Kuwait’s political crisis is undermining energy growth and options

Goals and challenges

• Current crude production is 2.71 mmb/d versus an OPEC quota of 2.68 mmb/d. A new OPEC agreement assigned a quota or “voluntary cut” of 2.55 mmb/d from May to December 2023. In addition, roughly 300,000 b/d of natural gas liquids and condensates are produced, not part of its OPEC quota. Crude output reached a high of 2.85 mmb/d in 2016.
• The 4 mmb/d production capacity target was to be achieved in 2020 and maintained until 2030. By 2018, the 2020 timing had slipped. In 2021, the new date for achieving the goal became 2040, but was then adjusted yet again to 2035. Currently capacity is roughly 2.9 mmb/d.
• Sources of supply (including natural gas): 
  • The Burgan oil field (operated by KOC) has a production capacity of about 1.4 mmb/d, 48% of the total. Burgan is a very mature oil field and had been declining at a rate of 6% to 7% per annum in recent years. If Burgan production cannot be stabilized, then it is extremely difficult to grow Kuwait output overall. KOC now targets a 1.5 million b/d capacity for the field. Additional crude comes from adjacent fields. 
  • West Kuwait oil fields (KOC operator) produce roughly 500,000 b/d, declining at a rate of about 4% to 5% per year recently. 
  • North Kuwait fields (KOC operator) produce about 600,000 b/d and 6 billion cubic meters per year (bcm/y) of non-associated gas. 
  • Kuwait receives 50% of Partitioned Neutral Zone (PNZ with Saudi Arabia) crude production (operated by Chevron onshore and offshore by a Saudi Aramco/KOC joint venture), which is about 200,000 b/d (net to Kuwait) currently.
  • 1.7 to 1.8 bcm/y of associated natural gas is produced with oil output from the various fields above.      
• Much of Kuwait’s challenge is managing production decline. Higher water cuts, more investment in required secondary and tertiary recovery, all drive complexity and higher cost.
• On the growth side, KOC's challenges are also profound and in newer, less well-known reservoirs. Deep, high pressure/high temperature (HPHT) sour gas, light and heavy crudes (see the northern Kuwait fields) all amount to more complexity and a higher cost per unit of production.  
• Poor goal setting (with high risk of achievement) can be just as detrimental as operational failure to achieve well-selected objectives.  
• Kuwait has struggled for years to increase its non-associated natural gas production. Last year saw high LNG costs (Kuwait imports LNG for power given insufficient domestic gas output), with some respite offered subsequently by cheap imports of Russian and Iranian high sulfur fuel oil (HSFO) burned for power generation (seasonal). 
• KPC is concluding a downstream investment program (clean fuels upgrading, new Al Zour refinery and LNG import facility) on the order of $33 billion, which should increase flexibility for upstream spending. Downstream spending is not done, however, KPC has ambitious plans for new petrochemicals capacity this decade. 
• The downstream sector cannot perform optimally if dedicated input streams cannot be assured. Downstream's record of safety incidents and project delays describes a performance similar to that for upstream. 

Institutional capacity

• An increasingly mature, technically complex upstream sector requires risk taking, higher spending and expanded capabilities. Increased investment in petrochemicals in an integrated energy sector requires timely critical path execution. 
• Remarkably, pre-1990, KPC was very innovative, pioneering a captive refining strategy in energy markets. It had a unique Q8 branding strategy in European product markets and created Kufpec to enter international upstream to replace domestic production. KPC has experienced minimal growth in institutional capacity over the past three decades due to having zero strategic autonomy and limited operational autonomy. 
• Strategic autonomy is determined by the degree of control over budget planning, formulation of growth objectives, international expansion decisions, business areas focus and the ability to prioritize segments of the value chain, with a high degree of emphasis on commercial objectives. It is the Supreme Petroleum Council that sets the strategic direction and budgets for KPC. Oversight roles in this area are vigorously contested in Kuwait’s National Assembly. 
• Operational autonomy determines the ability to independently choose which projects to invest in, and how to manage those projects, appropriate service sector partners, and employ skilled personnel. Greater operational autonomy goes hand-in-hand with increased capabilities. KPC/KOC’s limited operational autonomy is due to interference with choice of service sector partners, project management and choice of personnel.  

Energy sector design 

• Kuwait’s upstream sector does have some foreign company participation. Technical service agreements (TSA) have been in place for decades. Currently, there are several enhanced TSAs involving KOC and Shell (northern Kuwait fields) and BP (Burgan). The first enhanced TSA, or ETSA, was signed with Shell for the development of technically difficult HPHT sour gas fields in northern Kuwait in 2010.  The ETSA elements include: KOC as operator, making all strategic and operating decisions with the advice and support of the foreign company; focus on achieving KOC's strategic targets; foreign company technical staff seconded into KOC's operating structures; compensation via fees on a per man-hour basis; and performance bonus structure. 
• The ETSAs appear to be inadequate given KOC’s institutional capacity and performance. 
• Kuwait has had decades to observe operational and contractual performance in neighboring countries. Its upstream sector is in the same petroleum basin as that for Iraq, Saudi Arabia, Iran, Qatar and the UAE (all or part). Same reservoirs, source rock, thermal history and operating environment, with very different performance in some cases and quite similar in others. It is well positioned to assess the strengths and weaknesses of neighbors at no cost to itself.  
• Yet the government has failed to leverage its surrounding examples. Given the importance of oil revenues to the budget, this is a critical and remarkable failure. 
• Organizations are designed to deliver the results that they deliver. The Kuwait energy sector appears to be designed for political purpose; political elites have created a patronage system, with the National Assembly an arena for political confrontation and contestation. Oil Ministry leadership is caught up in political battles in the parliament with resultant high turnover. The parliamentarians demand the energy sector employ their constituents, leading to over-employment and inadequate technical knowledge.