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Kuwait needs foreign investor help to reach output targets

Kuwait’s ban on foreign ownership of hydrocarbons is complicating the state firm’s plan to lift oil and gas output

In 2012, Kuwait was the world’s 10th largest oil producer, with output averaging 3.1 million barrels a day (b/d). It hopes to ramp that up to 4m b/d in the next seven years.

Although Kuwait has vast oil reserves, including Burgan, the second largest oilfield in the world, state-run Kuwait Petroleum Corporation (KPC) admits it will need help from international oil companies (IOCs) to meet its production targets. The plan calls for output at four northern oil fields, Raudhatain, Sabriya, al-Ratqa, and Abdali, to reach 1m b/d by 2015. In turn, this should drive Kuwait’s overall oil production capacity to 3.5m b/d by 2015, ahead of a ramp-up to 4m b/d by 2020.

Much of Kuwait’s oil production is concentrated on a few mature fields, including Greater Burgan. Burgan produces around 1.3m b/d -- almost half Kuwait’s total output. Kuwait Oil Company (KOC), KPC’s upstream arm, wants to boost Burgan’s production to 1.7m b/d through enhanced oil recovery techniques, such as water injection.

The work at Burgan is part of KPC’s five-year, $100 billion investment plan aimed at upgrading production and export infrastructure, as well as refinery capacity, unveiled last year.

Progress is crucial to the country’s economy – and to KPC. Oil-export income accounted for almost 70% of KPC’s $75bn in revenue last year.

Kuwait has 101.5bn barrels of oil reserves, the sixth largest in the world, and the country holds around 6% of the global total. Kuwait also has another 2.5bn barrels of oil reserves that lie within the Neutral Zone, which Kuwait shares with Saudi Arabia.

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Kuwait is also tapping into increasing oil demand from growing Asian economies. Kuwait’s crude oil exports to China increased to around 152,000 b/d in June, up by 13.2% year-on-year. Kuwaiti government data showed the country supplied 2.8% of China’s crude oil imports in June, compared with 2.5% the year before.

Although new discoveries have been made, Kuwait’s heavily regulated oil sector hinders further exploration and production.

Kuwait’s energy policy is set by the Supreme Petroleum Council, headed by the prime minister, and overseen by the Ministry of Petroleum. KPC acts as the instrument of the state to carry out its petroleum policies, while KOC manages all upstream development.

Kuwait has a constitutional ban on foreign ownership of resources, which has hampered development in the sector. The government, however, realises that to reach its 2020 oil-output target, it needs help from foreign companies and is trying to boost their presence in the country’s energy sector. To work around the foreign ownership ban, KOC has signed several Enhanced Technical Service Agreements (ETSAs) which aim to allow foreign companies a greater degree of access to Kuwait’s oil industry.

KPC signed one such deal with Shell in February 2010 for development of the technically challenging Jurassic gasfields. These reserves, which lie in the country’s north, were discovered in 2006 and contain 35 trillion cubic feet (cf) of natural gas, according to the US Energy Information Administration. The fields are too sour for local firms to produce alone. The project aims to produce 1 billion cf per day (cf/d) of gas from Kuwait’s northern Umm Niga and Sabriya gasfields.

The ETSA offers a fee in exchange for the IOCs’ technical expertise, but do not give ownership of any of the hydrocarbons developed to the foreign partner. As part of the ETSA, high fixed fees are usually combined with performance-based payments related to achieving production targets.

The advantage of the ETSA framework is that the agreements do not require the approval of Kuwait’s parliament. But there is still debate and uncertainty over its legal status. New projects with IOCs have been delayed because of reluctance in some quarters to allow more foreign involvement in the country’s energy sector.

Indeed, the government is even investigating the Shell-KOC agreement for its legality under Kuwait’s constitution. The uncertainty threatens the government’s plan to produce 4.3bn cf/d of gas by 2030. Last year Kuwait managed output of around 1.4bn cf/d.

If Kuwait is to reach its 2020 oil production target it will need to develop a new generation of technically challenging oil and gas reserves.

Although the ETSAs are a step in the right direction for Kuwait in gaining technical knowledge and cooperation from IOCs, the country must devise much more attractive investment terms if it is to gain international help to boost output. 

Table 1: KPC by the numbers
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