Renewed push for Iraqi-Kuwaiti gas supply deal

Kuwait’s growing electricity demand and Iraq’s desire to not waste gas it flares daily were the impetus for the neighbours to agree in principle to a gas supply deal in early 2018.
Saturday 31/08/2019
Gas flares at the Basra Gas Company’s (BGC) facilities. (AFP)
Sticky issue. Gas flares at the Basra Gas Company’s (BGC) facilities. (AFP)

Kuwait and Iraq are building on their neighbourly energy cooperation with news that they have picked a British firm to conduct a technical study on developing joint border oil fields.

However, one project preliminarily agreed to last year by the two Gulf countries, involving natural gas deliveries to aid Kuwait in meeting its soaring electricity demand and help Iraq pay war reparations, still needs a sign-off from the government of Iraqi Prime Minister Adel Abdul-Mahdi.

The two Gulf countries signed an agreement in early August awarding British reservoir speciality firm ERC Equipoise a contract to study the most effective way to invest and tap into several shared border oil fields. The technical review, expected to take two-and-a-half years, will reportedly focus on the Ratqa/Rumaila and Safwan/Abdali fields.

Developing shared oil fields has long been a sticky issue for Gulf producers but Kuwait began pushing to resolve outstanding field conflicts with several of its neighbours last year, resulting in the collaboration with Baghdad and progress with Riyadh on restarting their shared Neutral Zone production.

In August 2018, then-Kuwaiti Oil Minister Bakheet al-Rashidi said the government expected to reach an agreement on importing gas from Iraq as well as the development of shared border fields by the end of last year.

Kuwait’s growing electricity demand and Iraq’s desire to not waste gas it flares daily were the impetus for the neighbours to agree in principle to a gas supply deal in early 2018 involving the piped delivery of gas from southern Iraqi fields to Kuwait.

The agreement, which had been under discussion by the former foes for several years, was for Iraq to initially supply the emirate with 50 million cubic feet per day (MMCF/D) of gas, with volumes gradually rising to 200 MMCF/D. The arrangement was intended to help Baghdad work down reparations it owes to Kuwait from its 1990 invasion, recently estimated at $3.7 billion.

Iraq flares some 1.7 billion cubic feet per day of associated gas primarily from its southern oil fields, losing as much as $2.5 billion in potential revenue. Iraqi Oil Minister Thamer Ghadhban said this summer that his government aimed to eliminate flaring from those fields by 2022.

Although early discussions focused on using an existing 30-year-old pipeline near Basra that would have required extensive maintenance, it was subsequently reported that Iraq had hired Japanese firm Tokyo Engineering to build a new line to Kuwait, with completion and first deliveries expected this year. It is unclear how much progress has been made on that new pipeline.

As part of the potential gas supply deal, Kuwait signed an agreement with the Basra Gas Company — a consortium comprised of Iraqi state firm South Gas Company, Royal Dutch Shell and Mitsubishi that produce gas from the Iraqi southern fields of Zubair, Qurna 1 and Rumaila.

A recent Kuwaiti media report stated the gas agreement had been on hold because, while it had been approved by former Oil Minister Abdul Jabar Ali al-Luaibi under Prime Minister Haider al-Abadi’s government, it now needs to be signed off by Ghadhban under the current Iraqi administration. Disagreement over the pricing of the Iraqi gas may have delayed finalising the supply deal.

Kuwait uses natural gas primarily for domestic power generation, water desalination and in its petrochemical industry. Because of the Kuwaiti government’s continued practice of heavily subsidising electricity costs for its citizens, domestic power demand continues to climb, particularly during the summer months.

Kuwait is consistently ranked among the highest in the world in power consumption per capita. The emirate has become increasingly dependent on liquefied natural gas (LNG) imports because its own gas output is insufficient to match demand.

Although areas in the emirate were hit by power cuts as recently as the summer of 2016, the government has worked to increase the Gulf country’s power capacity through plant upgrades as well as increased LNG supplies to avoid blackouts.

In June, Kuwait’s Ministry of Electricity and Water stated that, with temperatures topping 50 degrees Celsius, the emirate recorded its highest electricity consumption of 14,360 megawatts (MW), a 3.5% rise compared to the highest rate registered in 2018. Kuwait’s power grid capacity is approximately 18,000 MW.

Kuwait became the first LNG importer among the Gulf Cooperation Council members in 2009, taking in imports via a floating storage and regasification unit at al-Zour Port.

A major infrastructure project in progress at al-Zour that includes a 615,000-barrel-per-day refinery and the petrochemical plant would provide the emirate with a permanent LNG import terminal with an annual regasification capacity of 22 million tonnes and eight storage tanks. The land-based LNG facility is to be completed in the first quarter of 2021.

State oil firm Kuwait Petroleum Corporation indicated that it will transition from short-term supply deals to contracts of up to 15 years of annual LNG volumes totalling 6 million-7 million tonnes after 2020.

Should the Iraqi-Kuwaiti gas supply deal fail to materialise, it wouldn’t be a stretch for the emirate to revise or supplement those LNG contracts to satisfy its domestic power needs.