Faced with the spectacular fall in crude oil prices over the past six months, Kuwait has launched a review of Project Kuwait, its upstream investment programme. Oil Minister Mohammed al-Olaim insists that the core strategy for the sector will not change, but it is far from clear what this will mean in practice.

With export prices for Kuwaiti crude now at a quarter of their July 2008 levels, the government has decided it must reassess the economic viability of its ambitious project agenda, which is running well behind schedule.

The $55bn initiative aims to raise oil production capacity to 4 million barrels a day (b/d) by 2020, from 2.6 million b/d today. But the plan to contract foreign energy majors to work on the overhaul of five northern fields has been stalled by resistance in the country’s powerful parliament, while negotiations to engage the international companies in the development of heavy oil resources and other untapped reserves have yet to produce firm agreements because of disputes over the form of contract to be used.

Crude prices

State energy firm Kuwait Oil Company (KOC) has made steady progress in raising northern field output to more than 650,000 b/d, from 450,000 b/d in 2000. But this is only enough to offset an expected decline in production at the vast Greater Burgan field complex in the south, from 2 million b/d to 1.7 million b/d.

Prospects for progress have been worsened by the collapse in crude prices as the world slides into recession. The relative economic resilience of Asia, traditionally the biggest market for Kuwaiti oil, may offer a measure of protection for sale volumes, but provides no shield against the fall in prices, which has been spectacular.

Kuwaiti crude was selling at $135 a barrel in July 2008. By 22 December, when Al-Olaim admitted that a reassessment was under way, it had dropped to $35.62. “There is no doubt that the decline in oil prices is affecting the whole world and not just Kuwait,” says Al-Olaim. “There is a study to assess the next plan and its priorities.”

Of course, the price decline has implications for government finances and public service plans, but these may be less dramatic than the headlines would suggest.

Calculations for the 2008-09 budget, covering the 12-month period to the end of March, were based on what had seemed to be a conservative oil price of $50 a barrel.

Given the massive inflow of windfall revenue in the months when prices were soaring, it seems likely that revenue for the current financial year will still prove more than adequate to meet core budget needs, even if the outlook for 2009-10 is tight.

But the impact on future upstream capital investment, and the viability of projects that were pencilled in as key contributors to the expansion of national production capacity, is harder to gauge. The development agenda was drawn up before last year’s leap in oil prices and its viability was therefore never contingent on the boom conditions of the summer of 2008.

Indeed, the Project Kuwait programme has been under discussion since 1997. The principal obstacle to the implementation of this plan to bring in international energy majors has been the deep-rooted scepticism among members of the elected national assembly towards any foreign involvement that could be seen as jeopardising national ownership of natural resources, which is a core principle of the 1962 constitution that established Kuwait as a parliamentary state.

KOC executives have made a powerful technical case for the scheme, highlighting the contribution that the expertise of international companies could make in extracting the maximum production from the northern fields. A subsidiary operation, the Oil Devel-opment Company, was even set up to manage the programme.

However, a succession of oil ministers have struggled to win over parliamentarians. Even once the government appeared to have convinced MPs that the core constitutional principles were not threatened, because the foreign companies would operate as contractors under enhanced technical service agreements (TSAs), final approval for Project Kuwait remained bogged down in parlia-mentary procedural complications and repeated reviews.

KOC, meanwhile, pressed ahead with the overhaul of the northern fields on its own. It appears to have completed about half of the work that was originally judged necessary to raise the production capacity of the Abdali, Bahra, Ratqa, Raudhatain and Sabriya fields to 900,000 b/d from 450,000 b/d.

Since the June elections resulted in a new parliament keen on confronting upstream development plans, the government may have decided there is little point in struggling to secure a go-ahead for Project Kuwait, at least as it was first envisaged. “It just seems that the thinking in KOC has moved beyond Project Kuwait as originally conceived,” says one European analyst of the country’s oil sector.

