Kuwait's plans announced last week to invest at least US$6.1 billion in exploration over the next five years in order to increase production to a minimum of 4 million barrels per day (bpd) by 2040 - up from the 2020 average of 2.43 million bpd - look highly optimistic. This is even without factoring in the further negative effects of its inescapable but toxic relationship with Saudi Arabia.
On the face of it, the fact that Kuwait's fiscal breakeven Brent oil price for 2022 is set 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, would seem cause for optimism for the Emirate's ability to turn around its recent financial troubles. Indeed, the US$6 billion+ investment announcement from the Kuwait Oil Company (KOC) seems to have been produced in part on the back of this apparently positive budget data input, given that crude oil still accounts for around 90 percent of the Emirate's exports and government revenue. Specifically, the KOC said that it plans 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.
In this context, the KOC announced in February 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 U.K., and Egypt, plus domestic Kuwaiti companies. Although the KOC previously announced in September 2019 that it would order at least rigs, the tender was postponed for internal reasons, but with the financial crunch biting further Kuwait finally moved forward with the key oil and gas projects that required the new hardware. It was South Ratqa, in particular, that was an initial focus, with the aim being to secure production of at least 60,000 bpd of heavy oil from the field in Stage 1, which has now been achieved. Much of this new crude oil output is being recovered on the proviso that it is processed at the new Al-Zour refinery in order that it can contribute to the production of low-sulfur environmental fuel and supply it to power plants in Kuwait, as well as being available for export.
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"This production will also be added to the heavy oil that is currently being produced from the Umm Niqa field in northern Kuwait, which has been going since 2016, that amounts to 15,000 barrels of heavy oil per day, so totaling 75,000 barrels per day," the KOC's chief executive officer, Imad Sultan, underlined. This aligned with a recent statement from the KOC that it is moving forward 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 has now obtained approval to float a tender to build and operate two new Jurassic production units, which will 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.
Despite this, though, according to figures released last month, Kuwait's budget deficit increased by 175 percent in 2020-21 to KWD10.8 billion - the highest deficit in its budgetary history, according to Finance Minister, Khalifa Hamada. While revenues dropped (by 38.9 percent), expenditure increased (by 0.7 percent), and salaries and subsidies still accounted for a whopping 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 already used many of the economic stimulus tools available to it last year, including the reduction of a key discount rate twice to a historic low, relaxing banks' liquidity requirements, bolstering banks' lending capacity by enhancing maximum credit limits and reducing risk weights, but apparently to no avail.
The key sticking point, as ever for Kuwait, is the unwillingness of the National Assembly to authorize government further borrowing, including allowing for any international bond offering (none has occurred since 2017). As a result of this ongoing lack of any meaningful funding strategy, 'Big Two' global ratings agency, S&P, cut Kuwait's key foreign currency credit rating by one notch (to A+ from AA-) in July. Even less propitiously, S&P kept its outlook on the country 'negative'.
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In effect, there has been no substantive change at all in the approach, and therefore, outlook, for Kuwait's economy - and consequently its future oil production - since the death at age 91 of its former ruler, Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah. His successor, half-brother Sheikh Nawaf Al-Ahmed Al-Jaber Al-Sabah, aged 84, continues to face the prospect of a burgeoning budget deficit, with no ability of being able to address it without the National Assembly finally approving more public debt and being subject to the whims of neighboring Saudi Arabia over its on-off oil take from the Partitioned Neutral Zone (PNZ).
Currently, the PNZ is functioning largely as it should, but this is not to say that the Saudi's 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 august 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 to 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 there by more than 80,000 bpd.
By Simon Watkins for Oilprice.com
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