Domestic politics slow Kuwait’s oil production expansion plans
Washington - Kuwait is once again pledging to increase its oil production capacity. A senior executive with the state-owned Kuwait Petroleum Corporation (KPC) said that the emirate would spend as much as $115 billion over the next five years, including $76 billion on exploration and production, with the goal of increasing production by 1 million barrels per day (bpd) to 4 million bpd by 2020.
Kuwait’s track record on hitting production capacity targets has been far off the mark and the fields it hopes to develop require foreign expertise, an ongoing sticking point with the country’s National Assembly.
About 25 years ago, KPC forecast in its 15-year crude expansion programme covering the period of 1990-2005 that crude production capacity would increase to 3 million bpd by 2000 and 3.5 million bpd by 2005.
In 1998, as part of Project Kuwait, the Kuwaiti government announced the emirate’s goal of reaching 4 million bpd of capacity by 2020 and sustaining that level until 2030. It was hoped that this more ambitious objective would lure international oil firms to help develop the challenging northern oil and gas fields that require technology and expertise beyond Kuwait’s ability.
However, over the years the Kuwaiti legislature has resisted moves to bring foreign participation into the emirate’s oil and natural gas upstream business, declaring various proposals for foreign involvement “unconstitutional”.
Therein lies the crux of Kuwait’s problem. The Kuwait constitution excludes foreign firms from ownership of the country’s natural resources, thereby preventing the common product-sharing agreements that international oil firms prefer when making major investments to explore and develop oil and gas resources.
As an accommodation, KPC created an “incentivised buy-back contract” (IBBC) arrangement that avoided production sharing and oil concession ownership for foreign companies. The ruling Al Sabah family agreed that the legislature would have the power to approve all IBBC contracts.
That structure was opposed by the National Assembly, which has assumed the role of protector of the country’s most important natural resources, arguing that it is in the interests of Kuwaiti citizens and future generations that foreign oil firms gain no control over or shares in the emirate’s oil and gas assets.
Flash forward to 2016: Kuwait’s crude production capacity is about 3.15 million bpd, just above its target for 2000 and below its goal for 2005. In an effort to come up with a mechanism to tap into foreign expertise without raising the hackles of the National Assembly, KPC’s exploration and production subsidiary, Kuwait Oil Company (KOC), tested the waters in 2010 by signing an $800 million enhanced technical services agreement (ETSA) with Royal Dutch Shell to provide contract services to assist in developing the giant Jurassic natural gas reserves discovered in 2006 in northern Kuwait.
Not surprisingly, the Shell deal ran afoul of the legislature, which in 2011 launched an investigation into the awarding of the contract amidst allegations that it had been granted without competition. That investigation is ongoing and has put a damper on investments by other international firms eyeing Kuwait’s oil and gas upstream activities.
In 2014, KOC invited five international powerhouses — Shell, BP, Total, Chevron and ExxonMobil — to bid on an ETSA for the Ratqa heavy oil field development near the Iraqi border in northern Kuwait. The objective was to have an initial 60,000 bpd pumping from the field by 2018 and increase that volume to 180,000 bpd by 2025 with an ultimate target of 270,000 bpd by 2030. The plan stalled due to political opposition to the ETSA.
KOC signed a less-controversial technical service agreement with BP in September 2014 in which the British oil major would provide enhanced oil recovery expertise to ensure that the production capacity of Kuwait’s giant and mature Burgan oil field in the south is maintained at 1.7 million bpd after boosting recovery rates through water injection.
Because the bulk of Kuwaiti crude production derives from mature fields, KPC and KOC have little recourse but to develop the emirate’s northern heavy oil fields if the Kuwaiti government wants to substantially boost its crude output.
It is not as if the emirate does not have the financial resources to move forward with such plans. According to the Sovereign Wealth Fund Institute, as of April the Kuwait Investment Authority had assets exceeding $592 billion.
It is doubtful, however, that Kuwait will hit its 4 million bpd oil production capacity target by 2020 as the biggest obstacle hindering the Gulf state’s oil development progress remains domestic politics.