Kuwait's oil and gas sector is a vital source of income for he country but long-term prospects hinge on the implementation of new projects, which seem as far off as ever
For the twelfth-richest country in the world, powered by its oil production, Kuwait faces some surprising challenges. The most tangible is the power cuts that struck in summer 2010 and 2011, leaving residents unable to sleep in temperatures exceeding 50 degrees.
The power cuts are just the tip of the sand-dune, symptomatic of a broader malaise in the Kuwaiti economy - an inability to execute major projects. Political gridlock culminated in the storming of the Kuwaiti parliament in November last year by protesters angry over corruption allegations. The complex dispute continues, combining elements of democratic politics with a generational struggle within the al Sabah ruling family.
Along with adequate supplies of electricity and gas, this stagnation prevents Kuwait from realising its oil production potential, at a time of record oil prices and nervousness over spare capacity. Interestingly, Chinese premier Wen Jiabao, on his recent tour of the Gulf, did not visit Kuwait even though it is one of the three countries (with the UAE and Saudi Arabia) which could increase production to make up for any reduction in Iranian supplies.
Kuwait's oil production performance has actually been surprisingly good recently. The country claimed its output reached three million barrels per day (b/d) at the end of 2011, which would be the highest level since 1973.
In the longer term, heavy investment is needed if the country is to reach its target of four million b/d by 2020, reaffirmed in November by oil minister Mohammed al Buseiry. As far back as 1998, 'Project Kuwait' was unveiled, an ambitious plan to bring in international oil companies to increase output at five northern fields. This would help compensate for the increasing maturity of Burgan, the country's largest (and world's second-biggest) field, discovered in 1938. By placing foreign investors astride the route from Iraq, it would also help guarantee Kuwait's safety in case of any repeat of Saddam Hussein's 1990 invasion.
But Project Kuwait was first held up by disputes between parliament and government. MPs alleged the deals violated constitutional provisions against foreign ownership of oil reserves, even though - like Iraq's - the contracts were for technical services, paying only a fee per barrel produced. And the 2003 US invasion of Iraq removed a large part of the national security motive, while soaring oil prices made expanding output seem less urgent.
In 2006, a Kuwait Oil Company (KOC) report surfaced in the international press claiming that the country's reserves were heavily overstated - just 48 billion barrels instead of the then official 99 billion. KOC denied the report, said that it did not include some 70 undeveloped reservoirs, and actually upgraded its reserves by 12 billion barrels in 2010. But some MPs took the report as further ammunition against Project Kuwait, and even called for production to be reduced to conserve resources for the future.
Kuwait also has substantial heavy oil reserves. In the Saudi section of the Neutral Zone, oil major Chevron has run a successful steam injection pilot to establish commercial production. Little progress has been made on the Kuwaiti side, despite agreements signed with ExxonMobil and Total. Heavy oil forecasts, now included in the four million b/d target, have been repeatedly scaled back.
The gas and electricity front is an even more complex story. With most of Kuwait's gas production a by-product of oil and insufficient to meet demand, the country is forced to look to imports. The offshore Dorra field is disputed with Iran, which said in early January it would develop the field on its own if no agreement was reached. Meanwhile, long negotiations with the Qataris for a pipeline ended in 2006 when Saudi Arabia refused to allow it to transit it their territory.
A pipeline from Iraq, completed just before the First Gulf War but never used, could bring in growing amounts of otherwise wasted, flared gas. However, despite the involvement of private company Kuwait Energy in Iraqi gas developments, the relationship between the two countries remains frosty, over outstanding debts and war reparations, and Kuwait's construction of a port which the Iraqis complain impedes their narrow access to the Gulf. In July 2011, Iraqi MPs accused Kuwait of stealing their oil by drilling under the border. Saddam Hussein made a similar accusation before the 1990 invasion.
With no prospect of supplies from its neighbours, Kuwait thus became in September 2009 the first country in the Middle East to import liquefied natural gas (LNG), using an innovative floating terminal. Remarkably, the first shipment arrived from Sakhalin in Russia's Far East, rather than from near neighbour Qatar, the world's largest LNG exporter.
