Kuwait Oil and Gas Industry: An Overview
Kuwait Oil and Gas Industry: An Overview
Kuwait is a small country that holds 102 billion barrels of proven oil reserves and ranked tenth in the world for oil and other liquids output in 2015, and fifth among the fourteen OPEC members. Oil export revenue accounts for about 89% of total fiscal revenue. This article reviews the country's oil and gas sector in detail.
1. Energy Overview
Kuwait covers only about 6,900 square miles (roughly 17,870 square kilometres — 1/120 of Saudi Arabia and 1/92 of Iran), yet in 2015 it ranked tenth globally in output of oil and other liquids and fifth among OPEC's fourteen members, behind Saudi Arabia, Iran, Iraq and the UAE.
The economy depends heavily on oil export revenue. The IMF estimates that oil accounted for 70% of government revenue in 2015, though the real share was as high as 89%. Like other OPEC members, Kuwait saw export revenue fall sharply as international prices declined: export revenue was about USD 104 billion in 2014, equal to 94% of government revenue, but only USD 55 billion in 2015.
The US Energy Information Administration estimates Kuwait's net export revenue at USD 40 billion in 2015, about half the 2014 level. Lower output and lower export volumes played a part, but falling prices were the dominant factor. To maintain its position as a leading global producer, Kuwait has set a target of 4 million barrels per day of crude and condensate by 2020. The plan includes expanding capacity in the Neutral Zone, which was shut in during the fourth quarter of 2014 amid a dispute with Saudi Arabia. Over the past decade, however, upstream delays and insufficient foreign investment have made capacity growth extremely difficult.
Most of the capacity increase is expected to come from projects of Kuwait Oil Company (KOC), whose total capacity is expected to reach 3.65 million barrels per day by 2020. The remaining 350,000 barrels per day would come from projects in the Partitioned Neutral Zone (PNZ) managed by Kuwait Gulf Oil Company (KGOC).
To reduce its dependence on oil, Kuwait has stepped up exploration and development of non-associated gas fields, although these still contribute little to output. Additional gas will support a power sector that has recently been unable to generate enough electricity to meet peak demand. Gas rose from 34% of primary energy consumption in 2009 to 43% in 2015, while the share of oil and other liquids declined.
2. Institutions and Policy
Energy policy is set by the Supreme Petroleum Council and reviewed by the Ministry of Oil.
Kuwait Petroleum Corporation (KPC) and its subsidiaries implement oil policy across the country.
The Kuwait Investment Authority manages the country's sovereign wealth fund and oversees all domestic spending and international investment.
Kuwait's constitution prohibits foreign ownership of its resources and revenue, yet the government encourages foreign participation through technical and service contracts. Kuwait is an emirate led by the Emir, a position held hereditarily by the Al-Sabah family; the Prime Minister, Deputy Prime Minister and Council of Ministers are approved by the Emir. Disagreement between the Emir and parliament over contract management — particularly contracts involving foreign companies and project logistics — is a major reason why large energy projects are frequently delayed, and frequent changes of government and dissolutions of parliament have slowed major projects further.
3. Oil and Other Liquid Fuels
3.1 Sector organization
The government owns and controls all oil development. The state-controlled KPC and its subsidiaries control all of Kuwait's oil and other liquids, from upstream through downstream to export.
[Supreme Petroleum Council] Oversees the oil industry and policy-making. It is chaired by the Prime Minister; its other members (six ministers and six private-sector representatives) serve three-year terms and are selected by the Emir.
[Ministry of Oil] Supervises implementation of all policies in the upstream and downstream oil and gas sectors.
[KPC] Manages domestic and foreign oil investment.
[KOC] KPC's upstream subsidiary, taken over by the government in 1975, manages all upstream oil and gas development.
[Kuwait National Petroleum Company (KNPC)] Controls downstream operations.
[Petrochemical Industries Company (PIC)] Oversees petrochemicals.
[Kuwait Oil Tanker Company (KOTC)] Oversees oil exports together with KNPC.
[Kuwait Foreign Petroleum Exploration Company (KUFPEC)] Handles KPC's overseas interests, including upstream oil and gas in eight countries.
