Following the death at 91 of Kuwait’s ruler, Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah, his half-brother, Sheikh Nawaf Al-Ahmed Al-Jaber Al-Sabah, aged 83, faces a daunting challenge characterised by a burgeoning budget deficit, a constrained ability to raise debt, low oil prices, and ongoing feuding with the country’s legislature and with neighbouring Saudi Arabia. The scale of the challenge was underlined just before Sheikh Sabah’s death with the downgrading of Kuwait by two notches by credit ratings agency Moody’s reflecting ‘liquidity concerns’. This action will not help Kuwait’s ability to tap the global equity markets for corporate funding in the short- and long- term. In providing evidence for its double downgrading of Kuwait, Moody’s added that it projects net sovereign issuance of up to KWD27.6 billion dinars (US$90 billion) would be required to meet the Kuwaiti government’s funding requirements between the current fiscal year and the fiscal year ending March 2024. The problem with this, though, as highlighted by Kuwait’s Finance Minister, Mariam Al-Aqeel, earlier this year, is the National Assembly’s perennial refusal to approve the public debt law.
The government has been seeking approval from the Assembly to borrow up to KWD20 billion but was denied the amount, leaving Al-Aqeel no option but to continue to take from the state’s General Reserve Fund. This was despite Al-Aqeel highlighting that borrowing by increasing the public debt is cheaper than withdrawing money from the sovereign wealth fund. This was a core concern of Moody’s, which stressed that: ‘The persisting deadlock addressing the funding situation now directly threatens the ability of the government to function, representing a significant escalation in the brinksmanship between the two branches of government’.
As it stands, Kuwait had already slipped into an economic contraction of 1.1 per cent in the fourth quarter of 2019, over the same period in the previous year, even before the latest Saudi-led oil price war began. In January – still two months ahead of Saudi’s disastrous decision - Al-Aqeel stated that the breakeven oil price required for Kuwait to post no deficit was US$81 per barrel (of Brent), as she unveiled a 2020/21 budget projecting a KWD9.2 billion (US$30 billion) deficit.
This was the sixth major deficit year in a row, and higher than the 2019/20 estimate of KWD8.27 billion, even after the transfer of 10 percent of total revenue to the Future Generations Fund, managed by the Kuwait Investment Authority. Kuwait still derives about 50 per cent of its GDP, more than 90 of its exports, and about 90 per cent of its fiscal receipts from hydrocarbon products, so the likelihood of a sustained low oil price environment for the foreseeable future makes the outlook negative not just for Moody’s but for Al-Aqeel and new ruler Sheikh Nawaf as well.
These perilous finances will clearly serve as a brake on the most viable option for Kuwait to extricate itself from this financial black hole, which is to increase crude oil production even at low prices. The current OPEC+ production cap agreement aside for one moment, it had long been Kuwait’s plan to increase its crude oil production up to 4 million barrels per day (bpd) and in April it managed a record 3.15 million bpd. This was a product of the return of output from the Partitioned Neutral Zone (PNZ) that it shares with Saudi Arabia and of increased volumes from its northern heavy oil fields. By August, though, this had fallen back to well under 3 million bpd of mostly heavy and medium sour crude, following an announcement from the state-owned Kuwait Petroleum Corporation (KPC) to cut its budget from oil and gas production to KWD3 billion (US$9.9 billion) from KWD3.7 billion dinars.
Whether Sheikh Nawaf will be able to reverse this policy paralysis remains to be seen, although he does have some significant experience behind him, having served by all accounts competently as minister of the interior from 1978 to 1988, minister of defence from 1988 to 1991, acting minister of labour and social affairs from 1991 to 1992, and then deputy chief of the Kuwait National Guard from 1994 to 2003. From late 2003 to his appointment as Crown Prince in 2006, Sheikh Nawaf resumed his position as minister of the interior plus taking on the role of deputy prime minister. These roles, particularly in defence and the national guard – together with the interior ministry that oversees Kuwait’s intelligence services – will have given him some insight into how to deal with the political vicissitudes of the Saudis, which he will need not just to navigate through the current OPEC+ deal (and future ones) but also to safeguard Kuwait’s interests in the 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 this year, production at 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 wanted to firmly show its neighbour 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, jeopardising SAC’s ability to move ahead with its full-field steam injection project in Wafra that was intended to boost output of heavy oil there by more than 80,000 bpd. When Saudi started lying again about levels of oil production and capacity (that it has never produced or sustained, respectively) – just after the Houthi-Iran attacks on Saudi’s Abqaiq and Khurais facilities in September 2019 - then Saudi’s need to find all the oil it could finally allowed for the re-opening of the PNZ.
In reality, Saudi’s closure of the PNZ – together with its instigation of the 2014-2-16 oil price war – were the two key reasons that caused Kuwait’s financial problems in the first place. Kuwait’s big budget deficits began in the very year (2014) that Saudi closed the PNZ’s Khafji oil field as it wiped out Kuwait’s spare capacity in one fell swoop. Additionally, the closure made it more difficult for Kuwait to achieve its cornerstone economic plan (‘Project Kuwait’) of increasing crude oil and condensate production to the aforementioned 4 million bpd by the end of this year.
There are two reasons for some positivity, however, for Sheikh Nawaf. The first is that, aside from the short-term negative impact of Moody’s recent downgrade, the longer-term inclusion of Kuwait into the benchmark MSCI emerging markets indices still looks set to go ahead, although it may be delayed again beyond November. In this context, MSCI made clear that the last postponement – from May to November - was only due to the COVID-19 pandemic and that the Boursa Kuwait continues to meet all the necessary criteria for a classification in its emerging markets indices. This inclusion would mean that all of the global funds that use the MSCI for country inclusion and weighting their portfolios would automatically adjust these portfolios to include Kuwait with the weighting adopted by MSCI. As of the beginning of 2020, at least US$1.8 trillion in assets were benchmarked globally to the MSCI’s emerging markets indices suite.
The second reason is that the Kuwait Oil Company (KOC) announced recently that it intends to issue tenders for the purchase of 24 rigs to support plans to expand its oil and gas output capacity. At the same time, export operations for the first shipment (500,000 barrels) of heavy crude for the global market began recently from South Ratqa, with the KOC’s chief executive officer, Imad Sultan, adding that the strategy is to secure production of at least 60,000 bpd of heavy oil from the South Ratqa field in Stage 1. This production will be added to the heavy oil that is currently being produced from the Umm Niqa field that amounts to 15,000 barrels of heavy oil per day. Additionally, the KOC 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’.
By Simon Watkins for Oilprice.com
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