiry, or if the ministry also suspects KOC may have not followed procedures correctly.

Mr Harami, however, doubts if the SPC had authorized a ministry probe he thinks only parliament is investigating: Theres no way the SPC can investigate anything, and the ministry doesnt have the resources to do it. Shell, which had previously confirmed that parliament is investigating the deal (MEES 27 June) was not willing to comment on the second probe.

Whatever the outcome of any investigation, combined with the projects other problems it makes ETSAs under the terms currently offered by KOC look even less appealing to the majors. Mr Harami says: Its not worth the bad publicity for IOCs afterwards. Besides, they burned their fingers many times and in particular re the Northern Project [also known as Project Kuwait] after spending time, effort, money ended up with nothing.

Gas Shortage

Kuwait is desperately short of gas and needs the majors to boost output. Yet state-owned refiner Kuwait National Petroleum Company (KNPC) is preparing designs for a $1.15bn gas fractionation train at the Mina al-Ahmadi refinery. Its next step is getting its parent firm KPCs approval. A KNPC source tells MEES that the train will take non-associated gas. But KOC looks unlikely to hit its upstream oil field targets, potentially leaving idle the planned train and a planned petrochemical plant near the site. This gives the Jurassic gas project whose condensate could substitute ethane feedstock for the planned olefins plant of KPC subsidiary Petrochemical Industries Company (PIC) even greater urgency.

Kharafis EPF was the third awarded by KOC to meet the final goal of 1bn cfd and 350,000 b/d of liquids mostly light crude but with some condensate from the northern Jurassic gas fields Sabriya and Umm Niga by 2016. Kuwaits current gas output nearly all associated gas is about 1.3bn cfd and it has to burn crude oil in power plants during peak power demand. The fractionation train the refinerys fifth will have a capacity of 105,000 b/d of LPG and condensate, and 800mn cfd of ethane and natural gas. It is scheduled for start-up in 2017.

The fourth train, of the same size and configuration, will be built by 2013-14, in time for extra associated gas and NGLs to come from the Western fields. Last year Saipem was awarded a $900mn onshore contract to build a new gas booster station in West Kuwait. The station is comprised of three high and low-pressure gas trains to produce 234mn cfd of gas and 69,000 b/d of condensate and LPG. If the project is completed, it is scheduled to be on stream within the second quarter of 2013. Saipem is also building Gas Booster Station 160 located in Southeast Kuwait for KOC.

For 2017, when the fifth train is due to start up, Kuwait has pinned its hopes on developing the offshore Dorra gas field to provide 500-800mn cfd of feedstock. It is preparing a bidding round to build a sulfur unit in the planned onshore processing plant. However, Dorra lies in the Neutral Zone, which Kuwait and Saudi Arabia jointly operate, and have put off developing for decades because it straddles a disputed border with Iran. The countries back rival groups in Bahrain, and Tehran has recently increased the tension by announcing that it will go ahead alone and develop the field without a border deal. Contractors say that the moves make it unlikely that Kuwait will develop Dorra.

The only other potential source of gas for the train is associated gas from planned oil field developments. Three gathering centers in the Northern fields will, KOC claimed last year, help boost crude capacity output by 120,000 b/d soon with accompanying associated gas, to 820,000 b/d. Insiders, however, question how KOC can do this. In 2007 it signed a preliminary ETSA with ExxonMobil to raise production from the fields to 900,000 b/d capacity by 2020, and said that this was not possible without the majors. Talks with ExxonMobil, however, have dragged on for nearly four years without the deal being closed and KOC claims to have achieved the increase alone. KOC also claims to have 3.5mn b/d of crude production capacity. Analysts, however, put it at below 3mn b/d. Contractors wonder why the fifth train is being built, given its lack of feedstock. Its a 50-car garage for a two-car home, a gas field and refinery equipment supplier tells MEES. Communication between KPC affiliates is poor. KNPC officials involved in projects that require upstream feedstock frequently dont know the status of KOCs developments.

The growing gas crisis is a potential additional threat to Kuwaits power supplies. Due to poor transmission networks and lack of power plant capacity, Kuwait typically suffers power outages each summer. And this summer the power demand will be heavier than usual in August as Kuwaitis return home for Ramadan instead of spending their customary summers abroad in cooler countries that have functional power supplies.

Kuwait had turned to nuclear power, carrying out feasibility studies and selecting a site for power plants. But its program may not progress as planned. Deputy Prime Minister Muhammad al-Sabah has recently said that the country no longer intends to include nuclear power in Kuwaits energy mix. It is not clear if his comments meant a delay or cancellation of the program.

Copyright MEES 2011.