Upstream gas excites Kuwait [NGW Magazine]
In mid-September, Kuwait abruptly cancelled a major oil project while proceeding with a tender for facilities to build out its gas production capacity. The emirate has become the latest Gulf nation to seek to diversify its economy.
The local Al-Rai newspaper quoted senior sources at Kuwait Oil Co. (KOC) as saying that a project to drill 11 wells to facilitate increased heavy oil production had been called off. The cancellation is not entirely surprising given that Kuwait has reduced oil production by nearly 1mn barrels/day (b/d) as part of the Opec+ reductions and that parent firm Kuwait Petroleum Corp. (KPC) – in common with other national oil companies throughout the region – has been reassessing its capital programme and reducing capital spending in its 2020-2025 five-year plan. KOC and other local companies are now expected to halt or cancel more projects following direction from KPC.
However, the move to cancel a contract awarded – though not yet signed – to an international company is illustrative of the push common among the Gulf’s top oil producers to prioritise gas development, particularly ahead of costly heavy oil development. Like Saudi Arabia, Iraq and the UAE, Kuwait wants to reduce the role of crude in electricity generation, freeing up more for export.
In 2015, the most recent year for which data is available, oil accounted for 64% of generating capacity, with heavy crude dominant in the energy mix. According to the Kuwait Institute for Scientific Research, the role of oil is expected to decrease to around 25% by 2035, as gas and, to a lesser extent solar, make up ground. Natural gas demand is expected to grow by 2.2%/yr during that period and will meet around 55% of generation by 2035. However, with several large power plants configured to use low-sulphur oil, petroleum products are likely to retain an important role in longer term power generation.
The country has sizeable reserves, sitting on 60 trillion ft³ at the end of 2019 according to BP’s Statistical Review of World Energy. That is around 1% of the global total, though non-associated gas resources have been relatively untapped. Production rose to 650bn ft³ last year with associated gas accounting for nearly nine tenths. Some of that was reinjected to boost crude production.
Demand meanwhile has grown to 830bn ft³/yr and Kuwait has come to rely more on LNG imports for feeding gas-fired generation and water desalination, with the full complement of gas demand coming from the power and industrial sectors. Kuwait is the Middle East’s only net importer of LNG.
Until 2015, Kuwait imported gas through the 5.8mn metric tons (mt)/yr Golar Igloo floating storage and regasification unit at Mina Al-Ahmadi between April and October. That is when air-conditioning demand is highest. This period was later stretched to all-year-round except January, with cargoes coming from a variety of sources and base-load capacity increasing to 500mn ft³/d. Peak capacity has gone up to 900mn ft³/d.
And while there is enough gas output to meet base-load demand for now, this will not be the case for much longer. A permanent facility is being built at the industrial centre Al Zour, which will receive LNG imports throughout the year when it comes on stream later than planned in 2021.
The emirate has also spent many billions of dollars developing its downstream sector, the latest stage of which is the vast Clean Fuels Project, while world-scale projects are being developed for olefins, aromatics, paraxylene (PX), propylene, polyethylene and polyprolyene (PP), all of which will benefit from increased gas feedstock availability. Al-Zour’s petrochemical wing is expected to produce around 2.8mn mt/yr of petrochemicals with commissioning scheduled for 2024. This includes 1.4mn mt/yr of PX, 940,000 mt/yr of PP and 420,000 mt/yr of gasoline.
With that in mind, industry sources have said that the bidding process remains ongoing for a $1.5bn contract to construct facilities dedicated to the development of the country’s large Jurassic Gas resources in the north. Following an invitation from the Central Agency for Public Tenders (CAPT), three local firms were reported in August to have been qualified for the contract to construct Jurassic Gas facilities 4 & 5. The deadline for bids is set for December 22 with a deposit of $28mn.
These companies were revealed to be Al-Manafea General Trading and Contracting Co. on behalf of Chinese firms Sinopec Engineering and Sinopec Luoyang Engineering; the National Projects Alliance Co. on behalf of fellow Chinese oilfield services company Jereh Oil and Gas Co.; and the local Oil and Gas Field Services Co. The CAPT is understood to have refused to qualify two companies’ participation in the project. However, NGW understands that UK-based Petrofac, Samsung Engineering and Daewoo Engineering & Construction both of South Korea and Japan’s JGC have all joined the fray. And so too has KBR, which in June announced its intention to reduce its engineering, procurement and construction workload.
Kuwait discovered the large reserves at Jurassic Gas in the north of the country in the middle of last decade. The project is a three-phase development that will target non-associated sour gas resources estimated at around 34 trillion ft³ in the Bahrah, Dhabi, Mutriba, Raudhatain, Sabriyah and Umm Niqa fields. After lengthy delays over potential IOC involvement, KOC finally awarded three build-own-operate contracts in 2016 to install early production systems (EPS) at East Raudhatain, West Raudhatain, Sabriya and Umm Niqa.
The plants were commissioned by US oilfield services firm Schlumberger and local company Spetco in 2018, with each producing roughly 35.3bn ft³/yr of gas and 40,000 b/d of light oil. KOC had originally intended to carry out the second phase of development through a single EPC contract and tendered the $3.9bn Jurassic Gas 1 facility in September in 2018. This called for a 215bn ft³/yr plant at the Al-Ahmadi hydrocarbons hub near Kuwait City. But the tender was cancelled two months later following disputes over contracting strategy. With the authorities having agreed to revert to dividing up the scheme into several EPS, the project was further delayed by disagreements between KOC and the CAPT over the prequalification process.
Jurassic Gas phase one production is expected to reach 300mn ft³/d this year, rising to a plateau of 400mn ft³/d in 2021. KOC expects first gas from phase two to be on-stream in 2022, rising to around 600mn ft³/d by mid-decade. The third phase is expected to follow in the late 2020s adding around 150mn ft³/d, though given Kuwait’s history of lengthy project delays, this may end up running into the next decade. Jurassic Gas facilities 4 & 5 will allow for a combined production increase of 100,000 b/d of oil and 300mn ft³/d of gas.
Plans to boost Jurassic Gas have been discussed since 2010 but strained relations between the parliament and cabinet have resulted in the latter being dissolved seven times in the last 14 years. It would have been eight times, but late last year the Emir instead accepted the cabinet’s resignation. Quarrels over the involvement of foreign companies in the country’s most important industry have routinely derailed upstream progress.
Despite that, Kuwait invested heavily in facilities to allow production to rise at its onshore assets with the heavy oil and Jurassic Gas projects being the key beneficiaries. Political will has seen momentum build behind gas development plans in recent years and the clear economic benefits of doing so cannot be ignored, particularly when oil production is under such great scrutiny and electricity demand growth is rampant.
The administration is likely to face further pressure to use domestic resources to feed the multi-billion-dollar downstream investments that will be central to Kuwait’s efforts to add value to every barrel of hydrocarbons produced. The petrochemical sector too has seen its fair share of controversy, with the most high-profile case following PIC’s withdrawal from a $17.4bn plastics venture with Dow Chemical in 2008 that led to the US firm being awarded $2.2bn in compensation.
The fact that the Jurassic Gas projects have so far survived the KPC budget cull is a positive sign, but the question is whether Kuwait will be able to hold its cabinet together for long enough for the development to realise its potential.