Even with LNG, more than half of Kuwait's electricity is generated from fuel oil, which is expensive and polluting. Like other projects, plans to upgrade two refineries and build a third, al Zour, to replace the ageing Shuaiba facility and produce clean, low-sulphur fuels have been repeatedly delayed. Al Zour, cancelled in 2009 over accusations of contracting irregularities, was revived in 2010, but there is no great industry expectation of fast progress.
Large discoveries of gas in Kuwait's north in 2006 promised to ease its supply problems. But the Jurassic finds, deep underground, at high pressure and sour (with a high proportion of deadly hydrogen sulphide) were described as the "world's most difficult gas project". One local Kuwaiti construction firm built a faulty gas processing plant; another, Kharafi, ran into financial and bribery troubles with Italian subcontractor Saipem. Shell was engaged to give technical advice, but Kuwait's parliament launched an investigation into whether KOC had overstepped its authority in awarding the deal.
Gas shortages have also caused problems for the petrochemical sector, an engine of economic growth and employment generation in other Gulf countries. Most striking was the collapse of the $17.4 billion K-Dow joint venture in late 2008 when, with falling oil prices, opposition parliamentarians claimed it was over-priced. Dow Chemical later sought $2.5 billion in damages over the project's failure.
Kuwaiti electricity demand is growing at some seven to 10 per cent per year, amongst the fastest rates in the world, spurred by very low prices that have not changed for decades. Kuwaiti consumers pay 0.7 US cents per kilowatt hour (kWh), compared to a basic rate of 5.4 cents per kWh in Dubai and generating costs estimated at 12.5 cents.
Last October, the electricity and water ministry announced ambitious targets to generate a tenth of its electricity from solar power by 2020. With conducive climatic conditions, and sunshine matched to peak demand from midday air-conditioning, there is a strong economic case to replace oil with solar power where possible. But delays in choosing the appropriate technology means most observers are sceptical these targets will be met.
The then foreign minister Dr Mohammad al Sabah backed away from plans for nuclear power in July last year. In the meantime, completion of one gas-fired power plant, at Sabbiya, will partly ease the situation, but delays to the North Zour station, originally planned to begin operations in 2013, are likely to lead to renewed shortages.
Inward-looking politics have prevented Kuwait from playing the role it should have done in regional and global energy markets. Recent increases in production have been very useful in making up for disruptions from Libya. But the lack of progress towards the four million b/d target prevents the country from playing much of a role in the Saudi effort to offset any shortfalls from sanctioned Iran.
As one of the world's major oil reserve-holders, Kuwait risks losing market share to Iraq as its neighbour's ambitious expansion plans progress. Gas investments around Basra would help bring much-needed supplies while improving political ties with Baghdad and fostering stability. And it could have led the Gulf in unconventional oil and gas, with its Jurassic finds, but has failed to find an effective partnership model or develop sufficient indigenous capabilities. It is thus unlike all of its Gulf Cooperation Council (GCC) peers, even Saudi Arabia, which have worked effectively with foreign oil companies.
Although a closure of the Strait of Hormuz is improbable, Kuwait is very vulnerable to any disruption of Gulf traffic. Unlike Iraq, Saudi Arabia, the UAE and Oman, it has no alternative routes avoiding Hormuz for its oil exports. Yet this danger has received surprisingly little attention - with no talk, for instance, of connecting Kuwait to the Saudi pipeline system to give it an outlet to the Red Sea.
In Kuwait, as in its two large northern neighbours, energy developments are held hostage by politics. But even Iran, despite sanctions and bureaucratic infighting, has been more successful in progressing its gas, refining and petrochemicals projects. Kuwait, arguably the most developed of the Gulf countries in the 1960s, has come to rest on its laurels.
With parliamentary elections in early February unlikely to resolve the deadlock, there seems little hope for an improvement in Kuwait's energy scene until it ceases to be a political plaything, and returns to being the key pillar of sustaining economic growth and quality of life.
Robin M. Mills is Head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing Carbon. robin@oilcrisismyth.com and Twitter@robinenergy
© The Gulf 2012
