Can Kuwait oil make the grade?

09 November 2007

With ageing light crude fields, Kuwait Oil Company is turning to heavy oil as it looks to up its output to 4 million barrels a day.

Kuwait is fast losing the ability to rely solely on light crude as the mainstay of its oil-based economy. The Burgan field - the world’s second largest - is now more than 60 years old and output cannot be maintained at the same rates as it was in the past.

Upstream operator Kuwait Oil Company (KOC) denies Burgan’s 1.7 million-b/d capacity is under pressure, but most analysts in and outside the state say that maintaining this figure beyond the near future would cause irreparable harm to the reservoir.

Declining quality

Many of the state’s other fields in the north and west face the same situation. If any evidence is needed, it can be found in the rapidly rising ratio of water to oil produced. Water production from fields will soon overtake the state’s total 2.7 million-b/d oil capacity output, and may reach 4 million-5 million b/d equivalent by 2015 as oil quality declines.

KOC’s solution to the problem is to look at increasing the production of its heavy oil reserves. It says it wants to be producing 250,000 b/d of heavy oil by 2015, from next to nothing today, and aims for heavy oil output to constitute 900,000 b/d of its 4 million-b/d 2020 production capacity target.

“The plan is to have heavy oil constituting almost 25 per cent of Kuwaiti 2020 oil production,” says Khalid al-Sumaiti, deputy managing director for north Kuwait at KOC. “Of that, 700,000 b/d will come from the northern fields, with the remaining 200,000 b/d coming from the west and south-east.”

Increasing heavy oil output is a natural choice for KOC. Kuwait, together with Iraq, has the region’s largest heavy oil reserves, with estimates totalling more than 20,000 million barrels - although it is debateable how much of that is ultimately recoverable.

Yet KOC freely admits it has little or no experience with heavy oil production. Such has been the state’s plentiful light crude reserves that it simply has never had to gain any heavy oil expertise.

Foreign assistance

Unsurprisingly, the state upstream operator has looked abroad for assistance. In late October, it announced it had signed a heads of agreement with the US’ ExxonMobil Corporation to develop its heavy oil reserves under the terms of its recently introduced enhanced technical services agreements (TSAs), the first of its type so far in Kuwait.

The state has long had TSAs - essentially set-rate advisory contracts with international oil companies (IOCs) - but the enhanced version allows it more flexibility to extend IOC involvement beyond mere technical advice.

Under the terms of the deal, Exxon will help develop heavy oil reserves in the lower Fars deposit close to the Ratqa field in the north. It will also be involved in the midstream blending and upgrading of the product, as well as downstream refining and possibly marketing.

“The idea is to have Exxon involved in all aspects of the production chain from upstream to downstream,” says Al-Sumaiti. “We will use the enhanced TSA framework for the upstream element, and probably form a joint venture for the downstream aspect.”

The final details will only be ironed out once the two firms’ feasibility study is finalised in July 2008. “The deal may involve the development of a new refinery,” says Al-Sumaiti. “But we cannot make a conclusion until we have seen the results of the commercialisation study.”

There are, however, question marks over the Exxon deal. While KOC says the agreement is wrapped in the framework of its enhanced TSA, local industry observers say the agreement is akin to a far more contentious operating services agreement.

“Exxon wants equity in the midstream and downstream parts of the deal,” says one Kuwait-based oil executive. “It does not do TSAs, and has no interest in a piecemeal approach. But it is extremely difficult to see how such a move would abide by the constitutional prohibition on foreign ownership of the state’s natural resources.”

Exxon is remaining silent on the terms of the agreement but Al-Sumaiti’s rebuttal is clear. “I assure you Exxon will not be taking any equity,” he says. “If it was, we would have to go to parliament for approval.”

Whatever happens, parliament is bound to watch developments closely. Its opposition to IOC involvement in the upstream sector is well known. The state’s landmark upstream initiative, Project Kuwait, which involves IOCs assisting KOC with production from four northern oil fields, has been delayed by parliament for more than 10 years. How KOC and the government sell the deal to the public will be a key factor in whether the Exxon agreement progresses.

Indeed, questions have already been asked by several MPs. Ahmed al-Sadoun, arch-critic of IOC involvement in Kuwait, has already asked for extensive clarifications from the Oil Ministry on the terms of the deal. If there is even a hint that it could be unconstitutional, the scheme - legal or otherwise - may stall before it has even begun.

Technical problems

Politics is not the only issue. Technical challenges are just as great. In a typical range of properties for lower Fars, the majority of heavy oil is particularly viscous, at 13-17 per cent API gravity, with about 40 per cent at 11-13 API gravity. Most sits at a depth of 450-650 feet.

Another big problem is that the heavy crude is ‘fingered’ - spread over a wide area but contained within very thin pockets, often less than 30 feet deep. KOC says more than one heavy oil extraction technology will be required, although until 2010 it will stick with the cold heavy oil production with sand technique, wherein the sand is produced along with the oil - rather than filtered in the well - and then separated and disposed at the surface facilities.

Much will depend on the lower Fars pilot project, which is currently under bid evaluation. The two-year scheme involves the drilling and operation of five wells, each with capacity of 200-500 b/d of heavy oil.

Technical hurdles are not the only problem. The area is littered with landmines as a legacy of the Gulf War period, and they will have to be removed through an extensive clearance operation. Manpower and rig availability are other ongoing issues.

Marketing of the heavy crude is the other big headache. KOC has traditionally used the US’ Chevron Corporation for the marketing of its existing, but limited, heavy crude production, much of which comes from the Divided Zone. But following the expiration of the marketing agreement earlier this year, KOC and Kuwait Petroleum Corporation (KPC) have suffered a couple of embarrassing episodes that have left heavy crude sitting idle without a buyer.

“Either KPC will have to substantially improve its heavy oil marketing operations, or Exxon will have to get involved in some way,” says the oil executive.

Al-Sumaiti does not rule this out. “Exxon’s involvement in marketing the heavy oil is something else that will have to be decided later,” he says.

If Exxon’s involvement is a success, it will provide the impetus for separate enhanced TSAs for south-east and west Kuwait heavy oil production with other IOCs. “We went for the north first as generally it is easier to get at the heavy crude there,” says Al-Sumaiti. “No talks are under way yet [with IOCs], but we do plan to move into the other areas in due course.”

Kuwait’s move to heavy oil production is a significant shift for the local hydrocarbons sector. The era of easy oil is well and truly over. Already it has become clear that the next 50 years will be far more challenging than the past half a century. And the state will not be able to overcome these challenges by going it alone.

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