Despite its oil riches, the Gulf could soon be facing an energy shortage in a critical area. Gas demand is increasing rapidly from industrial developments across the region and, unless new finds are made to meet the rising demand, plans for economic diversification could suffer. However, for Kuwait, a solution appears to be at hand, with the first production of non-associated gas coming on stream this year.

The development is all the more significant as other states are struggling to produce all the gas that is needed. Saudi Arabia is investing heavily in gas exploration but has yet to find any new fields large enough to meet projected demand, and Qatar is maintaining its self-imposed moratorium on further developments of the giant North field.

Kuwait started exporting oil in 1950 and ever since geologists have been hunting for separate natural gas fields, known as non-associated, or free, gas. The search was fruitless until early 2006, when Oil Minister Sheikh Ahmed al-Fahd al-Sabah surprised the industry and the country by announcing that Kuwait had entered the gas age.

State upstream operator Kuwait Oil Company (KOC) had discovered reserves of more than 34 trillion cubic feet of non-associated gas at four northern fields.

The discovery could not have come at a better time. Hampered by a lack of gas, the state’s power plants had for years had to burn heavily polluting, expensive fuel-oil.

False dawns

Attempts to negotiate gas import deals with Qatar, Iran and Iraq had all failed for political reasons. Kuwait’s drive to produce more products from its upstream oil industry was limited to a handful of petrochemical units because of a lack of gas feedstock to fuel the energy-intensive processing.

It was growing increasingly clear that the gas shortage was holding the state back.

While many enthusiastically welcomed the gas find, heralding it as the beginning of a new era for Kuwait, there was also scepticism. The announcement came just two months after reports that the state’s proven oil reserves were only half the official figure. There was speculation that the gas find was announced to create a good news story and divert attention from the politically sensitive issue of oil reserves.

Even some KOC officials were sceptical about the find, having seen many false dawns over the years.

“When we found the gas, we asked ourselves whether this was really real or not,” says Mohammed Ahmed Hussain, deputy chairman and deputy managing director of planning and gas at KOC. “We started drilling [for the gas] in 2000, but it took us five years to get it, such was our caution.”

In fact, far from being a rushed announcement to distract critics, the gas find appears
to have been one of the most meticulously analysed discoveries in the region. Following a deep-well discovery at the Sabriya field in 2000, KOC tested commercial rates of gas at the Najmah-Sarjelu and Marrat formations, and established high-pressure gas condensate in the Jurassic limestone. Exploratory wells in six other structures revealed more discoveries.

“There was extensive data collection from drilled wells, and we set up a small test plant of 18 million cubic feet a day (cf/d) of gas and 5,000 barrels a day (b/d) of condensate [with Australia’s WorleyParsons],” says Hussain. “Delineation and appraisal wells to prove commercialisation were drilled with [US oil services firm] Schlumberger, and a joint reservoir study using analogues, fracture modelling and fluid and rock properties data was carried out.”

KOC then moved on to create a dynamic compositional model for the six fields across north Kuwait, where gas was believed to exist. Various forecasts were drawn up for Ratqa, Mutriba, northwest Rawdhatain, Sabriya, Umm Naqa and Bahra, and a phased development plan to produce the gas was created.

Increasing production

Eight years on from the first wells being drilled, Kuwait’s non-associated gas is now going into production. This is being carried out through an early production facility (EPF) by the local Safwan Petroleum Technologies, which won the $240m, five-year contract to build and operate the plant in 2006. Under the first-phase plan, 175 million cf/d of gas, as well as 50,000 b/d of condensate, was being produced by the end of March.

This is only the beginning. A second phase is expected to ramp up gas production to 600 million cf/d by 2011, with a third phase bringing output to 1 billion cf/d by 2016, according to KOC.

“We have completed 21 wells in six structures and have six rigs devoted to deep drilling,” says Hussain. “We plan to add another rig for Jurassic drilling, and are tendering new 3D-seismic surveys. A dynamic model for reservoir management has also been produced.”

As gas production begins, attention is turning to downstream operations where refinery operator Kuwait National Petroleum Company (KNPC) has plans to process the new output to meet the demands of the power sector, for which most of the gas is destined.

Gas and liquefied petroleum gas (LPG) from the EPF will be transported by pipeline to the Mina al-Ahmadi fractionation trains, which will in turn process it into lean gas for power generation. Ethane and natural gas liquids such as propane and butane will also be extracted from the gas, which opens up the prospect of further petrochemical development in the state. Most of the condensate produced from the wells will be destined for export.

Hussain says that with gas production of 1 billion cf/d, more than 300,000 b/d of condensate will be produced, along with 3,000 tonnes a day (t/d) of ethane and 3,000 t/d of propane and butane. As a by-product, more than 750 t/d of sulphur will also be produced, which will either be stored underground or exported.

Now that the first gas production is coming on stream, thoughts are turning to further development, but while KOC has set 2011 as the date by which to increase output to 600 million cf/d, the second-stage EPF has yet to be tendered. The upstream operator appears to be running out of time if it wants to hit its targets. Despite this, Hussain says KOC may increase the targeted capacity to even more than the 1 billion cf/d it has set itself for 2016. “This higher target will developed by 2010,” he says.

Much depends on the results of the first phase of the EPF. The business model being used is not often employed in a region where national oil companies prefer to finance their own facilities. It is even more unusual given the political resistance in Kuwait to private sector involvement in a key public resource.

Yet KOC is effectively paying a private company to extract natural resources on its behalf. At the end of the five-year concession, it has the option of paying Safwan for the facility or asking for it to be dismantled. If the latter option is taken, the upstream operator would then have to build its own, more permanent, facility.

Hussain explains that the rationale behind using the EPF model is about managing risk. If the gas plan does not work out or proves to be financially unsustainable, the facility can be dismantled or abandoned without any cost beyond its initial development. In effect, the EPF is a large pilot plant.

For now, KOC seems optimistic that enough gas will be produced to make further production likely. “We have found gas in the Dhabi field and Umm Naqa is very promising,” says Hussain. “Offshore has huge potential too, and we are looking at the prospect of Jurassic gas throughout Kuwait. Deeper horizons are being investigated, and more drilling prospects are being identified.”

Lost revenues

The power sector will have most to gain from any new finds. The state’s six major oil-fired power plants consume 125,000-b/d of crude, which equates to more than $10m a day, or $4bn a year in lost export revenues. The environmental impact is unquantifiable, but potentially even more damaging in the long term.

So grave is the situation that KNPC is preparing to spend more than $14bn to build a new refinery to provide low-sulphur fuel-oil for the power sector.

The new gas production will certainly help the environment as well as freeing more oil for export. Yet even with KOC’s gas strategy, its parent company, Kuwait Petroleum Corporation (KPC), plans to import liquefied natural gas (LNG) during the summer, when electricity demand is at its highest. The LNG will be sourced from the spot market and regassified onboard specially adapted vessels.

In the longer term, domestic gas production may prove to be large enough for Kuwait to avoid importing LNG.

For now, KNPC is looking to the future by preparing plans for a fifth gas fractionation plant and a new acid gas removal unit at its Mina al-Ahmadi refinery, to process the new gas and remove the sulphur. KOC is also evaluating the potential for a new dedicated gas line from the northern fields to the refinery, should the existing infrastructure not be sufficient.

The gas discovery has unlocked several options for Kuwait. After years of accepting that gas was always out of reach, it can now look to a future where gas can compliment its plan to increase crude production capacity to 4 million b/d. It is not the panacea for all the ills facing the state’s hydrocarbons sector, but it does leave it with one less thing to worry about.