Kuwait Slow to Respond to Transition

While some Mideast Gulf producers move to accelerate monetization of their oil and gas reserves in the face of the energy transition and an uncertain demand outlook, Kuwait is falling behind. According to the latest annual report by state-run Kuwait Oil Co. (KOC), sustainable crude oil production capacity hit 2.579 million barrels per day at the end of the financial year 2020-21 on Mar. 31 — a fall of 227,000 b/d versus the previous year and the third consecutive year of decline. Over the past three financial years, KOC's capacity has now fallen by 572,000 b/d from where it stood in 2017-18, with capacity down in its three producing regions: North Kuwait, South and East Kuwait, and West Kuwait. In 2019-20, KOC had managed to increase capacity in West Kuwait by 24,000 b/d, although this could not prevent an overall year-on-year drop of 49,000 b/d. Especially concerning for KOC was that production capacity continued to slide even as it increased the number of wells drilled to 418 from 356 a year earlier. KOC did not specify what had caused the decline but said it “overcame many technical challenges over the past year.”

If everything had gone to plan, Kuwait — home to the giant Burgan field — would have hit its original production capacity target of 4 million b/d last year. This would have put it closer to fellow Opec members Iraq and the United Arab Emirates, presently the group's No. 2 and 3 producers with capacities of 4.6 million b/d and around 4 million b/d, respectively. But as the target continued to slip, so did its timeline for completion, which has been pushed back as far as 2035, according to Oil Minister Mohammad al-Fares. Even Kuwait's downgraded 3.5 million b/d target by 2025 — which includes capacity from the Neutral Zone it shares with Saudi Arabia — appears some time off. This, says Kamel Harami, an independent Kuwaiti oil analyst, has had implications on Kuwait's status in Opec because it prevented the country from seeking a higher share in the group's oil production. The issue could become even more pressing now that Opec-plus moves forward with rolling back supply curbs until later in 2022. Kuwait's Opec-plus production ceiling for September was 2.478 million b/d, but given that its ceiling is set to rise steadily at around 27,000 b/d each month going forward, it could soon max out its available capacity. Even if KOC avoids any further capacity losses, barring a big output surge in the Neutral Zone — which doesn't fall under its remit — Kuwait will hit its production limit sometime next year.

For decades, Kuwait has struggled to make sustained progress on its oil and gas agenda, as senior oil officials and energy megaprojects have come under regular scrutiny by the country's parliament, often resulting in lengthy investigations and resignation of officials and oil ministers. A general hesitance to allow foreign investors into its national oil industry has contributed to project slowdowns. KOC's performance also raises questions over the enhanced technical services agreements (ETSAs) with international oil companies (IOCs) that it has relied on since Kuwait's constitution bans any foreign ownership in its natural resources. The ETSAs with the likes of BP and Royal Dutch Shell have contributed to the development and preservation of some fields, but were structured to ensure that IOCs could not book reserves or production, operate fields, or invest in the subsurface. These unfavorable conditions, combined with ETSAs' relatively short time frames, have offered limited incentive for IOCs to bring their best technologies, including for enhanced oil recovery (EOR). Kuwait's aging oil fields, many of which have decline rates between 5%-8%, increasingly require the application of more complex and costly EOR techniques. Although KOC is "adopting various EOR methods like water, gas, and chemical injection depending on the field’s reservoir type, it is highly cost intensive and would necessitate considerable investment to move forward," says Rystad Energy analyst Priya Walia. But with investment constrained, various EOR applications "are still in pilot stages," she adds. Moreover, the skills and knowledge required aren't readily available in KOC, says Harami.

Kuwait stands in stark contrast to fellow Opec members Saudi Arabia and the UAE, which are monetizing oil and gas assets through equity sales and privatization deals and working to expand their production capacity before the end of the decade. The idea is to press their competitive advantage from holding low-cost, low-carbon reserves. KOC's response to the transition has been slow by comparison. It is studying use of wind to power operations at its Ratqa field, but has yet to reveal a broader strategy on how to address the transition, at a time when even crisis-ridden Iraq has taken first steps.