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Kuwait’s plans to expand its oil and gas production capacity have faced decades of delays, almost entirely due to debilitating discord between Kuwait’s Parliament (the National Assembly) and executive branch of government. The oil ministry and state-owned Kuwait Petroleum Corp (KPC), however, are at last moving forward with significant new oil and gas projects as the Parliament and Cabinet cooperate on budget deficits, declining oil revenue, and economic growth prospects.
Increasing oil production capacity, and consequently oil revenue, has become a financial imperative. The government recently announced plans to spend $115 billion over the next five years on the oil and gas sector, with $75 billion earmarked for exploration and production to meet a targeted increase of one million barrels per day (mb/d) in capacity to four mb/d by 2020. The government also announced plans in early July to partially privatize parts of the state oil company in a bid to increase cash flow.
A period of relative political stability between the fractious legislature and the royally-appointed Cabinet has prevailed since the country’s last parliamentary elections in July 2013, which paved the way for greater cooperation. Kuwait’s legislature historically has maintained a confrontational relationship with the executive branch, with the government lurching from crisis to crisis, which has slowed or derailed the implementation of infrastructure developments and economic reforms, earning Kuwait the moniker “queue and wait.”
There are no clear mechanisms to resolve legislative versus executive disputes; the only recourse is dissolution of Parliament by the emir, which has become increasingly frequent since Sheikh Sabah Al Ahmad al-Sabah assumed power in 2006. The 2006-13 period was marked by heightened political volatility, with the Parliament dissolved six times. The Cabinet was reshuffled a dozen times over the same period, and a total of 33 times since the country’s independence in 1961.
The relative calm that has prevailed since the 2013 elections reflects the rise of a more balanced legislature. The emir’s decree to change the voting system to a “one person, one vote” system, rather than the previous four votes per person rule, sparked a political crisis, prompting the opposition, largely an Islamist-tribal coalition, to boycott the elections in 2012 and 2013. As a result, a more independent, pro-government Parliament emerged.
One important change to the Cabinet line up since 2013 has been the rise of Anas Khalid Al-Saleh, who has served as minister of finance since January 2014, deputy prime minister since January 2015, and acting oil minister since November 2015. The 43-year-old Saleh, part of a younger generation of ministers who previously held the commerce and industry portfolio, now exercises considerable power over the country’s economic future. Taking the helm as finance minister just before the oil price crash, he nonetheless managed to rein in the budget and at the same time forge a constructive working relationship with the Parliament. Equally, his appointment as oil minister in late 2015 is a key reason contract awards for major energy projects have gained momentum. Saleh replaced the widely unpopular Ali Al-Omair, a former member of Parliament, who clashed with almost everyone, especially executives at KPC.
Kuwait’s oil industry has been hamstrung by a legislature that has a long history of challenging the authority of the Supreme Petroleum Council (SPC), oil ministry, and state-owned KPC to make decisions on contract awards to foreign companies, alleging mismanagement and corruption and embroiling energy officials and foreign companies in lengthy investigations. In the past, the Parliament regularly summoned the country’s oil ministers for questioning, a process known in Kuwait as “grilling,” which is often pre-empted by the minister’s resignation. As a result, there have been 11 oil ministers in the past 10 years.
The Parliament has long considered one of its key roles as guardian of the country’s natural resources. Article 21 of the constitution states all natural resources and revenue derived from them are the property of the state. However, in 1998, Kuwait’s SPC proposed offering a production-sharing agreement that was in conflict with the constitution but justified the contract as needed to attract international oil companies with experience for the technically complex oil fields in the northern region bordering Iraq. The plan, “Project Kuwait,” was also considered critical to boosting production toward a target of four mb/d. The Parliament roundly rejected Project Kuwait and, emboldened with a healthy dose of nationalism, argued Kuwaiti companies should operate the country’s fields.
The contract model was abandoned and various versions of technical service contracts have been put forward over the past 15 years. The Parliament traditionally views any foreign participation in the country’s oil sector with suspicion and has consistently derailed negotiations. KPC’s exploration and production arm, Kuwait Oil Company (KOC), entered into an enhanced technical service agreement (ETSA) in early 2010 with Shell for the development of the northern Jurassic gas resources but the project stalled after the Parliament instigated an investigation of the award process by the public prosecutor. After four years of investigation, the prosecutor closed the case on April 20, bringing no charges.
The cancellation of a joint venture between Dow Chemical and Kuwait’s Petrochemical Industries Company, however, was a far more serious and costly debacle that was prompted by the Parliament’s criticism of the deal during the 2008 global financial crisis. The government pulled out of the $17.4 billion deal rather than risk yet another political crisis. Four years later, however, the International Court of Arbitration of the International Chamber of Commerce came down on the side of Dow, awarding the company damages of $2.16 billion.
The Stars Align for Kuwait’s Oil and Gas Industry
An array of developments – the lower oil price environment, an unusual period of political détente between the legislature and cabinet, and a new oil/finance minister intent on securing the country’s future economic growth – have combined to set in motion the long-delayed expansion of the oil and gas sector.
