Gas: Going big on gas

25 February 2003
Back in the early 1980s, Kuwait's then oil minister Ali al-Khalifa is said to have become increasingly frustrated with the attempts by Kuwait Oil Company (KOC) to discover more non-associated gas. What was needed was a major source of gas to feed new power and industrial capacity. What was delivered was yet more crude.

Little has changed over the past 20 years. Kuwait continues to be blessed with copious quantities of oil - reserves of 96,500 million barrels are equivalent to 9.2 per cent of the world's total - but gas is another matter. Although it has reserves of 1.5 trillion cubic metres, nearly all of it is in the form of associated gas, meaning production is inextricably linked to oil output and, by extension, OPEC quotas.

The need for new non-associated gas discoveries is pressing. KOC estimates that, by 2006, demand will have jumped to 1,400 million-1,500 million cubic feet a day (cf/d) from 800 million-900 million cf/d at present. By 2012, it will have soared further to about 1,800 million-2,000 million cf/d.

Gas demand is being driven by new power generating and industrial capacity. The Ministry of Electricity & Water (MEW) is planning 2,400 MW of additional capacity by 2006. At Petrochemical Industries Company (PIC), three major projects are planned for the Shuaiba industrial area (see box, page 26).

KOC is well aware that demand will eventually outstrip supply. 'The volume of gas we produce will not meet our requirements. While preparing our long-term plans for 2010-15, we realised there would be a shortfall in the future supply for new power and petrochemical projects,' says Ahmed al-Arbeed, KOC's chairman and managing director.

KOC pipes most of its gas production to sister company Kuwait National Petroleum Company (KNPC), which, after processing, delivers it on as feedstock to PIC and MEW. The remaining volumes are used by KOC itself, for oil field reinjection to maintain pressure.

Kuwait Petroleum Corporation (KPC) and KOC have adopted a twin-track approach to tackling the gas supply issue. KOC is stepping up its exploration activities and looking to expand existing gas infrastructure. On the exploration front, a new drilling programme has been launched in the northern oil fields. In June, the first well was drilled at Rawdhatain and the results were encouraging. 'We have made some discoveries since then and penetrated certain zones which contain high GORs [gas/oil ratios],' Al-Arbeed says.

GOR is the volume of associated gas produced from each barrel of crude. At Rawdhatain, GOR was tested at 2,000 cubic feet of gas per barrel of oil. At Burgan, in the west, KOC tested at 500 cubic feet. 'We are continuing to carry out long-term testing of the discoveries and a development plan will be formulated soon,' he says.

As for its existing infrastructure, plans are afoot to interconnect gathering centres and reduce the flaring of gas. Finally, the recently established Kuwait Gulf Oil Company is pursuing plans to develop the Dorra field, which is shared equally between Iran, Saudi Arabia and Kuwait. The Kuwaiti share of gas from the proposed field development will be about 400 million cf/d.

Even with the Dorra gas, supplies will be insufficient, says Al-Arbeed: 'Gas imports are a must for Kuwait.'

Kuwait has been a gas importer before, purchasing up to 400 million cf/d of Iraqi gas between 1986 and the invasion in 1990. This time, it is looking to Qatar to make up the shortfall. In mid-2001, an initial agreement was signed with Qatar Petroleum and the US' ExxonMobil Corporation to take at least 1,000 million cf/d of North field gas through a 590-kilometre subsea pipeline. In early 2003, a major obstacle was overcome on the project when Saudi Arabia gave clearance for the pipeline to pass through its territorial waters.

The Iraqi experience has made Kuwait acutely aware of the need to diversify import supplies. As a result, it is also talking to Tehran about buying at least 300 million cf/d from National Iranian Oil Company.

Key internal issues still have to be resolved before KPC is in a position to sign final agreements with either Qatar or Iran. These range from defining precisely the volume of gas to be contracted, to establishing the take-or-pay formulae with end-users. 'These are critical issues for us and will to a significant extent determine the economic viability of the gas import projects,' says Al-Arbeed.

Finalising the precise volume of gas to be purchased will be a complicated task. KPC will have to determine the future needs for reinjection to increase oil production, the growth in population and per capita consumption of electricity.

The sharp seasonal swings in demand for gas will have to be factored in, too. 'The swing in volumes is huge between summer and winter and we have to evaluate all the options of this at the least cost,' says a senior KPC official.

KPC will also have to define its role in the proposed trans-border gas projects. 'Although we will be the buyer from Qatar, we will not be the end-user,' says the KPC official. 'The MEW will take up the bulk of the volume. A new type of arrangement will have to be worked out, which will embody the same terms that will be incorporated into the main agreement.'

At present, KPC is neither bound by any formal deal with the MEW, nor is there any agreement that covers its purchase of power from the utility. 'Gas imports will force us to change these loose agreements and enter into formal commercial contracts,' the KPC official says.

The arrival of the first imported gas, scheduled for 2006, will not only significantly bolster gas supplies. It will also free up some 100,000 barrels a day of fuel oil, which is currently burned in local power stations, and significant quantities of ethane, which will support additional petrochemical capacity. 'Imported gas, if delivered at an attractive price, will be the best and cleanest fuel to power our electricity needs,' the official adds. 'It will be a win-win situation for everyone.'


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