[Kuwait Petroleum International (KPI)] Handles downstream operations abroad.
Several non-state companies also operate in Kuwait, including Independent Petroleum Group, Aref Energy Holding and Kuwait Energy Company (KEC). KEC has been notably successful and has acquired interests abroad since its founding in 2005, including in Yemen, Egypt, Russia, Pakistan, Ukraine and Oman.
PNZ operations are managed separately onshore and offshore.
Onshore: development began with the American Independent Oil Company (Aminoil) and was nationalized in 1977. Getty Oil, later part of Chevron, developed the onshore Wafra, South Umm Gudair and Humma fields. Although management of KPC's PNZ interests passed to KGOC, Chevron remains a partner in managing the project.
Offshore: the Japanese Arabian Oil Company (AOC) discovered the Khafji, Hout, Lulu and Dorra fields in the 1960s, but its concessions in Saudi Arabia and Kuwait expired in 2000 and 2003. KGOC was created in 2002 to oversee KPC's offshore operations. KGOC and Saudi Aramco Gulf Operations Company (AOGC) then formed the Al-Khafji Joint Operations Company (KJO) to manage PNZ offshore oil and gas production.
3.2 Oil reserves
According to Oil & Gas Journal, Kuwait held 102 billion barrels of oil reserves as of January 2016, about 6% of the world total and the sixth largest globally. This includes 5 billion barrels of proven reserves in the PNZ, which Kuwait and Saudi Arabia share equally. About 13 billion barrels are heavy oil, mainly in northern Kuwait, with the remainder largely in the PNZ.
3.3 Exploration and development
Kuwait is using enhanced oil recovery (EOR) to lift stagnant crude capacity. Although new reserves have been found, a heavily regulated oil sector has slowed further exploration and production.
In 2015 Kuwait produced close to 2.5 million barrels per day of crude plus 200,000 barrels per day of non-oil liquids. About half of output comes from the south-west, mainly the Burgan field, which holds steady at 1.7 million barrels per day.
Total output of oil and other liquids, including Kuwait's PNZ share, was close to 2.7 million barrels per day in 2015. Since then the Wafra and Khafji fields have been shut in because of disagreement between Kuwait and Saudi Arabia over PNZ development: relations cooled when Saudi Arabia shut Khafji in October 2014 citing environmental reasons, and Wafra was shut in May 2015. There is little indication of when PNZ production will resume.
Because foreign ownership of Kuwaiti natural resources is prohibited, development of domestic fields has at times stalled. Light crude has been found in the central region but is not yet in production. Oil was discovered in the South Maqwa area of Greater Burgan in 1984, with gravity of 35° to 40° API. Drilling at Kra'a al-Mara from 1990 found large volumes of 49° API crude. Another discovery in 2006 at Sabriya and Umm Niqa in northern Kuwait found an estimated 20–25 billion barrels, but most of it is heavy, sour oil that is technically difficult to develop.
Kuwait recently announced a light oil discovery in the west, at Jathathil, which should help raise light crude and gas capacity and reserves. The country aims to lift crude capacity to 4 million barrels per day by 2020 even if prices stay low, and KOC has been allocated a USD 33 billion budget for the expansion. Kuwait also plans to upgrade export infrastructure at home and abroad and to build downstream facilities. The long-term expansion includes developing four oil and gas fields in the north, particularly important given uncertainty over PNZ output. Attracting international oil company investment and participation will be necessary to meet the 2020 target.
Many international oil companies (IOCs) have signed Enhanced Technical Service Agreements (ETSAs) to help raise recovery from mature fields, without being permitted to invest in Kuwaiti upstream or downstream assets. In February 2010 Shell signed an ETSA covering the Sabriya and Umm Niqa fields, although progress on raising output has been slow. KOC held talks with ExxonMobil, Shell and Total on developing the Lower Fars reservoir at Ratqa but ultimately abandoned joint development; in January 2015 it signed a USD 4 billion contract with Petrofac for phase one of the Lower Fars heavy oil project. In July 2010 KOC also signed a memorandum of understanding with Japan Oil, Gas and Metals National Corporation (JOGMEC) to assess the feasibility of CO₂ injection for EOR.
