Field of Dreams

Kuwait is ploughing billions of dollars into an expansion plan that will overhaul facilities and see production eventually hit four million barrels of oil a day. But will it meet its targets and what role will the International oil companies (IOCs) play? O&G takes closer look at this bold vision and speaks with Saad Al-Shuwaib, CEO of Kuwait Petroleum Corporation (KPC), the umbrella organisation for the emirate’s state-run oil and gas operations.

“Capital project management is becoming a big obstacle as projects are becoming more complex and at the same time exceeding their costs and not meeting their deadlines”
-Saad Al-Shuwaib, KPC

Perched on the 19th floor of KPC’s headquarters in Kuwait City, Saad Al-Shuwaib’s plush office gives you panoramic views over the stunning Arabian Gulf Coast through its expansive floor-to-ceiling windows. Officially opened in February, the gleaming Kuwait Oil Sector Complex, which is also home to the country’s oil ministry, has two fan-shaped glass towers spouting from the front. A beautifully crafted infinity pool greets visitors at its entrance overlooking Kuwait Bay. Inside, the opulent lobby offers a welcomed respite from the searing heat outdoors, which can top 55°C in the summer. This state-of-the-art facility stands of a shinning example of what petro-dollars can buy these days in this energy-rich emirate. The recent rocketing price of black gold has, of course, swelled the coffers further.

A founding OPEC member, Kuwait is the oil cartel’s second largest exporter, while reserves account for ten% of the world’s total. According to official data, the land here holds the fourth largest oil reserves in the world. Its state-owned business, KPC, and its stable of subsidiary companies currently produce around 2.6 million bpd. However, the Kuwaiti government has ambitious plans to ramp up production to three million bpd next year – 12 months ahead of schedule. Looking further ahead, Al-Shuwaib, who was appointed CEO 12 months ago, says production will hit 3.5 million bpd by 2015 and four million bpd by 2020. These are bold targets but ones that will have to be achieved if world supplies are to meet soaring demand. Indeed, OPEC predicts that consumption could reach 118 million bpd by 2030.

“Expanding economic activities in the world and especially in China and India are the main drivers for continuous rising demand for energy,” says Al-Shuwaib when quizzed on global supply and demand fears. “We adopt the view that there is sufficient petroleum resources, conventional and non-conventional liquid fuels, to meet growing demand for decades to come. However, key players in the market need to make timely investments to expand oil and gas supplies.” This includes Kuwait. “We in Kuwait will pursue with our long term plans to sustain enough supplies to the market according to strategies set for KPC until 2020.”

Strategies

Leaning back in his leather chair, Al-Shuwaib explains how his vision for the business will become a reality, in a country that is seeing home energy demand rise 10% annually. First, he says KPC will spend US$55 billion between now and 2013 to finance production, refineries and new tankers. At least half the investment will be needed for new drilling and enhanced recovery technologies. Tapping into undeveloped areas of the country will also be a priority. Earlier this year Al-Shuwaib told reporters of how KPC was exploring in “less than one-third” of the country’s total area. KPC plans to exploit difficult fields in the north and west of the country, holding vast reserves of heavy oil. Indeed, in 12 years time, the plan is to pump 750,000 barrels of heavy oil a day. 

However, this cannot be achieved without the help of the international oil companies (IOCs) who have been involved in the country’s operations since the industry was nationalized in the 1970s through basic technical service agreements. But now for the first time ever KPC is involved in negotiations with foreign majors for performance-related contracts – dubbed “enhanced technical service agreements”. These new deals allow overseas companies a greater role in operations and key projects. “These technical service agreements are still working, however, we are working to improve and strengthen such relations,” Al-Shuwaib comments.

US heavyweight ExxonMobil has signed a preliminary deal for the north, while BP, which already hold service contacts, is in talks regarding oil fields in the west. Fellow global player, Chevron, is negotiating an enhanced technical service agreement for the oil-rich Burgan fields to the southeast. More than two-thirds of the country’s oil production comes from the greater Burgan area – considered to be the second largest oilfield in the world. Unfortunately for the IOCs, the fly in the ointment continues to be the Kuwaiti parliament’s reluctance to allow foreign companies any operational control over its prized reserves. So for the time being the multi-billion dollar Project Kuwait (originally drawn up in the 1990s to award IOCs 20-year “operating services contracts”) appears to be no closer to being resolved. The political disputes and objections to Project Kuwait, mostly by Islamist and tribal MPs, has stunted progress, whilst the country was left without oil minister for six months until acting oil minister Mohammad Al Olaim was recently appointed to the position on a permanent basis.

