Kuwait searches for foreign partnership model

OGJ SPOTLIGHT: Kuwait Oil Co.

Nader Hamad Sultan
We are looking for financial strength, technical aptitude, and international experience. We want someone who has experience with sour crudes, our type of infrastructure, and our types of reservoirs.

Kuwait is considering allowing foreign equity participation in its upstream sector, expanding on a maiden effort to allow a foreign equity stake in its petrochemical sector. This is the first such consideration since Kuwait nationalized its upstream concessions in 1975.

In an interview with OGJ, Nader Hamad Sultan, Kuwait Petroleum Corp.'s (KPC) deputy chairman and managing director of planning and international operations, said concerns for national trade policy, "strategic economics," and access to state-of-the-art technologies are the main reasons for this possible reversal in government policy.

This is a sensitive issue for a country that contains 9% of the world's proven oil reserves, and it will certainly elicit interest from oil companies worldwide. Areas that may be opened up to foreign interests include fields near the Iraqi border and under-explored areas in western Kuwait.

Searching for a model

In a search for a foreign equity participation model, KPC and its upstream subsidiary, Kuwait Oil Co. (KOC), are investigating agreements in use around the world.

"There are types of agreements out there that certainly can be modified, but there are also approaches that have not yet been identified," Sultan said.

Ultimately, the model may include elements of both direct negotiation and competitive bidding.

"We have not finalized the pros and cons of either approach," Sultan said, indicating it may be some time before a workable model is developed.

Foreign participation models used by other state-owned companies are "designed in a certain way," and for a particular reason, Sultan noted.

For example, Azerbaijan uses the direct negotiation approach because it has no direct access to outside oil markets and must bargain directly with Russia, Turkey, and Iran for export routes.

Competitive bidding models are also of interest to KPC. Venezuela recently chose an open competitive model to entice foreign investment and bring in new technologies.

During that country's third marginal field round held in June 1997, about 130 of the 200 prequalified companies were foreign firms. These firms offered bids totaling more than $2 billion.

Nevertheless, Kuwait does not feel comfortable with an approach that may form cultural mismatches. "We are not motivated by the money, as we certainly have sufficient capability to invest," Sultan said. Even with a modified competitive bidding model, KPC will continue to be very selective about its partners.

Sultan feels, however, that a modified form of competitive bidding will benefit Kuwait.

"There may be a midpoint between the two [competitive bidding and direct negotiations]. We may first preselect certain oil companies, then have them competitively bid against each other."

In addition, there are certain agreement types KPC is not willing to consider.

"We are looking at improving a modelellipseHowever, it is not necessary that it be a production-sharing agreement. We wish to avoid that ap- proach."

KPC is currently developing a list of prerequisite skills that details the exact qualifications it seeks for prospective companies and specific projects.

"We are looking for financial strength, technical aptitude, and international experience. We want someone who has experience with sour crudes, our type of infrastructure, and our types of reservoirs," Sultan said.

Kuwait's national security may be buttressed by this move. Foreign equity interests-including those held by companies from member nations of the North Atlantic Treaty Organization-may help discourage aggression by other countries in the volatile Middle East.

"It is important to have strategic and economic relations with the outside worldellipseThis makes for strong relations between ourselves and other countries," Sultan said.

He also believes KPC can benefit from the technical expertise of the majors.

"We can start from scratch and learn from a zero base or, instead, with a helping hand, reduce the learning curve."

Technical service agreements

In the past, Kuwait has limited foreign participation primarily to technical service agreements (TSAs) with such companies as Chevron Corp., British Petroleum plc, Total, Exxon Corp., and Royal Dutch/Shell.

BP and the former Gulf Oil Corp., acquired by Chevron, have historical ties with KOC. BP and Gulf were the original founders of KOC, having formed a joint venture in 1933.

Kuwait allocates TSAs on a geographic basis. Chevron's covers the Greater Burgan area, BP's covers fields in northern and western Kuwait, and Total's covers joint operations in the Neutral Zone.

Services performed by these companies focus on technical and managerial strategies used in optimizing field production. However, there is some pressure being placed on KPC to expand the roles these companies play.

The International Monetary Fund also is urging Kuwait to open up more to private-sector interests, including foreign investors.

In 1996, BP renegotiated a 3-year TSA, while in July 1997, Total formed a new TSA. Early this year, Chevron renegotiated a 31/2-year extension of its contract.

Chevron Chairman Kenneth Derr, however, recently told the Wall Street Journal that Chevron is not "interested in doing technical service work for the long term."

Planned production increases

The Kuwaiti government has two long-term objectives. First, it wants to increase profitability and state dividends; second, it wants to expand oil production.

Kuwait's crude oil production was 2.19 million b/d in December 1997. The country intends to increase oil production to 2.5 million b/d by 2000, 3 million b/d by 2005, and 3.5 million b/d by 2010.

This aggressive program will cost an estimated $13 billion.

Despite the Organization of the Petroleum Exporting Countries' production quotas, Sultan feels the market will be able to accept further increases as needed over the next 5-10 years.

"People are underestimating the lack of oil infrastructure in many of the areas where they have projected increased production," Sultan said, referring to the Caspian Sea. "The market will need to have OPEC producing more oil."

In a report by the U.S. Energy Information Administration, non-OPEC production growth is expected to lag OPEC production growth and, as a result, shrink to less than 45% of total world oil production by 2015. Non-OPEC production now accounts for almost 59% of current world production of about 66.5 million b/d.

By 2005, world demand may grow by 20 million b/d.