Most of Kuwait's reserves and production come from a handful of mature fields discovered in the 1930s and 1950s. Greater Burgan accounts for most of both. Burgan is considered the world's second-largest field after Saudi Arabia's Ghawar; discovered in 1938, it was not fully developed until late in the Second World War. Its crude is mostly medium to light, at 28°–36° API, and the field produces about half of Kuwait's total output at 1.7 million barrels per day. KOC intends to raise capacity through seawater or CO₂ injection.
Most of the remaining output comes from Umm Gudair, Minagish and Abduliyah in the south-west. Umm Gudair and Minagish produce a range of gravities, mostly medium at 22°–26° API. Water injection began at Minagish in January 2003 to improve recovery and replace pressure depletion.
Several large fields lie in the north. After Greater Burgan, Kuwait's second-largest producer is the Raudhatain field at 350,000 barrels per day, followed by neighbouring Sabriya at 100,000 barrels per day. The Ratqa border field, which extends south into Iraq's South Rumaila structure, produces 45,000 barrels per day, and the smaller Abdali field 30,000 barrels per day.
3.4 Project Kuwait
Project Kuwait is central to the plan to raise capacity to 4 million barrels per day by 2020. Proposed in 1997 to encourage foreign investment, particularly in northern fields, it was held up for years by parliament because its contract structure risked being unconstitutional. The constitution's ban on foreign ownership of natural resources rules out production sharing agreements (PSAs), which would otherwise encourage IOC investment, so Kuwait devised the incentivized buy-back contract (IBBC), which involves neither production sharing nor concession.
The IBBC allows the government to retain ownership of oil resources, control production levels and manage assets strategically, while paying foreign companies per barrel, together with cost recovery allowances and incentives for adding reserves. In May 2007 the ruling family transferred authority to approve IBBC agreements to parliament, causing further delay. Performance-based incentives have also been introduced more widely under the ETSA framework.
Almost all Kuwaiti oil currently comes from onshore fields. Project Kuwait aims to expand offshore capacity. Most of the additional output would come from developing the Lower Fars heavy oil field and associated oil from the Jurassic gas field. Ratqa heavy oil output is to rise to about 60,000 barrels per day by 2020, with liquids from the Jurassic field reaching 350,000 barrels per day.
Another unconventional source of output is the rehabilitation of damaged fields that have not been developed since Iraqi forces withdrew in the 1991 Gulf War. In February 2012 KOC invited Spain's HERA, Korea's GS Engineering and Construction and India's TERI to bid for land remediation work that could restore substantial oil resources. The programme will run for several years at a cost of about USD 3.5 billion, funded by the UN Compensation Commission, and the first phase covers only three sites. During the Gulf War Iraqi forces set more than 700 wells on fire, and an estimated 5 million barrels per day were lost during the nine months it took to extinguish them. Spilled crude formed thousands of oil lakes, which block access to production areas and known reserves, further limiting exploration and production.
3.5 The Partitioned Neutral Zone
The PNZ was created in 1922 to settle a territorial dispute between Kuwait and Saudi Arabia. It covers 6,200 square miles (16,057 square kilometres). Early Oil & Gas Journal estimates put PNZ resources at 5 billion barrels of oil and 1 Tcf of gas. In 2015 the zone produced 600,000 barrels per day, split equally between the two countries, but output fell immediately to 500,000 barrels per day after Khafji was shut in in October 2014.
Onshore PNZ output is concentrated at Wafra, in production since 1953 with estimated recoverable reserves of 4.9 billion barrels, making it a super-giant heavy oil field. Wafra is linked to production facilities and gathering centres at South Umm Gudair and South Fuwaris.
A full-field steam injection EOR project led by Chevron was under way to replace pressure depletion and raise heavy oil output, but Chevron suspended operations in the PNZ because of the dispute between Kuwait and Saudi Arabia and difficulties over work and equipment safety.
