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Kuwait looks for way out of domestic gas conundrum – KOC looking to boost output, pay for expensive LNG imports

gasKUWAIT: State-owned Kuwait Oil Co (KOC) shortlisted five oil majors for a five-year consultancy contract in late September, designed to boost oil and gas output - the Gulf state's latest attempt to tap IOC technical advice in the face of stiff local resistance to non-Kuwaiti participation in the country's hydrocarbons sector.

Shell, BP, Total, ExxonMobil and Chevron are to bid for a five-year consultancy contract let by KOC, a subsidiary of Kuwait Petroleum Corp (KPC). KOC will issue a tender for those companies to sign the contract which starts in the 2015-2016 fiscal year.

Although its main aim is to attempt to increase crude oil production capacity to 3.65 million barrels per day, the consultancy contract is also a belated attempt to breathe fresh life into the country's faltering upstream gas program, focused on the northern non-associated Jurassic field.

Kuwait's bid to raise domestic gas production has made no substantive progress since the Jurassic project's inception in 2010. That leaves Kuwait as a net importer of gas, with 15.6 billion cubic meters of production in 2013 outpaced by consumption of 17.8 bcm.

The Jurassic gas fields of Umm Niga and Sabriyah, estimated to hold a total of 991 bcm of reserves, are central to any effort to find a domestic solution to the country's sizeable gas requirements.

The Jurassic gas program is the centerpiece of an enhanced technical service agreement signed between Shell and KOC in February 2010. But progress has been held up. In a further blow to Kuwait's domestic gas program, local reports in mid September suggested KOC was preparing to scrap a $1.5 billion contract awarded to build facilities at the Jurassic field.

Political challenges
Contracting troubles are only one - albeit serious - source of delays on the Jurassic gas project, which ultimately aims to produce 28 MMcm/d. More troublesome are the political challenges that have hindered Shell's chances of making faster progress on its upstream program. Kuwaiti MPs launched a probe into a contact estimated at $800 million in 2012, referring the contract to the public prosecutor for investigation because of alleged irregularities in the agreement.

It is the politicized probe, rather than the technical challenges, that has stunted Kuwait's attempt to produce gas from the northern fields. "Kuwait is known as much for its political constraints as for the complexity of its upstream gas sector," said Justin Dargin, a Gulf energy analyst at Oxford University.

Political opposition has made it increasingly difficult for any IOC that dares to get involved in Kuwait. "Even though the current parliament is regarded as a bit more pro-government than the previous legislature, the parliamentary probes effectively chill any potential investment [in] upstream development," said Dargin, who emphasized that the arduous political conditions - rather than the actual commercial terms - play a more significant role in inhibiting Kuwait's chances of tapping foreign expertise.

Further delays come out of the complex nature of the system in Kuwait, where political and commercial interests overlap. Some political groups represented in parliament are linked to commercial entities. "When some contracts are seen to benefit particular companies, other factions invariably attempt to obstruct them," said Dargin.

In fact, anything related to oil and gas in Kuwait has always been acutely sensitive because of the general atmosphere of distrust between government and opposition, said Kristian Coates-Ulrichsen, Middle East fellow at Rice University's Baker Institute. "The [opposition] are simply not feeling confident in the [government's] ability to act cleanly. This is complicated further as temporary alliances form among political and business interests and senior members of the ruling family. There are so many pitfalls that any one of them could have the potential to derail an agreement," said Coates-Ulrichsen.
Political intrigue makes for entertaining chatter in Kuwait's diwans, but is potentially harmful to its chances of building a more coherent political system that could catalyse development of its sizeable domestic gas reserves, estimated at 1.8 trillion cubic metres.

LNG efforts
In this light, the country's ramped-up effort to boost imports of LNG this year is an understandable - if expensive - solution. Kuwait signed agreements in the first half of 2014 to import LNG cargoes from Shell, BP and Qatargas, with commitments for 32 shipments per year, each of 80,000 tons. This gas will go some way to meeting local power stations' requirements for increased gas supplies, after repeated summers of blackouts.
However, increasing LNG imports does have other effects on the local gas market. The overall effect of bringing in expensive LNG - priced in the range of $13-14/MMBtu - is to push up the weighted average cost of gas. That results in a need to raise electricity tariffs or increase the amount of subsidies to the electricity sector, according to Gavin Law, Wood Mackenzie's senior gas consultant.
"LNG is being sold to power companies at a higher price than was previously the case. Subsidies are being moved around between the power and gas sectors at an increasing rate," said Law.
Despite the cost implications of rising LNG imports - local estimates put the price of Shell's 18-cargo deal at $12 billion - Kuwaiti officials are hopeful some volumes from the Jurassic fields will contribute to future supply growth. However, these are not likely to offset the need for continued LNG imports.
Further supplies sources could result from Kuwait's acquisition of overseas gas production capacity. Kuwait Foreign Petroleum Exploration Co. acquired Shell's 8 percent interest in the Wheatstone-Iago gas field and its 6.4 percent stake in the Wheatstone LNG project in Western Australia for $1.1 billion, giving the country a potential interest in LNG cargoes due to come onstream in 2015.
Kuwait's toxic politics will, in the meantime, remain a hurdle for any IOCs considering entering its upstream - even those lured by KOC's new consultancy contracts. Buying in LNG cargoes, by contrast, seems an considerably simpler solution.

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This article was published on 08/10/2014