But when you consider that the oil sector accounted for 60% of Kuwait’s gross domestic product (GDP) in 2007, it’s not hard to fathom why some hostility exists. Despite the opposition, for Shuwaib the advantages are abundantly clear: “The desired benefits from foreign participation includes extracting maximum value from the reservoir assets, adding reserves, optimization of capital expenditure, cost savings, application of new technology, acquisition of improved management systems and creation of job opportunities for Kuwaitis.”

Like a lot of the national oil companies (NOCs), KPC needs outside help, particularly with easy-to-reach oil is dwindling – creating the need for improved technologies to extract hydrocarbons. Indeed, field maturity is a problem with most in the country being more than 60 years old. “Production is moving to increasingly difficult locations as easy oil is diminishing and the high oil price makes previous exploration and complex asset maximization economically viable,” Al-Shuwaib explains. “A very important challenge in this area is to improve technologies to respond to these complexities and at the same time improving technology application capabilities.”

Downstream, the organisation plans to drastically improve capacity with new refineries and petro-chemical plants. As much as US$30 billion is being allocated. In May it was announced that KPC had awarded US$10 billion worth of contracts construct the grassroots 615,000 bpd Al-Zour facility – the largest single-phase refinery project ever built. Situated near the border with Saudi Arabia, It is due to be complete in 2012 at an estimated cost of US$15 billion. Al-Zour will also produce 200,000 bpd of low sulphur fuel oil for electricity generation. In the pipeline too is a large-scale upgrade of current refineries in the country “to enable us to produce cleaner products and meet environmentally friendly fuel specifications”, Al-Shuwaib notes. Kuwait also plans to upgrade two of its three existing refineries, Mina Ahmadi and Mina Abdullah. With Al-Zour on line, Kuwaits’ total refining capacity will swell to
1.4 million bpd. It currently stands at 930,000. After Al-Zour is up and running, KPC plans to close the Shuaiba refinery. 

But it’s not only at home that KPC is expanding; the company is flexing its muscle on the international stage too – Asia especially. Just prior to mymeeting with Al-Shuwaib, he and a delegation from KPC, travelled to Vietnam to sign contracts on a deal between KPC’s subsidiary Kuwait Petroleum International (KPI) and the country’s national oil company Petrovietnam, Japan’s Idemitsu Kosan Co. and Mitsui Chemicals to build the socialist republic’s second refinery and petrochemical complex. The planned facility, 200 miles south of the capital Hanoi, is expected to produce 10 million tonnes per year.

Vietnam’s neighbour, China, is also a country that KPC is involved with. Indeed, the country’s fourth largest oil company, Sinochem Corp., will be processing Kuwaiti crude at its proposed refinery in East China in around 18 months. This will be through a joint venture with KPC and Royal Dutch Shell that will see the refinery process 240,000 bpd. As well as this, KPC is progressing with plans to build a huge refinery-petrochemical complex southern Guangdong Province, while KPC hopes to sign agreements with India in the future. Al-Shuwaib stresses that these overseas deals are all about securing long-term outlets for Kuwaiti crude. And it’s not just oil; KPC revealed a few months ago that it had signed a Memorandum of Understanding with Dow Chemical for a joint project totaling US$19 billion to manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate.

Green credentials

When the conversation broaches the issue of climate change, the boss is quick to point out how Kuwait is not shirking its ‘green’ responsibilities. Al-Shuwaib talks openly about how the business will invest US$100 million in new energy technologies, including hydrogen fuel cells, carbon capture and storage, and hydrogen generation from oil. “KPC has been very conscious to the dilemma of climate change and invest to improve energy efficiency, reduce emissions and to continuously monitor its carbon footprints. Furthermore, carbon capturing and storing (CCS) is one of the industry's main objectives at the time being.” Naturally, technology is a required necessity.

“A stated objective of KPC is to promote the development of new technologies which will maintain oil’s long-term competitive position by making it a more efficient and environmentally-friendly energy source through an active investment policy,” Al-Shuwaib states.

He also enthusiastically explains how they adopted a zero flaring policy in 2002 for both onshore and offshore operations This is set to be reached in 2011. KPC also supplies low sulphur gas oil for the local market and low sulphur fuel oil for the Ministry of Electricity and Water Power stations. “Our role is to be proactively managing the environment, health and safety aspects related to KPC's businesses and become a regional leader in HSE (health, safety and environment) performance.”

