Kuwait: Struggling to tackle gas crunch

24 October 2012

Political obstacles and technical challenges continue to squeeze Kuwait’s plans to increase domestic gas production to support its industrial ambitions

Kuwait has long grappled with a shortage in domestic gas production. The gap between supply and demand has played a part in stalling the Gulf state’s downstream industrial ambitions.

Kuwait has a daily shortfall of almost 400 million cubic feet of gas. The country produced almost 1.2 billion cubic feet a day (cf/d) in 2011, according to the oil ministry, but the bulk of this was associated gas from crude production. Only 130 million cf/d of non-associated gas was produced, leaving Kuwait at the mercy of Opec quotas.

Kuwait has significant gas deposits, but political bickering and project delays have hampered progress. This is now slowly beginning to change.

Two schemes are crucial to the country’s plans to boost its gas production and support economic diversification. One is Jurassic gas fields in the north of country and the second is harnessing associated gas in the Divided Zone between Kuwait and Saudi Arabia.

Jurassic fields

The Jurassic gas fields are vital for Kuwait, for their role in not only meeting domestic gas demand, but also in freeing approximately 100,000 b/d of crude for export, which would otherwise be burned as fuel in power plants. The light crude being produced is also added to Kuwait’s export crude blend, improving its quality and generating additional revenue.

An estimated 35 trillion cubic feet of non-associated gas was discovered in several Jurassic structures beneath the oil fields of Sabriya and Umm Niqa in the north of the country. The development of the technically complex fields has been seen as a potential fix to Kuwait’s gas woes, but political stalemate in the country has dampened its prospects.

Production at the Jurassic fields began in 2008 and currently stands at 175 million cf/d. Kuwait Oil Company (KOC) plans to raise this to nearly 1 billion cf/d by 2017.

The project is divided into three phases, using a system of early production facilities (EPFs). These are temporary facilities, used to test the viability of production for a period, usually five years, before a final decision to invest in permanent production facilities.

The first-phase EPF was awarded in 2006 to the local Safwan Trading & Contracting Company for $240m. The company built facilities to produce 175 million cf/d of gas along with 50,000 barrels a day (b/d) of oil. The second phase (EPF-2) was awarded to the local Kharafi National in late 2010, with the aim of producing 100,000 b/d of wet sour crude oil and up to 510 million cf/d of gas. The final phase of EPFs could add another 400 million cf/d of gas by 2017 if given the go-ahead.

But this is by no means certain, given the delays to EPF-2. Planned for completion by the end of 2013, the estimated $1.5bn EPF-2 project has been slow to move ahead and continues to suffer long delays. The initial award to Kharafi National in October 2011 came nearly a year after the company had submitted its bid and emerged as the lowest bidder. According to a source close to the scheme, the 11-month delay was due to financial difficulties. KOC’s budget was increased to KD560m from initial estimates of KD150m, following an appraisal of the project with UK/Dutch oil major Shell.

The Central Tenders Committee (CTC), which oversees all major public tenders in Kuwait, has historically been reluctant to award deals that come in much above the initial budget. The deal also faced political scrutiny. In October 2011, Musallam al-Barrak, a member of parliament, questioned then oil minister Ahmad al-Abdullah al-Sabah as to why KOC had rushed to award the deal against the recommendation of its foreign adviser, Shell, and the CTC. 

Slow progress

Even after the award, progress remained slow. Italy’s Saipem, which was appointed as a subcontractor, said in its 2011 annual report it had only started engineering work for the project. This would include the construction and commissioning of an oil and gas treatment facility, as well the installation of the gathering system and pipelines and the construction of a sulphur granulation plant.

After nearly a year, Saipem was removed from the scheme and replaced by the UK-based Petrofac in late September. A spokesman for Kharafi National told MEED in early October that the project was proceeding, saying the “procurement of major equipment and commencement of physical work at the project site is quite imminent”.