Kuwait’s loss of production at the shared Neutral Zone operations with Saudi Arabia has also added greater urgency to green lighting new projects. A disagreement between the two countries has escalated since late 2014, prompting Saudi Arabia to shut-in the 50/50 shared 500,000 barrels per day (kb/d). The Neutral Zone was divided in 1969, with crude output from the 200 kb/d Wafra field and the 300 kb/d Khafji field shared equally. Saudi Arabia suddenly shut-in output from the Khafji field in October 2014, reportedly for environmental reasons, and Wafra in May 2015.
Meeting the four mb/d target by 2020 is clearly not possible given the short timeline but the raft of contracts that have been inked or are planned for 2016, including three politically sensitive ETSAs, have charted a new course for the country. Projects under consideration include development of the northern region’s oil and gas fields, enhanced oil recovery schemes, massive water management programs at aging fields, upgrading and expanding gathering centers, and a new liquefied natural gas (LNG) import and regasification terminal.
With little publicity, KOC quietly awarded long awaited ETSAs to BP and Shell. The Parliament reportedly signed off on the contracts in March but no formal announcement has been made. BP has won an ETSA for managing the 70-year-old Greater Burgan oil field, which provides 60 percent of the country’s total production of 2.8 mb/d. Burgan is the second-largest oil field in the world after Saudi Arabia’s Ghawar. BP will implement an advanced water injection plan aimed at maintaining production at 1.7 mb/d beyond 2020. Low reservoir pressures and long-term use of water injection to increase oil recovery rates is a significant problem at the country’s aging fields. To combat the problem, KOC signed an ETSA with Shell for the water management for various fields. Shell secured a second ETSA for the Ratqa heavy oil field near the northern border with Iraq, which was part of the original Project Kuwait plan. Ratqa is expected to produce 80 kb/d by 2018, 200 kb/d by 2025, and reach maximum output of 270 kb/d by 2030. Shell had previously signed a contract to capture carbon dioxide at oil fields and reinject it underground to produce more crude. Also in the northern region, a $4.2 billion contract for the Lower Fars Heavy Oil project was awarded to Petrofac in 2015. Offshore, KOC is also preparing contracts for rigs and technical services with plans to drill its first undersea wells in 2017.
New projects aimed at reducing the country’s gas deficit include the development of the giant Jurassic Non-Associated Gas Reserves in the northern region, according to Kuwait National Bank. At the same time, Kuwait, the largest Middle East importer of LNG, awarded a $2.9 billion contract in the first quarter for the Al-Zour LNG Import Terminal Project.
Downstream, KPC’s refining arm, Kuwait National Petroleum Corporation, plans to spend $42 billion by 2022, including on a new refinery and clean fuels project. The projects have been on the drawing board for almost a decade and have faced repeated delays.
Kuwait has also taken a page from Saudi Arabia’s playbook and announced plans to sell minority stakes in its state-owned oil companies as part of a broader economic reform plan to reduce its budget deficit, which is forecast at $38.6 billion for 2016-17. The government has a four-year plan to organize the sale of shares in its international operations and the shipping and chemical arms of KPC, according to Saleh. The country’s oil production will not be part of an initial public offering.
The Calm Before the Storm?
Greater political consensus has been a critical factor in advancing long delayed oil and gas developments and other infrastructure projects but the uncommon atmosphere of cooperation between the legislative and executive branch may fracture for any number of reasons. A return to higher oil prices may weaken the Parliament’s resolve to make controversial decisions and work with the Cabinet. Succession issues and internal royal family power plays could also undermine the relative political calm. The current emir is 85 years old, with an orderly succession expected for his 75-year-old brother, Crown Prince Sheikh Nawaf Al Ahmad al-Sabah. However, factional infighting among ambitious royal family members seeking to be named the new crown prince by Sheikh Nawaf when the time comes emerged soon after Sheikh Sabah took the reins.
The most immediate problem, however, will come in June 2017 when parliamentary elections are scheduled. A return to a more confrontational Parliament would increase the political risks for international oil companies, especially holders of freshly minted ETSAs. The legal challenges against Shell and Dow Chemical are a worrying memories. The decision by a large majority of Islamist and tribal opposition members to boycott the last election was a miscalculation since it left them with no voice to set the agenda in Parliament. Some of the major opposition groups plan to end the boycott and field candidates in 2017. However, a new amendment to the election law that bars those convicted of blasphemy or insulting the emir from contesting parliamentary elections will affect dozens of opposition leaders. The government’s deliberate move to undermine the opposition leading up to the elections, and supported by the current legislature, has served to strengthen the resolve of some groups to return to Parliament. What role the Islamist opposition blocs will play across the wider political spectrum going into the elections is still unclear.
Critical to the outcome of the elections will be the success of the current Cabinet and sitting Parliament in delivering long-promised infrastructure projects, robust development of the private sector, and sustainable reforms that will ensure strong future economic growth. It remains to be seen if measurable successes can be achieved before the elections, and if they will be sufficient to maintain the current atmosphere of cooperation.
has written on energy issues for over 35 years. She was previously a non-resident fellow at the Arab Gulf States Institute in Washington and is currently a contract editor for the Paris-based International Energy Agency, where she earlier served as a senior oil market analyst.
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