Offshore PNZ capacity is below 300,000 barrels per day and is operated by Khafji Joint Operations (KJO), a joint venture of KGOC and Saudi Aramco Gulf Operations Company, which is also responsible for developing and expanding offshore capacity. Offshore output comes from a few large fields, with Khafji accounting for most of the total and for future expansion plans. The remainder comes from extensions of Saudi Arabia's Safaniyah field, the world's largest offshore field, including Hout, and from Dorra, an extension of the Arash field shared by Iran and Saudi Arabia.
3.6 Exports and consumption
Domestic oil consumption in Kuwait is rising, but most crude is exported to Asia.
Crude exports were estimated at about 1.9 million barrels per day in 2015, and have held at that level so far in 2016. Most Kuwaiti crude is sold to Asian markets under long-term contracts. The export stream blends several crude types, dominated by Burgan medium crude, with heavy oil, sour crude from northern fields and small volumes from Minagish and Umm Gudair. The single blended export grade, known as Kuwait Export Crude, has a gravity of 30.5° API — typical of medium Middle Eastern crude — and is generally regarded as sour, with 2.6% sulphur. In 2015 about 66% of Kuwaiti crude, or 1.2 million barrels per day, went to Asia-Pacific, with about 200,000 barrels per day to the United States. The largest customers were South Korea at 315,000 barrels per day and China at 290,000 barrels per day.
As of August 2016 the customer base was unchanged from 2015, with Asia taking most of the volume: South Korea 21%, China 16% and Japan 12%. Shares going to European countries such as France, Greece, Italy and Turkey declined.
Because most crude is sold into Asia, the most important benchmark for Kuwaiti exports is Dubai or Oman pricing, or a combination of the two; Kuwaiti crude generally sells at a small discount. European buyers price against a weighted Brent average and Saudi medium crude.
Kuwait's main crude export terminal is at Mina al-Ahmadi, with additional terminals at Mina Abdullah, Shuaiba and Mina Saud (also called Mina az-Zour).
Kuwait consumes only a small share of its own oil output. National consumption was 455,000 barrels per day in 2016, with most production exported. Kuwait also exports refined products, at 739,000 barrels per day in 2015. Domestic crude consumption has nevertheless grown steadily, mainly because of increased oil-fired power generation.
3.7 Refining
Kuwait maintains refining and marketing interests in Europe and plans to expand in Asia, particularly China, Vietnam and Indonesia, while continuing to export refined products worldwide.
The three integrated refineries — Mina al-Ahmadi, Mina Abdullah and Shuaiba — had nominal capacity of about 936,000 barrels per day in 2015. All are coastal, about 30 miles (48 kilometres) south of Kuwait City, and are owned and operated by KNPC. The largest, Mina al-Ahmadi, dates from 1949 and has 466,000 barrels per day of capacity; Mina Abdullah and Shuaiba have nominal capacity of 270,000 and 200,000 barrels per day respectively.
KPI manages KPC's international refining and marketing. Its operations include more than 4,400 retail service stations across Belgium, Spain, Sweden, Luxembourg and Italy, and interests in refineries abroad, including a 50-50 joint venture with Italy's ENI at the 240,000 barrel per day Milazzo refinery in Italy. KPI also holds a stake in the Nghi Son refinery and petrochemical complex in Vietnam, a joint venture with Vietnam Oil and Gas Group, Idemitsu and Mitsui Chemical.
3.8 Clean Fuels Project and Al-Zour
After repeated delays, Kuwait appears finally to be making progress on its ambitious downstream programme. In February 2014 the Central Tenders Committee approved the Clean Fuels Project (CFP), expected to cost more than USD 12 billion and aimed at upgrading existing refineries to a combined capacity of 800,000 barrels per day by 2019.
Beyond the CFP, Kuwait plans to reinvigorate refining by building the new Az-Zour refinery, shutting the Shuaiba refinery, replacing old equipment and installing new units at existing plants. One crude distillation unit at Mina al-Ahmadi is to be dismantled and some units removed at Mina Abdullah, while capacity at the two refineries rises to 800,000 barrels per day. Once in operation, the planned refinery will be the largest in the Middle East, with start-up expected in 2020.
