Kuwait hopes to regain its status as an international business centre in 2010, banking on the promise of a $100bn-plus development plan and a period of relative political calm to entice international firms to look beyond its poor track record for project execution.

Nowhere is this more necessary than in the oil and gas sector, which for decades has been at the centre of intense controversy.

The past two years have seen this debate take a turn for the worse, with the collapse of two multi-billion dollar projects, which have seriously damaged the country’s reputation as an attractive place to do business for international oil and petrochemicals producers as well as engineering companies.

Contracts cancelled

The first deal to collapse came when the country’s highest decision-making body for the hydrocarbon sector, the Supreme Petroleum Council (SPC), cancelled a $17bn joint venture with the US’ Dow Chemical, known as K-Dow, at the last hour in December 2008. State petrochemicals producer Petrochemicals Industries Company (PIC) may yet have to pay $2.5bn for failing to honour its side of the deal.

Then, in March 2009, the SPC told state refiner Kuwait National Petroleum Company (KNPC) to cancel the five construction contracts it had awarded on a $15bn heavy-oil refinery at Al-Zour the year before.

Strong criticism from members of parliament (MPs) were seen as major contributing factors behind the cancellations of both deals. Sources close to the government and state energy giant Kuwait Petroleum Corporation (KPC) blamed parliamentary opposition to the deals on nationalist politicians sceptical over the involvement of international companies in the lucrative sector and others with murkier motives, such as vested business interests.

As the global financial crisis closed in, contractors working in the country complained of excessive tender costs and wary local lenders making it nearly impossible to bid on major oil and gas schemes, which also took a long time for KPC’s subsidiaries to award compared to other state oil companies in the region. International oil companies (IOCs) started reducing their presence in Kuwait after technical service agreements (TSAs) – the only contracts they held in the country – ran out in 2008 and 2009, and with long-mooted enhanced TSAs (ETSAs) nowhere in sight.

Firms such as the UK’s BP, UK/Dutch Shell,  ExxonMobil and Chevron of the US had been trying to get more lucrative terms in the country for years, but gave up as opposition to their involvement made it hard to negotiate an agreement of any kind.

By July 2009, Chevron, long seen as the most experienced IOC in the country, shut its Kuwait City office after ending negotiations for an ETSA to develop the giant Burgan oilfield. A month later, senior IOC sources told MEED they would not be able to strike any new deals in the emirate that year. With KPC’s board of directors up for re-election in November 2010, a more decisive attitude was unlikely, they said.

The dissolution of the SPC in March 2009 on the back of the resignation of the government made the likelihood of major forward steps in the sector look doubtful.

Prime Minister Sheikh Nasser Mohamed Al-Ahmed al-Sabah and his cabinet stood down to avoid parliamentary questioning, or ‘grilling’, over a range of topics including the way the Al-Zour contracts were awarded and the cost of the K-Dow joint venture.

New optimism

Nowhere is it more surprising, then, to hear optimism over the future of the country than in the offices of those working in the oil and gas sector. “All in all, things are moving in the right direction,” says Mohamed al-Shatti, office manager to KPC chief executive Saad al-Shuwaib.

KPC received a major boost in February last month when its subsidiary state oil and gas producer Kuwait Oil Company (KOC) announced it had agreed terms on its first ETSA with Shell to develop the northern Jurassic oilfield. “After the Shell deal, the door is open to a better view of Kuwait,” Al-Shatti says.

IOC executives agree, telling MEED negotiations that seemed to have stalled in 2009 are now getting back on track. “It’s good for KOC,” says an executive at one oil major.

“It renewed confidence in the country and the sector. KPC is of strategic importance to us and I personally am hopeful for [our future in] Kuwait.”

Chevron is now considering opening a new, expanded, office in Kuwait as part of plans to more aggressively target work in the emirate, according to a source at the oil major. Interest from BP and ExxonMobil is also increasing, say sources close to the companies.

“This year the government really seems to have got some backbone,” says one source with strong ties to the country’s political establishment and KPC. “The Shell ETSA was ready for four months and didn’t need SPC approval, but something changed this year.”

Analysts point to a new confidence seen in the cabinet since elections were held in May 2009. A better relationship between the government and the parliament was tested, although ultimately strengthened, by Sheikh Nasser agreeing to face parliamentary questioning in December that year. The two-hour session made Sheikh Nasser the first Gulf leader to publicly answer criticism from elected politicians.

The approval of a four-year, $100bn-plus spending plan in February last month highlighted a greater degree of co-operation between the executive and the legislative bodies; 53 out of 56 MPs voted in favour of the bill.

The positive sentiment in 2010 is not limited to IOCs. The SPC, which had only reformed a few weeks before, was in February meeting to discuss plans to retender construction con tracts on the Al-Zour refinery.

Sources close to the government tell MEED that it is keen to push through more major projects in the coming years as it moves to make the most of KPC’s planned $78bn oil and gas project spending programme to 2015.

Engineering contractors working in the country are also expressing cautious optimism over the working environment after the country’s Central Tenders Committee decided to cut the cost of bid bonds – used as a guarantee of contractors’ financial health and their ability to complete a project – from 5 per cent plus to a flat 2 per cent of bid prices in July 2009.

In January, KPC resolved legal issues with the firms that had won construction contracts for the Al-Zour refinery in March 2008, clearing the way for low-cost South Korean contractors to bid on the retendered deals.

Criticisms remain

While there has been an improvement in overall sentiment, new progress beyond the Shell deal has not been forthcoming. As MEED went to press, there was no news on the Al-Zour retender, and many in the industry remain critical of the project for technical reasons. Contractors still complain that KPC has not exerted pressure on local banks to get them lending for bid bonds on easier terms.

Another issue for the industry remains to be resolved: the emirate’s famously stifling bureaucracy. “It still takes months longer for KOC or KPC to approve things here than almost anywhere else in the region,” a senior adviser to KOC tells MEED.

“The bidding process is long and drawn out, and working here on any level is incredibly frustrating.”

Contractors agree. A series of major contract awards are pending, but have taken months for KPC to review before asking the Central Tenders Committee to approve them.

These include new $1.2bn gas processing facilities at the Jurassic field and two oil and gas booster stations worth $900m and $720m.IOC executives warn that although they are keen to work in the country, the terms must be good enough to consider.

Sources close to Chevron say that the company was close to signing an ETSA only a month before it closed its office last year, but in the end the company decided the terms on offer were not lucrative enough.

Industry insiders fear that the new SPC may cave in to politicians over future projects much as it did on the Dow and Al-Zour deals.

“KPC and the government need leadership that is going to stand up and defend these projects,” says Kamel al-Harami, a local economic analyst and former oil industry executive. “There are still those in parliament who have their own agenda, so they will need to be able to do this.”

The need for political consensus on the development of the sector remains, and Sheikh Nasser’s government will have to be prepared for criticisms of new projects, and especially those that involve IOCs.

Kuwait can currently produce 3.15 million barrels a day (b/d) of oil. KPC is targeting production levels of 3.5 million b/d by 2015 and 4 million b/d by 2020. To achieve this, the firm will need help from international companies.

In the near term, the SPC, KPC and the cabinet will do their best to capitalise on short-term gains.

But in the long term, only successive projects and contracts will truly revive international interest in Kuwait.