Lagniappe

 

Samuel Ciszuk / Global Insight :
First major Kuwaiti gas project delayed again

 

First Major Kuwaiti Gas Project Delayed Again, as Government Readies for New North Fields Push

Production from Kuwait's first non-associated gas field has been delayed once again, to early March; meanwhile, the government will renew attempts to push legislation making investor participation possible in the country's Project Kuwait through parliament.

Global Insight Perspective

Significance The need for production from Kuwait's first non-associated gas field to begin soon is becoming acute as the country suffers severe electricity shortages during peak demand season, yet Kuwait's future output growth programme more or less hinges on the North Fields development, which has been blocked by the parliament for over a decade.

Implications Kuwait does not have a reputation for success when it comes to bringing oil and gas projects onstream in a timely manner. In the midst of a globally overheated oil and gas services and construction market, cost escalations and material shortages might again upset planning and project execution.

Outlook

The stalled Project Kuwait plans will need an update to their two-year-old cost calculation figure of US$8.5 billion. Current costs might result in additional parliamentary resistance, especially if delays in the current gas projects continue to mount, leading to renewed power shortages and deeper criticism against the oil and gas establishment.

Finally Some Gas

Gas production from Kuwait's first non-associated gas field will shortly bring 175 mmcf/d of natural gas and 50,000 b/d of light crude and condensates onstream, in the first out of four development phases. The second phase—which will be launched almost immediately on the completion of the first—is expected to come onstream in 2011 and will raise production to 600 mmcf/d of natural gas and 165,000 b/d of light oil and condensates. A third stage should bring gas production to 1 bcf/d, and has been revised to allow for 350,000 b/d production of light oil and condensates in 2015—up from 275,000 b/d in previous plans—and a fourth phase has now been added. This fourth-phase development will aim to take the field's production to 1.5 bcf/d of gas, although according to Agence France Presse (AFP) Hashem Hashem, deputy director of the Kuwait Oil Company (KOC), declined to reveal a time-frame for the completion of the final phase.

It had been hoped that production would start originally in December, but was delayed until early in the first quarter. Now there has been yet further delay, with Hashem, according to AFP, saying that this has been set for March. With the global oil and gas industry contracting business being stretched, suffering heavy cost escalations and even some shortages, the deadline might again continue to slip, regardless of the importance that Kuwait Petroleum Corp. (KPC)—a parent of KOC and the country's NOC—has attached to the project. While project slippages have become the norm in the region lately due to global conditions, Kuwait has a particularly bad record in this regard, raising the spectre of further delays. Kuwait's severe power shortage problems have caused the state to suffer rolling blackouts and brownouts during peak demand in the summer season, meaning that, should the March deadline slip further past April and into May, the failure to bring the gas onstream would affect large swathes of the population. In doing so, it would also bring unwanted attention from parliament and from the general media.

The field's development has been speedy indeed, driven by these escalating shortages, and there are fears within the industry that such rushed development work could be potentially damaging for the reservoir of the field, which was only discovered in 2006. Certainly, development work has progressed so rapidly that the reservoir has not yet been fully delineated and explored. This only aggravates accusations against KPC's upstream subsidiary KOC, which lacks experience of non-associated gas reservoirs yet has been hindered in its bid to seek out extensive help from IOCs due to the parliament's heavy resource-nationalistic bias against foreign participation.

A Sceptical Parliament

The inclination in parliament to stand firmly against foreign investment and participation in core industries—especially the hydrocarbons sector—is the main reason for the stagnation of Kuwait's oil and gas industry. It has halted the vast Project Kuwait development programme, which aims to tap the resources of the country's northern oil and gas fields. High oil prices have lowered KPC's need for financial help in the development of the fields, but their complexity and the technological demands involved in the project necessitate extensive participation from IOCs: something that—apart from strictly as service providers—is prohibited by the Kuwaiti Constitution. While the realisation that Kuwait, with some of its mature fields falling into decline, needs to move ahead with these projects is growing among a wide array of parliamentarians, there is still strong support for the line that Kuwait's production rates should be tied to its reserve rates—which last year were revised radically downward—in order to guarantee as long a lifetime of Kuwaiti production as possible. Supporters of that line would therefore favour not bringing additional production capacity onstream, in order to preserve reserves for future generations.

With global costs having escalated sharply, and with an increasing number of projects being revisited and at risk of being abandoned as their profitability appears threatened, the cost calculations of Project Kuwait are bound to be outdated. When they were originally drawn up, two years ago, they put development costs for the complex northern field reservoirs at US$8.5 billion. Large-scale cost escalations will not help the government to build support for the project in a parliament that has already been highly critical of the cost escalations involved in the al-Zour refinery construction project. At al-Zour, an initial government budget of around US$6 billion has had to be increased to US$14 billion even before actual construction has begun.

Outlook and Implications

Technical difficulties and cost overruns—together with Kuwait's strategic electricity planning debacle—have led to a growing acceptance within its parliament that IOC expertise is needed to assist KPC's development of the country's new oil and gas fields. Nevertheless, further necessary upward revisions to the costs of Project Kuwait might also lead to the successful questioning of the project's profitability and timing among MPs.

The government has signalled that much more of the development will be through service contracts; however, this will not help KPC to keep costs down. Nevertheless, the government has committed itself to getting Project Kuwait through parliament, which will inevitably want to put its stamp on the plans if it passes them at all. The risk, therefore, is that cost escalations at ongoing projects such as Kuwait's non-associated gas venture and the al-Zour refinery scheme only encourage greater parliamentary resistance and scrutiny, creating further delays, unless the government manages to use the example of the non-associated gas project to its benefit, portraying it as an example of the complexities and the need for international skills and experience to be used in order to keep track of costs and deadlines.

Samuel Ciszuk is Global Insight's Middle East energy analyst. Petroleumworld does not necessarily share these views.

Editor's note: For more information on Global Insigth, contact: Catarina Feria-Walsh Global Insight, catarina.walsh@globalinsight.com. / www.globalinsight.com.
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Petroleumworld News 01/31/08

Copyright© 2008 Samuel Ciszuk. All rights reserved.

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