The current OPEC production quota for Kuwait is 2.19 million b/d. In December 1997, Kuwait hit that target, which amounted to a 2.5% increase in production vs. the same month in 1996 (OGJ, Mar. 9, 1998, p. 84).

KOC intends to increase production from fields in northern Kuwait to 800,000 b/d, as well as to increase production in its western fields. At the same time, it plans to decrease production from Greater Burgan.

This strategy will allow KOC to preserve Burgan's long-term producing capability, allowing it to serve as a swing producer when there are sudden surges in demand. KOC intends to maintain a spare capacity of 15% above total expected production requirements.

Plans include adding 16 billion bbl of new oil reserves by 2010. Eight billion bbl will come from exploration, and the remainder from enhanced oil recovery projects and additional development programs.

Current Kuwaiti oil reserve estimates are 94-96 billion bbl. The country ranks fourth after Saudi Arabia, Iraq, and the U.A.E.

KPC's financial situation is excellent. For the fiscal year ended June 1997, KPC posted record profits of 1.36 billion dinar, an increase of 36% from 1996 (see table 1 [97,164 bytes], table 2 [203,790 bytes], and figure 1 [156,274 bytes]).

Petrochemical expansion

In a move designed to increase the value of Kuwait's crude oil reserves, boost revenues, and protect revenues when crude oil prices fall, KPC is targeting expansion of the country's relatively small petrochemical industry.

"Unlike Saudi Arabia, petrochemical products have historically played a small part in Kuwait's marketing strategy," Sultan said. "If you want to add value, you have to pay attention to chemicals."

In the past, Kuwait has manufactured low-value products such as ammonia, urea, nitrogenous fertilizers, caustic soda, and hydrochloric acid.

However, since completion of the petrochemical complex by Equate-a joint venture of Petrochemical Industries Co. (PIC), Boubyan Petrochemical, and Union Carbide Corp.-Kuwait has begun producing high-end products such as polyethylene and ethylene glycol (see chart, this page).

Foreign participation, on the part of Union Carbide, is playing a large role in terms of technology transfer and capital for the Equate project. Union Carbide is the first outside company to truly have a foreign equity participation arrangement with KPC since the 1970s.

The agreement between KPC and Union Carbide developed through mutual selection rather than direct negotiation or bidding. KPC Managing Director for petrochemical industries and PIC Chairman Khaled Saleh Buhamra explained in KPC World, "No longer do we feel that it is always to our benefit to take 100% ownership positions and to bear all the risk."

The Equate partners signed a memorandum of understanding in June 1993, and commercial operations began Nov. 12, 1997. Once it reaches full capacity, the Equate complex will be one of the most efficient plants of its type in the world and one of the largest in the Middle East.

With global market growth for polyethylene and ethylene glycol estimated at 7%/year, Equate will be producing a volume equal to less than 1% of current world demand.

The core of the Equate plant is a 650,000 metric ton/year ethylene unit that uses technology licensed from Brown & Root. It will crack ethane gas from KNPC's Mina Al-Ahmadi liquefied petroleum gas plant to produce ethylene.

Of the ethylene output, 200,000 tons will be used to produce 360,000 tons of ethylene glycol, mainly used in the production of polyester for fabrics, plastic bottles, and antifreeze.

Two polyethylene units will use another 430,000 tons of the ethylene, and the remaining 20,000 tons will go to a butene-1 unit.

The $2 billion plant will market polyethylene and ethylene glycol to the Far East, Middle East, and Europe.

Expanded refining capabilities

In order to increase revenues and profitability, KPC subsidiary Kuwait National Petroleum Co. (KNPC) intends to increase refining capacity locally and overseas, focusing on export markets for high-value products.

As of July 1997, Kuwait's domestic refineries processed an average 895,000 b/d-75,000 b/d more than its 1991 prewar capacity.

KNPC plans to expand domestic refining capacity to 1 million b/d by 2010.

During the mid-1990s, the Mina Al-Ahmadi refinery was modernized to produce low-sulfur fuel oils used for Kuwait's power stations, refineries, and heavy industry.

Capacities and refining facilities also were expanded at Mina Al-Ahmadi and Shuaiba.

At yearend 1997, the capacity of the Mina Al-Ahmadi plant was 435,000 b/d, 4.8% more than in 1996 (OGJ, Dec. 22, 1997, p. 65; Dec. 23, 1996, p. 72). Shuaiba's 1997 capacity was 196,000 b/d, a 27.3% increase from 1996.

As of mid-1997, Kuwait was internally consuming 130,000 b/d of products, with the remainder targeted for export.

KNPC has said that it will begin distribution of unleaded gasoline in 1998 and plans to phase out its leaded gasoline product line with the completion of its methyl tertiary butyl ether, alkylation, and fluid catalytic cracking revamp project.

In addition, a network of inter-refinery transfer pipelines was laid between the three refineries and the Sabhan depot, creating an integrated complex capable of responding to local market needs.

"We have to match crude oil and reserves with markets for gasoline, kerosine, naphtha, and crude oil," Sultan said. "We are looking at Thailand, China, and other Asia-Pacific nations to further develop our refining capacity. That is where we see the growth."

KPC intends to establish 400,000 b/d of Asian refining capacity by 2000 and currently has 250,000 b/d of refining capacity in Europe, also earmarked for expansion.

A 184,000 b/d, $2.6 billion joint-venture agreement was signed with Indian Oil Corp. in July 1997, and discussions are under way with several other Asia-Pacific countries, including Pakistan and Indonesia.

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