IHS Global Insight Perspective | |
Significance | State-owned upstream operator, Kuwait Oil Company (KOC), is likely to attempt moving forward with tender awards for the second-phase development of its 2006 non-associated gas discoveries, hoping to raise production from 145 mmcf/d to 600 mmcf/d by 2012. |
Implications | Kuwait desperately needs to raise its domestic gas production. It has already been forced to commence expensive LNG imports from mid-2009, and is hoping that continued domestic—NOC-led—development will prove politically unchallenging for a parliament whose factions continue to block projects in order to stamp parliamentary authority on a sphere nominally exclusively under the government's influence. |
Outlook | Although political hurdles might be thrown up in the process, the necessity of the gas development—to ease chronic power shortages—is so evident that parliamentarians are likely to fear that obstructing the project would be counterproductive and portray them as obscurantist in the eyes of their constituents. |
Moving Forward
Kuwait Oil Company (KOC) is planning to award the main engineering, procurement and construction (EPC) contract for the second-phase expansion of its non-associated gas reserves by April, according to a report by Upstream. The project, which would result in production rising from 145 mmcf/d to 600 mmcf/d by 2012, is mainly centred on the construction of a permanent gas processing facility, as the current production—developed in a rush following the 2006 discovery—is being processed only in a temporary early production facility. Tenders have been published, while the urgency is underlined by the fact that the second-phase drilling process, carried out by a number of Kuwaiti drillers and U.S. rig operator Nabors Industries, is already under way. Around 100 wells will be drilled for the next stage of development, under the auspices of KOC. "We have already tendered for the second-phase. The wells are being drilled and we are building the pipeline", Mohammed Hussain, KOC's deputy general manager for gas and planning, told Upstream. "The deadline for receiving the bids is March and we expect to award the EPC contract in April", he added.
Knowledge Shortage
KIOC is planning to increase production from the 32 tcf discovery to 1 bcf/d by 2015, but will be heavily reliant on IOCs for the third phase—and any subsequent phases—as the gas reserves lie in deep horizons and are highly pressurised. KOC lacks the experience and expertise to develop and operate deep reservoir production by itself and remains a novice in all kinds of non-associated gas production and treatment. Kuwait has been unable over the past decade to develop its own additional crude discoveries for instance, given their similar complexities, despite having several decades of experience from managing and developing oil production.
The contrast between Kuwait's producing oilfields (which are largely producing from uncomplicated and straightforward reservoirs) and its newer oil and gas finds is striking, but still fails to conceal KOC's—and parent Kuwait Petroleum Corp. (KPC)'s- failure to manage a build-up of an in-house experience and knowledge bank. Structures to transfer technology and know-how from contractors to NOC workers and officials remain seriously deficient, raising a continuing problem for KOC in its development programmes, especially given the Kuwaiti parliament's increasingly vocal hostility to foreign oil companies' involvement in the emirate.
Knowing the Boundaries
Kuwait's parliament has over the past year succeeded in cementing the deadlock within the Kuwaiti hydrocarbon sector, by de facto closing down what hopes for progress there were. The future crude-production-capacity development schemes that centred on enhanced oil recovery (EOR) projects at its mature fields and development of its new Northern Fields discoveries seem to have stopped completely amid hostility to IOC involvement. The al-Zour Greenfield refinery project has also been halted—at least for now—as parliamentarians have alleged mismanagement of the costs and tendering process, while the long-overdue upgrade and renovation programme at two of its three remaining refineries has been frozen for similar reasons. The parliamentary involvement in scrapping projects reached a new peak in the last days of 2008, as it forced the scrapping of the K-Dow joint venture between Kuwait's Petrochemical Industries Company (PIC) and U.S. petrochemical giant Dow Chemical, resulting in a likely legal battle for compensation being fought by the U.S. player and a badly tarnished reputation for Kuwait as a reliable investment destination.
Outlook and Implications
Fears have been aired that the gas development could become the next target for some parliamentarians, wanting to cement their body's influence in the hydrocarbons sector—hitherto a reserve for the government and, in essence, the royal family. However, the extensive electricity shortages suffered by the Kuwaiti population over recent years during the peak summer demand season have themselves led parliamentarians to criticise government inaction and lack of strategies. As such, an obstructionist stance by parliamentarians on a solution to those same problems will be seen as very counterproductive. Indeed, the Kuwaiti deadlock—affecting far more than the hydrocarbons sector—has already prodded some to start regarding parliament itself as part of the problem—a notion that parliamentarians will be wary not to encourage needlessly. Hence, the gas development is more likely to be left untouched by the political discourse than not, unless some relatively major flaws are found in the tendering and projecting process.
Meanwhile, IOCs have in many cases been left disillusioned by Kuwait over the past years, with promised large-scale projects having been held back and offered contract terms continuing to be deeply unattractive. KOC has all the time dangled the prospect of future enhanced technical service agreements (TSAs) allowing the companies more than today's consulting contracts—including even some form of long-term production share (albeit probably under a different name)—but with parliament managing to secure an ever-increasing influence over the sector by succeeding to halt projects and its continued hostility to IOCs, prospects are hardly viewed as rosy. Indeed, with some of the interested majors apparently even making losses on their current consulting contracts, by the time Kuwait manages to move forward, few might be interested in bidding.
For the gas contract this will likely not be the case as service companies and contractors will be used for the processing plant project, but for further production growth—both in the oil and gas field—to get under way, some serious soul-searching and a realistic assessment of the country's own weaknesses needs to be made by its power brokers.
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