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Abu Dhabi, UAEWednesday 19 September 2018

Kuwait's government upheaval puts energy reforms in jeopardy

Production increases needed to maintain oil-share and lower LNG imports

Kuwait's oil minister Essam Al Marzouq (left) with OPEC secretary general Mohammad Barkindo in Moscow earlier this year. Anton Vaganov / Reuters
Kuwait's oil minister Essam Al Marzouq (left) with OPEC secretary general Mohammad Barkindo in Moscow earlier this year. Anton Vaganov / Reuters

“Not a very interesting economy,” was one Gulf-based economist’s less-than-glowing tribute to Kuwait. The country’s politics, on the other hand, have consistently been lively. After a brief dawn in the country’s energy sector, the resignation by the country’s government last week once again casts it into shadow.

Kuwait’s cabinet, appointed in December, resigned last Monday. The opposition, which holds almost half the seats in parliament, has been opposed to the austerity policies introduced by the government in response to low oil prices. They have long sought to question, or “grill”, a number of ministers in parliament, including oil minister Essam Al Marzouq over the alleged mismanagement of Kuwait Oil Company (KOC), the state-owned upstream entity.

But with no deadline for a new government to be appointed, and the country’s leadership trying to avoid fresh elections for now, the outgoing cabinet still has a window to push through some measures as part of a caretaker administration.

Kuwait’s previous parliament, in place from July 2013 to November 2016, was government-friendly since most of the opposition boycotted the July 2013 elections in protest over a change in voting rules. The parliament was dissolved in November 2016 following a row over fuel prices increases.

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Read more:

Kuwait government resigns, state news agency reports

Kuwait MPs draft law to block price increases

Conservatives make strong showing in Kuwait parliamentary election

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During its three-year tenure, Kuwait, previously derided by international oil companies as “queue and wait”, managed to move ahead on some important energy developments.

The country approved three facilities to produce gas from deep Jurassic-aged reservoirs in north Kuwait. Starting at the end of this year, these will help slow the growth in liquefied natural gas (LNG) imports, which will hit record levels this year. They will also yield 120 000 barrels per day (bpd) of light oil, stressing Kuwait’s compliance with the Opec production cuts, unless it reclassifies the oil as “condensate”, as it was previously defined.

KOC also signed up for the initial development of its enormous heavy oil resources, with a view to producing about 120,000 bpd from the Ratqa, Umm Niqa and Sabriya fields by 2020.

Kuwait needs the boost to hit its output targets. The country was meant to hit a capacity of 4 million bpd production by 2020, although this target has been endlessly pushed back. Of the 4 million bpd target, 350 000 bpd is due to come from the Saudi-Kuwaiti Neutral Zone, which has seen production suspended since 2015.. A series of oil spills from the nearby offshore Khafji field have cast further doubt over whether production in the zone will restart anytime soon.

From its current capacity of 3.02 million bpd, Kuwait will still need to find another 400 000 bpd to meet its goal, assuming the Neutral Zone re-opens. Meanwhile, the country has fallen behind the UAE, Iraq and Iran in its production capacity, with all three states planning to expand capacity even further.. Kuwait thus faces challenges in maintaining market share, particularly if the production cut agreement between Opec and non-Opec winds down next year. Mr Al Marzouq, or his successor, might want to keep the cuts in place as long as possible if politics cloud the chances of Kuwait boosting its output anyway.

The next phase of the Jurassic development, boosting national gas output by a fifth and adding another 220 000 bpd of oil, is due for bids in February. BP and Shell have technical services agreements to maintain production from mature fields and develop heavy oil. The upgrade of two refineries should be completed by 2019. And after years of negligible progress on renewable energy, bids for a huge, 1 gigawatt solar power plant are invited in the first quarter of next year.

It remains to be seen whether all these arrangements will be derailed by Kuwait’s recent parliamentary upheaval. Shell’s earlier technical service agreement from 2010 on the Jurassic gas suffered drawn-out parliamentary inquests into alleged irregularities. Another refinery, Ras Al Zour, needed as a replacement for the shut-down Shuaiba refinery, has been held up by cancellation of a pipeline tender.

Rising oil prices have somewhat eased the fiscal pressure on Kuwait. A deficit of 17.3 percent of GDP last year is set to fall to 12.6 percent this year, and this includes transfers to its future generations fund. With its large sovereign wealth holdings and small national population, Kuwait is still in a more comfortable position than most of its oil-exporting neighbours. The oil price it requires to balance its budget, around $50 per barrel, has risen in both 2017 and 2018, in contrast to most austerity-minded peers, but is still the lowest in the Middle East.

But the country’s parliament has stubbornly opposed cutting subsidies on electricity, fuel and water, with the country’s large financial cushion continuing to breed complacency. Energy price rises passed in March are extremely modest rising to upto 6 UAE fils per kilowatt hour for expatriates. This compares with the minimum rate of 23 fils charged by the Dubai Electricity and Water Authority. As well as the direct monetary cost, Kuwait’s continually rising consumption of subsidised energy has fostered an increased reliance on LNG imports, a situation the development of the country’s Jurassic gas is meant to ease.

It is something of a sad situation that only the absence of an opposition allowed major, much-needed energy projects to move ahead. Perhaps asking for a post-oil Kuwait is too much, but parliament or the government still needs to present a vision for what Kuwaitis are asked to give up, and what they will gain in return.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

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