BMI View: Despite a sizable hydrocarbons endowment, major upstream and downstream projects remain at risk in Kuwait given long-standing above ground challenges that show few signs of near term resolution. We continue to expect Kuwait to underperform its peers and its raw potential, and as a result we expect slower than targeted growth in oil production alongside a growing import burden for gas.
Kuwa it i s currently in the midst of a major upstream expansion project which seeks to expand crude production capacity from around 2.9mn barrels per day (b/d) currently to around 4mn b/d by 2020. The expansion, termed 'Project Kuwait' would see some US$55bn to US$60bn invested in upstream development s in Kuwait and the region ( see, 'Increased Output Remains Elusive Despite Planned Investment,' November 6 2012 ).
Given much of the added capacity is intended to come from enhanced oil recovery (EOR) projects as well as more difficult to recover resources such as heavy oil, Project Kuwait is intended to rely heavily on foreign expertise. In a November 2012 speech to a London conference, then Kuwait Oil Company (KOC) managing direct or Sami al-Rushaid told attendees discussions were underway with major international oil companies (IOCs) with ExxonMobil , Chevron , BP , and Total cited by media reports. At the time, al-Rushaid indicated KOC hoped to formally conclude at least one significant deal before end of 2012 ; however at the time of writing , no progress was available to report.
There has however been news made in other area of Kuwait's oil and gas sector; events that reinforce our view that above ground risks remain the key obstacle to further development of the co untry's hydrocarbons potential:
In 2012 Kuwait handed over an investigation regarding suspected irregularities in a US$800mn deal between KOC and Royal Dutch Shell to public prosecutors. The deal relates to a 2010 Enhanced Technical Service Agreement (ETSA) to develop a major non-associated gas field. An investigation was also underway at the time by the National Assembly, with allegations the contract was awarded improperly and without competition.
Given Kuwait bars foreign ownership of natural resources, ETSA's were seen as a method of incentivising IOC participation in upstream projects too challenging for KOC to develop on its own, however with Shell deal on hold, and no other agreements finalised, the scheme has generated more controversy than investment.
Industrial action, a relatively commonplace occurrence for Kuwait, hit the oil sector in May with nearly 80% of the workers at Kuwait's state run oilfield service outfit - Oil Sector Services Co (OSSC) - striking in a call for better pay.
A ruling in May from the International Chamber of Commerce (ICC) awarded Dow Chemical US$2.19bn in damages after the failure of a US$17.4bn joint venture in Kuwait's petrochemicals sector . Kuwait was found liable after pulling out of the deal following pressure from members of National Assembly .
Following the ruling, there was a major reshuffle of leadership in the state run oil sector with a the chief executive of Kuwait Petroleum Corporation (KPC) replaced alongside a number of senior officials at the state run Petrochemicals Industries Co .
These recent events underscore the prominent threat Kuwait's above ground risks pose to foreign investment in major upstream and downstream projects. Indeed, one of Kuwait's most ambitious projects, the Al-Zour project which aims to bring online the Middle East's largest refiner ies at 615,000b/d by 2018 has gained some momentum in recent months . In December 2012, project management contracts awarded, but even this project has been subject to lengthy delays as result of infighting between the government and opposition politicians in the parliament ( see, 'Al-Zour Moves Forward But Uncertainty Remains,' July 27 2012 ).
Disputes between the government and opposing politicians in Kuwait's National Assembly have been a key source of delays and a key deterrent to investment in the oil and gas sector. Indeed, as the recent World Economic Forum (WEF) Global Competitiveness survey indicates, political instability and bureaucracy are among the chief obstacles to doing business in the country. Home to the region's most influential legislative body, Kuwait's elected National Assembly has the ability to veto legalisation and place considerable pressure on the government and its ministers.
|All Signs Point To State As Biggest Hurdle|
|Kuwait - Most Problematic Factors For Doing Business*|
As the seven dissolutions of parliament since 2006 indicate, the body has largely effectively with persistent hostility between the opposition forces in parliament and the government ( see, 'Irrevocable Loss In Competitiveness,' July 9 2013). We note that we have seen some improvement in Kuwait's ability to manage its affairs when 'loyalists' who support the government's policies have taken a majority in the National Assembly. However even considering progress on key areas made under a recent parliament in which loyalists held the majority, BMI's Middle East team has little confidence that a return of government supporters to power would lead to an improvement in Kuwait's business environment.
|Lagging Its Peers|
|GCC - Ease of Doing Business 2013 Rankings and Global Competitiveness Index 2012-2013|
This suggest s that Kuwait is on track to slip further behind hits oil rich peers in the region, who themselves are in the midst of major upstream projects . Countries such as Saudi Arabia and Oman are also increasingly moving, with foreign support, toward tapping unconventional resources that Kuwait is equally eager to develop in the face of gro wing shortfall of gas supplie s ( see our Special Report, February 16 2013, 'Fracking Goes Global: State of Play and Outlook,' and 'Shale May Help Stem Growing Gas Shortfall,' April 1 5) . Yet as evidence d by the string of disappointments, delays, and challenges, we see more downside than upside risk to efforts aimed at generating foreign investment in the oil and gas sector.
|Below Target But On The Rise|
|Kuwait Oil Production, Consumption & Net Oil Exports ('000b/d)|
As a result, we expect Kuwait to miss its 2020 capacity goal with regard to oil, and instead for production to reach around 3.5mn b/d by the end of our forecast period. Given few signals Kuwait is ready to address generous subsidies which have supported inefficient consumption patterns; we expect the country's gas deficit to grow given a lack of substantive progress in developing new supplies from challenging developing associated and non-associated gas fields (see, 'GCC Subsidies : An Untenable System').
|Shortfall To Grow As Supplies Lag|
|Kuwait Gas Production, Consumption & Net Exports* (bcm)|
In short, without addressing the challenges stemming from its oft criticised business environment, we expect Kuwait to continue to underperform its potential. This will undermine earnings, with a greater than necessary import bill on gas, and a below potential earnings from oil exports as production disappoints.