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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Can Kuwait’s New Prime Minister Revive The Country’s Shrinking Oil Industry?

  • Kuwait’s entire government resigned in April and now a new prime minister has been appointed, a prime minister who hopes to revive the country’s oil industry.
  • Four years ago, the CEO of Kuwait Petroleum Corp announced a plan to significantly boost the country’s oil production, but output has only shrunk since then.
  • While Kuwait has an impressive breakeven price and could boost its oil production, it will be up to the new prime minister to push through the necessary economic reforms.

Kuwait’s crude oil production has shrunk to around 2.7 million bpd, little in the way of significant new investment has been made into its oil sector in years, and the entire government – including its oil minister - resigned in April. However, a new prime minister has just been appointed - retired general Sheikh Ahmad Nawaf al-Sabah. Will he be the one who engineers the long-envisioned two million barrels per day extra of crude oil production for Kuwait and the supply-crimped world? Just four years ago, the then-chief executive officer of the Kuwait Petroleum Corp (KPC), Nizar al-Adsani, announced that he expected the state-run oil firm to spend around US$500 billion in the run-up to 2040 with the intention of boosting the Emirate’s crude oil production capacity to 4.75 million barrels per day (bpd) by that year, up from the then-3.15 million bpd output Kuwait was producing. That figure of just under five million barrels per day of crude oil was more than either Iran or Iraq was producing at that point (4.4 million bpd, and 3.8 million bpd, respectively) and would have made Kuwait the second biggest oil producer in OPEC, after neighboring Saudi Arabia. 

In order to re-energize Kuwait’s efforts in this regard, then, the new prime minister’s immediate task will be to form a new government and he can begin this process by providing the names of potential candidates to Kuwait’s Emir, Nawaf Al-Ahmad Al-Jaber Al-Sabah, to issue a decree appointing them. This said, the 85-year-old emir, who succeeded to the throne in September 2020 following the death of his 91-year-old half-brother, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, has been able to do little to assuage the perennially fractious National Assembly’s opposition to spending money if it involves anything approximating to the country taking on more debt. It is the Kuwaiti National Assembly that must authorize any and all increases in pre-agreed government borrowing - including any international bond offerings – and any reforms that these necessitate must also then be passed through the legislature. This impasse has negatively impacted the ability as well of Kuwait’s US$580 billion sovereign wealth fund – the Kuwait Investment Authority – to make effective decisions to direct investment at boosting the output from the country’s oil sector. As a result of this previous lack of any meaningful funding strategy, ratings agency Standard & Poor’s (S&P) cut Kuwait’s key foreign currency credit rating by one notch (to A+ from AA-) in July last year and, even less propitiously, kept its outlook on the country ‘negative’. Recent estimates from S&P Global Commodity Insights suggest that Kuwait has less than 40,000 bpd of crude oil output upside remaining, and the state is quickly running out of output capacity.

Superficially, the fact that Kuwait’s fiscal breakeven Brent oil price for 2022 was projected at the beginning of the year to fall to US$64.50 per barrel (pb) from US$69.30 pb in 2021 and US$68.10 pb in 2020, according to IMF figures – and has been nearer to US$53 pb for some months now, according to FRED data – would have been cause for optimism for the Emirate’s ability to turn around its recent financial troubles. Indeed, a reiteration last year of a US$6.1 billion investment plan by the Kuwait Oil Company (KOC) seems to have been produced in part on the back of this apparently positive future fiscal breakeven projection, given that crude oil still accounts for around 90 percent of the Emirate’s exports and government revenue. Specifically, the KOC said that it planned to drill 700 wells per year over the investment period, an increase of approximately 300 wells, having also completed to date around 93 percent of the construction of the heavy oil plant project in the broadly promising South Ratqa field. 

