Oil majors lose faith in Kuwaiti projects

28 August 2009

Firms expect no deals in Kuwait this year because of infighting over the development of the sector

International oil companies (IOCs) working in Kuwait do not expect to strike any new deals with the country’s national oil company before 2010, as political opposition to foreign investment continues to block major energy contract awards.

In a 19 August meeting with local press, Kuwait’s ruler, Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah, made one of his strongest statements to date on the need for his handpicked government to reach a consensus with opposition MPs over the development of the oil sector.

The emir has dissolved the country’s National Assembly four times in as many years because of its members’ opposition to government policies, especially those related to the country’s lucrative energy sector.

“He called in the editor of every single paper in Kuwait and said that the parliament needed to start acting for the good of the country or he would dissolve parliament and declare a state of emergency,” says one source with close links to the Kuwaiti government. “He wants to get things done, and that includes pushing through big developments with the IOCs.”

However, executives at IOCs working in the country tell MEED they do not hold out much hope that new technical service agreements will be signed with foreign oil majors, or that progress will be made on the decade-old, multi-billion-dollar Project Kuwait scheme to boost oil production at the country’s northern oil fields.

Technical service agreements between state oil and gas operator Kuwait Oil Company (KOC) and the US’ Chevron, the UK’s BP and France’s Total ran out between August 2008 and May 2009. A deal between the UK/Dutch Shell Group and state refiner Kuwait National Petroleum Company (KNPC) ran out in February this year. Kuwait has no other major deals with foreign oil companies.

After their contracts ended, the firms continued talks over new, more lucrative enhanced technical service agreements, which were first mooted by KNPC’s parent company, Kuwait Petroleum Corporation (KPC), in 2006.

They also continued discussions over Project Kuwait deals, under which the Kuwaitis would hire a consortium of IOCs to increase production at the largely undeveloped northern Ratqa, Abdali, Rabhatain and Sabriyah oil fields. Kuwait planned to develop these fields under performance-based operational services contracts.

However, the state-owned energy companies have found it difficult to set the terms of both the enhanced technical service and operational service contracts as they must balance the IOCs’ need to turn a profit with Kuwait’s constitution, which bars foreign firms from owning natural resources.

The debate over how to pay the companies for their services has become a political minefield, with nationalist MPs questioning the motives of both the national oil company and the Oil Ministry in spending billions of dollars on new projects and contracts.

In the past 12 months alone, Kuwait has cancelled a $17bn petrochemicals joint venture with the US’ Dow Chemical Company and an estimated $15bn refinery at Al-Zour because of political opposition. In July, Chevron closed its main office in Kuwait. Senior executives said the company could not make money in the country (MEED 24:7:09).

In October 2007, KOC and the US’ ExxonMobil Corporation signed an initial enhanced technical services agreement to develop heavy oil reserves at the northern Lower Fars field, but this has not led to a full contract being awarded. Sources close to the deal say the terms on offer were insufficiently lucrative for Exxon.

“Shell is also in talks over developing deep sour [sulphur-rich] gas reserves in the east and north of the country,” says an executive at one IOC.

But, he adds, the Oil Ministry, KOC and KPC hold conflicting views on the role of IOCs, which could stall progress on the deal with Shell.

Another difficulty stems from KPC’s board of directors, who are due for re-election in November 2010. A major management reshuffle is likely to follow the election. Senior KPC executives are unlikely to want to make decisions that are seen as controversial before then, says the IOC executive.

More worryingly, in a May report on Kuwait’s economy, the International Monetary Fund (IMF) said that Kuwaiti government officials it had spoken to intended to develop the country’s oil and gas reserves without help from the IOCs.

“That is definitely not the message we are getting from the ministry or from the national oil company,” says an executive at a second IOC. “But the message is getting quite confused. They need IOCs’ help in the long run for the technology and sustainability of the industry, but the politicians can be quite shortsighted.”

If any deals get pushed through over the next 12 months, they will need to be smaller than Project Kuwait, says Samuel Ciszuk, Middle East and North Africa energy analyst at US consultant IHS.

KOC and KPC both declined to comment on the status of the enhanced technical services agreements or Project Kuwait when contacted by MEED.

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