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Kuwait bows to local and global realities

Domestic politics and international demand fears dictate downward revision of production targets

During a low-key meeting in early February, Kuwait’s Supreme Petroleum Council (SPC) made a critical decision for the future of the country’s upstream oil sector, and hydrocarbons-dependent economy, that will play out over the next two decades.

Last year the SPC, the government’s ultimate authority on energy matters, was considering a proposal to reduce its 2040 oil production target, to the level due to have been achieved this year, while also radically revising interim output goals downwards. This plan was nodded through at the SPC meeting and publicly confirmed by oil minister Khaled al-Fadhel shortly afterwards.

That the state oil conglomerate Kuwait Petroleum Corporation’s (KPC) longstanding target to raise production capacity to 4mn bl/d by 2020 would be missed by a wide margin had been evident for several years—notwithstanding officials’ stubborn insistence to the contrary.

Kuwait Oil Company (KOC), KPC’s domestic upstream operating subsidiary, stated in its latest-available annual report that capacity at the end of March 2019 was 2.855mn bl/d. The separately-managed 50pc share of the Partitioned Neutral Zone (PNZ), due back on stream this year after more than four years offline due to an intergovernmental dispute with Saudi Arabia, would add around 250,000bl/d to KPC’s total.

3mn bl/d - 2020 capacity target for KPC

IOC involvement

The chief obstacle to increasing production has been deeply entrenched political opposition to enlisting assistance from international oil companies (IOCs). KOC, spoilt by decades of pumping easily accessible crude, lacks the technical expertise to exploit the heavier, more-challenging reserves in the country’s north.

In 2007, ExxonMobil reached a preliminary agreement aimed at producing 700,000bl/d from the northern fields by 2017 but, after protracted wrangling over terms, the deal collapsed six years later.

The only northern development to proceed—the Lower Fars Heavy Oil project at the Ratqa field, contracted in 2015 for $4.2bn on an engineering, procurement and construction basis to the UK’s Petrofac—is due to yield a mere 60,000bl/d when fully commissioned later this year. When the contract was first put out to tender in 2013, it included a second phase to double capacity by this year—but KOC has not shown intent to imminently proceed with further development. 

Surprise announcement

Public sector projects in Kuwait are notorious for delays so most people had expected the timetable for capacity enhancements to be quietly allowed to slip by a few years. Long-term plans are inevitably subject to huge uncertainties—especially in Kuwait, where the government is fond of grandiose and reassuringly-distant economic ambitions. However, the extent of the revision makes the SPC’s decision something of a bombshell.

The SPC agreed to put back its 4m-bl/d target by 20 years and reduce its 2040 goal from the 4.75m-bl/d it predicted in 2017. Hammering-home the underlying strategic shift, the SPC set KPC a capacity target of a mere 3mn bl/d this year—roughly the existing level when the PNZ fields restart in the coming months—increasing only marginally to 3.1mn bl/d by 2025.

The extent of the revision makes the SPC’s decision something of a bombshell

No reason was given for the decision. When reports of the strategic rethink first emerged last October, “environmental concerns” were somewhat-misleadingly cited. These concerns were not a reference to the Kuwaiti government suddenly adopting the green agenda but to its fears about the global groundswell against fossil fuels impacting long-term oil demand. These fears were apparently enough to render the enormous price tag attached to achieving the original 2040 target not worth the risk.

Such a calculation is a major departure for one of the Gulf’s major NOCs. Abu Dhabi’s Adnoc adopted a new target in November 2018 of raising crude capacity from 3.5mn bl/d to 5mn bl/d by 2030. Likewise, Saudi Aramco, while not publicly disclosing production goals, has embarked upon a trio of multi-billion-dollar projects due to deliver a combined 1.2mn bl/d by mid-decade. Both companies consistently profess confidence in future demand.

Political opposition

The extremely modest medium-term target of 3.1m bl/d is likely a response to a combination of international and local conditions. The state is already facing an unfamiliar funding squeeze, on the back of five years of subdued oil prices and political obstruction of fiscal reform.

The costly projects required to deliver on earlier output goals could have spent years held up in the National Assembly (parliament). It is dominated by opposition MPs that are perennially suspicious of the government mismanaging the oil-sector and its finances and also critical of major short-term production boosts that they perceive to be denying resources to future generations. The huge outlays entailed appear especially egregious when output is being artificially constrained by Opec-wide cuts in response to global oversupply. Other Gulf governments are spared the same democratic accountability.

Parliamentarians would inevitably continue to frustrate attempts to achieve the level of IOC involvement required to tap the country’s undeveloped northern resources. The majors, facing similar financial and long-term demand metrics to KPC, are unlikely to willing to spend years courting the authorities in hope of an inroad.

Besides, the more immediate priority for KOC is staunching the decline at its existing fields—chiefly the supergiant Burgan. While Burgan is still the source of roughly half of KOC’s total production, after 70 years on-stream this is only maintained by it being subjected to enhanced oil recovery. KOC’s 2018 annual report put production capacity 300,000bl/d higher than the following year, so tending to current resources is both uncontroversial and urgent.

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