4. Natural Gas
Kuwait continues to rely on gas imports to meet domestic demand, and rising consumption has focused attention on exploring for and developing domestic gas.
Oil & Gas Journal estimates Kuwait's proven gas reserves at 63 Tcf as of January 2016. The strategy of economic diversification has shifted more focus onto gas development. Large non-associated gas discoveries in the north have attracted many IOCs, but contract structure and political instability are the main obstacles to rapid growth in capacity and reserves. The new gas finds are also geologically complex, mainly tight and sour reservoirs that require sophisticated technology and heavy capital spending.
4.1 Sector organization
Kuwait's gas sector, like its oil and liquids sector, is managed by KPC, which uses technical service agreements to attract the international investment needed for gas development.
As with oil, KPC owns all gas resources. The constitution rules out production sharing agreements, which would give IOCs equity in development projects, so Kuwait uses technical service agreements (TSAs) to bring IOCs into complex projects. In February 2010 Shell signed an ETSA to develop gas resources discovered in northern Kuwait, the Jurassic field, which holds 35 Tcf of gas in place; the reserves are too sour for local companies to develop.
4.2 Exploration and production
Kuwait aims to raise dry gas output to 3 billion cubic feet per day by 2030 to meet growing domestic demand and reduce reliance on imports during the summer peak.
Domestic gas output has grown gradually since associated gas production began in 2009, driven mainly by rising consumption. Output peaked at 1.6 Bcf/d in 2013 and has since declined: it was 1.4 Bcf/d in 2015, down from 1.5 Bcf/d in 2014.
Kuwait needs large volumes of gas for power generation, desalination, petrochemicals and EOR. The country is trying to shift towards gas to reduce dependence on LNG imports and cut the crude burned for power and water. KOC has announced a target of 3 Bcf/d by 2030, more than double current output.
Associated gas makes up about 80% of Kuwaiti gas output. Associated gas in the north is the main source of future growth, while the tight fiscal and political environment does not allow more offshore exploration.
Kuwait plans to raise output from the northern Jurassic non-associated gas field, discovered in 2006 with estimated reserves of 35 Tcf. It currently produces 150 MMcf/d and is to be expanded to 600 MMcf/d. The target was originally set for 2013 but the project has slipped and is now expected to be completed no earlier than 2019. Besides political factors, the Jurassic field is tight and extremely sour, posing technical and geological challenges.
The other source of non-associated gas is the offshore Dorra field in the PNZ, shared by Kuwait, Saudi Arabia and Iran. Kuwait and Saudi Arabia originally planned to bring Dorra on stream in 2017, adding 500–800 MMcf/d for the two countries to share. Disagreement between them over transport and resource allocation has delayed the project.
4.3 Consumption and imports
Kuwait consumed about 1.9 Bcf/d of gas in 2015, or 695 Bcf a year. Gas meets most of the country's power generation needs, but domestic output cannot cover summer peaks. Rising power demand has forced Kuwait to shut refineries and petrochemical plants so that more gas can go to electricity generation, and the country is replacing oil products with more gas and renewables to diversify power supply.
Domestic gas shortages cause frequent outages or rationing at summer peak, and Kuwait must import LNG to cover demand from March to October. It imported about 3.1 million tonnes of LNG in 2015, almost 15% more than in 2014, mainly from Qatar but also from Nigeria, Trinidad and Tobago, Yemen and Oman, plus re-exports from Spain and India.
Kuwait signed supply agreements with Shell and the trading house Vitol for LNG from 2009 to 2013. LNG is received at the Mina al-Ahmadi gas port, the first regasification terminal in the Persian Gulf, a floating facility that supplies LNG during peak demand with a send-out capacity of 500 MMcf/d. Kuwait's contract with Excelerate to operate the port expired in 2013, after which it signed a five-year agreement with Golar LNG for a larger vessel with 760 MMcf/d of capacity. That contract runs to 2019, by which time Kuwait hopes to have added domestic gas capacity and built a permanent onshore terminal.