None of this can be achieved without a strong workforce, he asserts. Indeed, KPC faces faces a universal challenge affecting both the NOCs and IOCs –the talent war. As projects get larger and more complex, the need for experienced staff across the many facets of an oil and gas giant’s operations is only going to intensify. Indeed, the industry is having to replace experienced and skilled workers approaching retirement age, while more and more students are choosing to shy away from oil and gas.

“Having a skilled and motivated workforce is becoming increasingly scarce,” he muses, “so the HR, learning and development departments are therefore becoming increasingly important.” And with Kuwait’s expansion plans, HR is intensified: “The need for such talents is increasing as projects become more complex and management becomes more difficult,” Al-Shuwaib points out. He says KPC is developing and will continue to develop advantaged remuneration and compensation packages in addition to extensive training and development programs in all aspects of the energy for its current and new employees.

Outlook

For KPC and its subsidiaries, the next few years will be interesting but challenging period in terms of oil production; but what about that other highly-sought after commodity – natural gas. Well, Kuwait the emirate is going to need more gas to fuel refineries and other industries – a significant chunk of these hydrocarbons will come from imports from Qatar, Iran and Iraq.

However, KPC is about to start production of free gas (not a by-product of oil exploration). Two years ago 35 trillion cubic feet of free natural gas was discovered in the northern oilfields. Al-Oliam was quoted in June as saying that the target was to produce a billion cubic feet of free gas a day by 2015 but for the time being, KPC is set to produce 175 million cubic feet a day.

So gas production is looking good and imports have been secured, oil production is being ramped up, alliances are being forged with the IOCs and KPC is spreading its tentacles into emerging markets. As our meeting comes to a close Al-Shuwaib, is keen to reiterate that KPC’s issues that need addressing are “magnified” by the scale of capital needed. “Capital project management is becoming a big obstacle for the oil industry and KPC in particular as projects are becoming more complex and at the same time exceeding their costs and not meeting their deadline. This is a competency that needs to be nurtured and developed to ensure the strategic objectives are met on the medium and short-terms” he remarks. And it is only going to get worse for the energy companies; according to the IEA, energy demand growth will require US$800 billion of investment per year over the next 25 years.

As the lift whizzes back down to the lobby, I can’t help but wonder what Kuwait’s energy targets will have on the nation’s future prosperity. After all, this is a crucial period for Kuwait if it wants to keep pace with the rampant economies of fellow Arab countries. However, according for the Energy Information Administration in the US, the nation’s reserves may only last another 50 years if production reaches four million bpd by 2020. Whether or not this outlook is true, only the Kuwaiti’s know for sure. Then there is the fear that the country may have already reached the dreaded Peak Oil scenario. Question marks remain but this is certainly one OPEC producer to keep a keen eye on in the next few years.

History of oil in Kuwait

Oil was first discovered in Kuwait in 1938 by Kuwait Oil Company (KOC), a London-based joint venture of the Anglo-Persian Oil Company (now BP) and Gulf Oil (now Chevron Corporation), under a concession granted by the then Amir of Kuwait, Sheikh Ahmad Al-Jaber Al-Sabah. KOC had been formed in 1934 following more than a decade of concession negotiations. However, development of this bounteous natural resource was delayed by World War II starting the transformation of Kuwait from a largely impoverished desert sheikdom into the modern nation-state it is today.

Over the next three decades, extensive developments occurred both in the upstream and downstream elements of the industry. A key turning point came in 1974 when Kuwait acquired 60% of KOC from BP and Gulf Oil. In addition, the Supreme Petroleum Council was formed to oversee the country's oil interests. The following year, the Ministry of Oil was established in its own right, separate from the Ministry of Finance. On January 27th, 1980, Kuwait Petroleum Corporation was formed, which brought together all elements of the industry under one holding company, thus enabling greater and more effective control. Throughout the 1980's, expansion and integration occurred continued. Today, the country is major oil exporter with estimated 190 years of reserves a current consumption levels.

• 78% of Kuwait’s oil production is sold to non-Arab states
• Kuwait is the world’s 7th largest oil exporter

Kuwait’s darkest days

Iraq’s invasion and occupation of neighbouring Kuwait in 1990 had a devastating impact on oil production.

• 700 oil wells were set ablaze
• Some 6 million barrels of oil were lost each day
• The cost of extinguishing the fires to Kuwait was US$1.5 billion
• The fires were not fully extinguished until 8 months after the end of the war