The KOC then announced that it had awarded around KWD350 million (US$1.16 billion) in contracts to a range of international companies for the supply of 31 oil rigs. The largest of these (10 rigs) went to China National Petroleum Corporation (CNPC), with the remainder going to a mix of seven foreign firms from Oman, the UK, and Egypt, plus domestic Kuwaiti companies. South Ratqa was the initial focus of these plans, with the aim of securing production of at least 60,000 bpd of heavy oil from the field in Stage 1, and that was achieved. Much of the new crude oil output was recovered on the proviso that it went for processing at the new Al-Zour refinery in order that it could contribute to the production of low-sulfur environmental fuel and supply it to power plants in Kuwait, as well as be available for export. 

This production – and future production that was to come from the intended US$6.1 billion investment program – was to have augmented the heavy oil production currently being produced from the Umm Niqa field. This has been in production since 2016 and back when the reiteration of the investment plan was made, was producing around 15,000 barrels of heavy oil per day, meaning that it – and the new output from South Ratqa – were together producing around 75,000 bpd. This aligned with a similar statement last year from the KOC that it was looking to move forward as well with the parallel development of three new fields in the western region of Kuwait, namely ‘Umm Rass’, ‘Kara’a Al Marw’, and ‘Kabd’. Specifically in this context, the KOC had obtained approval to float a tender to build and operate two new Jurassic production units, which would enable Kuwait to reach a free gas production capacity of 850 million cubic feet per day, and the production of approximately 250,000 bpd of light crude. 

Related: The Race To Produce A Commercially Viable Electric Supercar

Despite these plans, though, the willingness of the National Assembly to allow not just for budget programs to go through but also to approve the corollary necessary economic reforms has remained exceptionally limited. This intransigence was hardened with the release of figures last year showing that Kuwait’s budget deficit increased by 175 percent in 2020-21 to KWD10.8 billion – the highest deficit in its budgetary history, according to then-Finance Minister, Khalifa Hamada. While revenues dropped (by 38.9 percent), expenditure increased (by 0.7 percent), and salaries and subsidies still accounted for 73 percent of all spending. In response, the Governor of Kuwait’s Central Bank, Mohammad al-Hashel, highlighted that there is ‘an urgent need for economic reforms, and all parties, especially the executive and legislative authority, must work to address all imbalances.’ The Central Bank itself had already used many of the economic stimulus tools available to it at that point, including the reduction of a key discount rate twice to a historic low, relaxing banks’ liquidity requirement, bolstering banks’ lending capacity by enhancing maximum credit limits and reducing risk weights, but to little avail. 

Added to the dilemma facing the new prime minister is the uncertainty surrounding the future of the Partitioned Neutral Zone (PNZ), which leaves Kuwait directly subject to the whims of neighboring Saudi Arabia. Currently, the PNZ is functioning largely as it should, but this is not to say that the Saudis will not close it down again without warning and for purely vindictive reasons, as they have done in the past. Before production resumed in 2020, the PNZ had been locked down for around five years, after the Saudis closed the joint operations for the official reason that the site was ‘not compliant with new environmental air emission standards issued by Saudi Arabia’s Presidency of Meteorology and Environment Authority. 

According to this agency, a gas leak had sprung in one of its 15 platforms (in addition to producing around 280,000-300,000 bpd of crude just before its closure the site also produced around 125 million standard cubic feet per day of associated gases). The real reason, according to various oil and gas industry sources across the Middle East spoken to by OilPrice.com, was that Saudi Arabia wanted to firmly show its neighbor who was in charge. This came after Kuwait had been increasing its competition with Saudi Arabia in the key Asian export markets to the degree that it was selling oil to buyers in Asia at the widest discount to the comparable Saudi grade for 10 years. Additionally, Kuwait had been increasing the difficulty for Saudi Arabian Chevron (SAC) in obtaining work permits to operate in the Zone, jeopardizing SAC’s ability to move ahead with its full-field steam injection project in Wafra that was intended to boost the output of heavy oil thereby more than 80,000 bpd. 

By Simon Watkins for Oilprice.com 

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