Similar complications of structure and process have also been hampering progress on other parts of the upstream development agenda. In its drive to expand production capacity towards the ambitious 4 million-b/d target set by the authorities, KOC has developed a multi-pronged strategy, covering many different regions of the country, developing different types of deposit and working both on its own and with foreign companies.

Coming challenges

But this diversified approach faces technical, economic and political challenges. The government is operating in the face of considerable parliamentary scepticism about the usefulness of expanding capacity to 4 million b/d. Opposition MPs have argued that output should be limited to 1 per cent of reserves, to ensure that oil is available as a continuing source of income for future generations.

The scale of Kuwait’s reserves has been a matter of some controversy. A data leak in early 2006 sparked reports that the reserves might be only half the almost 100 billion barrels that had been thought. Oil officials insisted that such speculation was mistaken, because the leaked information had only covered part of the reserves.

But even on the basis of the 100 billion barrels reserves figure, a 1 per cent of reserves ceiling on production would limit output to less than 3 million b/d.

The political debate over the desirable target for national production creates an awkward context for the government to make the case for increased foreign involvement in the oil sector. If there is no serious financial or economic need to raise output above 3 million b/d, critics may ask, why seek to enhance the role of the international majors?

The recent fall in oil prices could also support those who argue for a limit on the scale of any production increase. As the global crisis has weakened demand and pushed oil prices down to just $30-40 a barrel, there is an argument for waiting for the long-term expansion of the Chinese and Indian economies, and the eventual economic recovery in the West.

Meanwhile, enhanced oil recovery (EOR) techniques will be needed to bolster output from the Minagish field from 150,000 b/d to 250,000 b/d.

There have been talks with US oil firms Chevron and ExxonMobil Corporation, and Japan National Oil Corporation, about the use of EOR in Kuwait, and the latter reached a heads of agreement for work in the north. A firm contract was expected to follow in July 2008, industry sources tell MEED, but no final deal has been concluded.

In 2006, KOC also announced a $1bn investment in the construction of a gathering centre and water injection plant in the north, and a booster station in the south.

Heavy crude is not the whole story. Over the past five years major light oil finds have been announced at Kara al-Marou, Sabriya, Umm Niqa and Arifjan. Last year, a major find of non-associated gas was announced.

But news of concrete project planning has been sparse in recent years. Against a context of political scepticism, it is not clear how far KOC feels able to go in finalising TSA deals with foreign companies, some of whom are wearying of the wait.

The gas discovery could have important benefits. Most existing gas is associated and Kuwait has struggled to make more gas available to replace oil as a fuel for power generation, and thus free up more crude for export.

The new discovery is believed to lie in strata below existing oil reserves, but details have yet to be released. Meanwhile, territorial disputes could complicate the prospects for development of the offshore Durra/Arash gas field, sited in the area where Kuwaiti, Iranian and Saudi waters converge in the northern Gulf.

A measure of the uncertain prospects for domestic upstream gas development is the fact that the government has held discussions with Iran and Qatar about potential imports of gas.

The subject was on the agenda in talks with Tehran held in 2008, and in November Iran’s Oil Minister Gholam-Hossein Nozari claimed his government had offered to supply 0.5 million cubic feet a day (cf/d).

Project review

Given the political, technical and financial complications facing Kuwait as it plans future upstream investment, the timing of the current project review revealed by Al-Olaim is significant. And the minister was strikingly vague in reasserting the government’s commitment to its strategic agenda.

Asked if the shape of the current five-year development plan was in jeopardy, he said: “We have strategic goals which we will keep…no doubt about that.”

Kuwait’s ambitious plan for boosting crude output to 4 million b/d was devised long before the price surge of 2007-08. Its under-lying viability may not, therefore, be imperilled by the recent slide in oil prices.

But the global economic downturn and oil market slump could provide timely cover for a graceful retreat. Decisions are some way off and may not be loudly announced, but it is likely the world will see KOC and the government quietly edge away from expansion targets that, in the distinctive Kuwaiti political and economic context, are increasingly unlikely to be achieved.