The Supreme Petroleum Council outlined Project Kuwait, its grand plan to increase the country’s oil production, in 1997, with an initial boost of 500,000 barrels a day (b/d), to 2.6 million barrels a day (b/d).
Under Project Kuwait, the state would enlist the help of international oil companies (IOCs) to increase output at five of the country’s northern oilfields (see map), as well as addressing falling production at Burgan, the world’s second-largest oil field.
In 2005, plans were further developed to raise oil production to 4 million b/d by 2020 from the 2.6 million b/d achieved under the initial capacity boost outlined in 1997.
But the plans stalled when legislation to pave the way for progress was put before Kuwait’s National Assembly (parliament).
It became deadlocked after proposals for greater participation by IOCs were opposed and concerns mounted among assembly members that over-production would threaten the sustainability of Kuwait’s future oil output.
These objections have remained hurdles to further expansion. Parliament’s arguments are based on two fundamental points: Article 21 of Kuwait’s constitution, which states that “natural resources and all revenues there from are the property of the state”; and the government’s reluctance to discuss the true extent of the state’s reserves.
Under Article 21, the government has a responsibility to ensure the “preservation and proper exploitation” of its hydrocarbons resources.
The reserves question has been a hot political topic since a report based on an analysis of internal Kuwaiti records in January 2006 concluded the country had oil reserves of 48 billion barrels and proven reserves of 24.2 billion barrels.
The government maintains it has reserves of 100 billion barrels, but fails to differentiate between proven and unproven resources.
On 15 June 2008, the stakes were further raised when four National Assembly members proposed a bill demanding that the government reveal to parliament the country’s actual proven reserves.
The bill also stipulated that Kuwait’s annual oil production should be no more than 1 per cent of proven reserves.
If the 2006 report is correct, this would limit output to 663,000 b/d. Even if the 100 billion-barrel figure were confirmed, the output cap would be 2.74 million b/d, effectively putting an end to the ambitions of Project Kuwait.
“I doubt very much whether Kuwait will be able to increase production to 4 million b/d,” says Kamel al-Harami, an independent oil analyst based in Kuwait.
“Parliament will insist on knowing the actual reserves before it gives approval.”
If Project Kuwait is to have any hope of going ahead, it must address these key issues. Kuwait’s senior oil executives recognise that they cannot achieve a step-change in production without close engagement with the IOCs.
Most of Kuwait’s major producing fields are more than 60 years old and require careful management.
“Kuwait cannot develop its oil industry without outside assistance,” says Al-Harami.
“With the heavy oil we need to produce, we do not have experience in house. Kuwait Petroleum Corporation [KPC], the national oil company, is restricted by its manpower, management skills, experience and know-how.”
Ploughing ahead without outside help could be damaging to the resources on which Kuwait depends.
“It is painful to admit, but even after 60 years of experience in the oil sector, Kuwait does not know how to deal with such reservoirs,” says Jasem al-Sadoun, managing director of the local Alshall Consulting. “It may even destroy them.”
Nor can the management of ageing oil fields be made to fit with a 1 per cent production rate. “People do not understand the concept of ‘use it or lose it’,” says one senior international oil executive.
“If you do not treat producing fields in the right way, that is what will happen. Limiting production to 1 per cent is arbitrary and is being suggested by people who have absolutely no idea what the business is like.”
It is highly unlikely that the government will publish reserves information, and doubtful whether it has the expertise to do so even if it wanted to.
But the government’s proposals might have more chance of success if they were better explained to parliament.
“It was presented in a disastrous way,” says Al-Sadoun. “[The authorities] talk about the highest rate of production – 900,000 b/d – rather than the average over 20 years, which would be at least 300,000 b/d less.
“They say it would create only 500-800 jobs in total over 20 years, which is nothing when we need to create 20,000 jobs a year.
“And they gave 1 billion barrels of oil zero value in the ground after 20 years, which is a nonsense.
“If they come up with the real reasons [a lack of necessary experience and in-house technology], they will have all the help they need.
“But if they continue with nonsense reasons, it has no chance. Using the fact that they are lagging behind as a justification to rebuild might even shake up the oil sector.”
Such a shake-up would not be without casualties. “If they are honest with parliament, it would go ahead, but some senior people would lose their jobs,” says Al-Sadoun.
“Maybe the minister would lose his job, even though he is new and is not responsible for the past 60 years. Somebody needs to sacrifice something.”
Even if parliament can be convinced, IOCs will still need to be persuaded of the economic merits of taking part in the project.
The constitutional barriers to IOC involvement mean that they cannot take a share in oil production, or book reserves.
The world’s five biggest oil companies – the UK/Dutch Shell Group, the UK’s BP, ExxonMobil Corporation and Chevron Corporation, both US, and France’s Total – are already present in Kuwait, but their participation is limited to technical service agreement (TSA), under which they provide consultancy services in return for a fixed fee.
Under Project Kuwait, they would be offered operational service agreements, under which they would recover 50 per cent of capital and operational expenditure, and receive a fixed fee for each barrel of oil produced.
“It is like driving a car for your rich landlord,” says the oil executive. “You do not own the car, you do not control where it is going, and you do not control how fast it is going.”
It is unclear that the proposed terms of the contracts would be sufficiently enticing to attract participation from the consortiums of IOCs that have been lined up to participate.
“The scope is smaller than was originally proposed, the economics were atrocious at $20-25 a barrel, let alone $100 a barrel, and it is the only agreement in the world I have ever heard of where you do not recover all your costs,” says the oil executive.
“The requirement to hire a certain number of Kuwaitis and to increase it every year means that manpower is out of your hands.
“And you have to give no less than 5 per cent of the project, and maybe up to 10 per cent, to Kufpec [the state oil overseas investment arm].
“They say they will enhance the terms, but whether it is enough is a different story. Even if it does go ahead, it is possible that the current IOC consortiums might not participate.”
So is there any chance Project Kuwait will go ahead? “It is a very good question,” says the oil executive. “And the answer is probably no.”
Al-Harami agrees: “It has evaporated,” he says. “I do not know what will happen.”
With the prospects for Project Kuwait so bleak, the government is investigating alternatives. State oil company KPC has proposed an enhanced TSA model, described by Saad Ali al-Shuwaib, its chief executive officer, as “TSAs on steroids”.
The enhanced TSAs would include remuneration in return for taking on greater risk, and would include payments linked to production targets.
Negotiations are under way with BP for oil acreage in the west, with Chevron on the Burgan field, with Exxon for heavy oil in the north, and with Shell on the development of gas, also in the north.
The limited freedom of IOCs to operate within this proposed framework means negotiations on the new contracts could still founder, as happened in neighbouring Iraq earlier this year.
“IOCs do not like TSAs or enhanced TSAs very much, because they do not give them full operational control to show what they can do,” says the oil executive.
“It is also difficult when they do not account for the dramatic increase in the price of oil, which has had an impact on their profitability.”
At the moment, the enhanced TSAs seem to have little more likelihood of going ahead than Project Kuwait.
“They maybe have a 40 per cent chance of success,” says the oil executive. “But if TSAs are shut down, the involvement of IOCs in Kuwait is finished.”