The project is notable for its use of the build-own-transfer (BOT) contracting model, which will see the plants owned by the contractor for a period of five years, while production is tested, before being handed over to KOC.

However, the model has been partly blamed for the project’s difficulties. Kharafi National has struggled to secure financing for the project, compared with a regular engineering, procurement and construction (EPC) contracting model, contributing to the delays. The fields are also technically challenging, with depths of between 5,000 and 6,000 metres. They are also sour, meaning the oil and gas contain significant proportions of sulphur.

To push the project along, Kuwait signed an $800m enhanced technical service agreement (ETSA) with Shell for the Jurassic gas fields at Raudhatain, Sabriyah, Bahra, Umm Niqa, Northwest Raudhatain and Dhabi. Shell became the first international oil company  to sign an enhanced services deal in Kuwait.

Kuwait’s constitution makes it impossible to use production sharing agreements with foreign oil firms, so the deal is limited to Shell providing assistance in research and development, rather than the actual development of the field. Nevertheless, this was still enough to draw the ire of Kuwait’s notoriously raucous parliament. In June 2011, parliament challenged the government’s decision to sign the deal without a formal tender procedure. With the ETSA now stalled and under investigation, it is unclear how KOC intends to proceed.

Divided Zone

The Jurassic fields aside, Kuwait’s other hope for increased domestic gas production comes from the Divided Zone, the area it shares with Saudi Arabia. The 16,000-square-kilometre area was left undefined when the borders of the two countries were demarcated in 1922, and hosts the offshore Dorra field.

Onshore oil and gas resources have since been developed jointly by Al-Khafji Joint Operations (KJO), a joint venture between Saudi Aramco subsidiary Aramco Gulf Operations and the Kuwait Gulf Oil Company. The zone currently produces 600,000 b/d of oil and 60-70 million cf/d of associated gas, the vast majority of which is flared.

With estimated reserves of approximately 60 trillion cubic feet, the offshore Dorra field has long been seen as a source of relief for both countries’ gas shortages. The field could produce between 600 million and 1.5 billion cf/d, dwarfing the amount of gas currently being flared from oil.

Both Saudi Arabia and Kuwait would be willing to take the full offtake of gas from the field, but this is not possible. Sharing the field means employing two separate sets of midstream infrastructure to transport each share to its respective country. The issue is further complicated by claims from Iran. The Islamic Republic has a stake in the field, which is split three ways along the maritime border. There has been much speculation as to how gas from the Dorra field will be shared between Kuwait, Saudi Arabia and Iran, which all claim partial sovereignty of the field. Initially, gas from the field was intended to be transported to Kuwait City via pipeline, transporting gas and natural gas liquids.

Some progress has been made. In 2011, Australia’s WorleyParsons was appointed by KJO to carry out the project’s study and front-end engineering and design (feed). KJO plans to build at least six platforms for extracting gas from the field along with interconnecting flowlines, gas gathering equipment, 200 kilometres of 30-inch pipe and 100km of subsea cables. It will also require extensive onshore gas processing facilities. Tenders for the engineering, procurement and construction (EPC) were expected in 2012, but these have now been delayed by KJO until early 2013.

Gas deficit

Kuwait has looked elsewhere for solutions to its gas deficit. In 2000, it signed a deal to import more than 1 billion cf/d from Qatar’s giant North Field. Price negotiations for the gas had concluded, but the project failed when Saudi Arabia objected to the planned pipeline passing through its territorial waters.

In August 2009, Kuwait became a net importer of gas, the first in the GCC. In its first year of operation, the Mina al-Ahmadi gas receiving terminal handled just 11 cargoes. By 2011, the number had jumped to 38.

With its vast oil reserves, Kuwait can easily afford the gas projects it is planning. But the state’s political system continues to hamper its ability push ahead with important schemes. This longstanding issue will need to be addressed if Kuwait’s gas production plans are to be realised.

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