Kuwait had already slipped into an economic contraction of 1.1 per cent the fourth quarter of 2019, over the same period in the previous year, before Saudi Arabia decided to gamble again with the finances of fellow OPEC members and launch another oil price war in March designed to disable the U.S. shale oil sector.
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With the same destruction of its budget as happened the last time that it trusted Saudi Arabia’s decision-making, Kuwait is even more desperate for funds than last time, as is every other OPEC member that followed Saudi’s lead.
In January – still two months ahead of Saudi’s latest disastrous decision – Finance Minister, Mariam Al-Aqeel, stated that the breakeven oil price required for Kuwait to post no deficit was US$81 per barrel (of Brent), and unveiled a 2020/21 budget projecting a KWD9.2 billion (US$30 billion) deficit.
This was the sixth major deficit year in a row, and higher than the 2019/20 estimate of KWD8.27 billion, even after the transfer of 10 per cent of total revenue to the Future Generations Fund, managed by Kuwait Investment Authority.
Al-Aqeel stressed at that point that the government was likely to have to continue to take from the state’s General Reserve Fund to finance the deficit because of the National Assembly’s ongoing refusal to approve the public debt law. This is despite, as Al-Aqeel underlined, borrowing (via increasing the public debt) is cheaper than withdrawing money from sovereign wealth funds. Regardless of this, though, with Kuwait deriving about 50 per cent of its GDP, more than 90 of its exports, and about 90 per cent of its fiscal receipts from hydrocarbon products, the state-owned Kuwait Petroleum Corporation (KPC) last week agreed with the finance ministry to cut its budget from oil and gas production to KWD3 billion (US$9.9 billion) from KWD3.7 billion dinars, according to local reports.
Given this, and recent and historical precedent, Kuwait certainly cannot trust Saudi Arabia to benefit it in any way financially, which is a key reason why the Emirate is looking to develop its own, independent revenue streams rather than rely on the whim of Saudi Arabia for revenues from the Partitioned Neutral Zone (PNZ). Although currently back in production, the PNZ has been perennially used as a weapon by Saudi to keep its neighbour in check, irrespective of the damage that this caused Kuwait. The recent re-starting of production from the jointly-held PNZ came five years after the Saudis closed it down, for the official reason that the site was not compliant with new environmental air emission standards issued by Saudi Arabia’s Presidency of Meteorology and Environment Authority (according to this agency, a gas leak had sprung in one of its 15 platforms). The real reason was that Saudi wanted to show its neighbour who was in charge, as Kuwait had been increasing its competition to Saudi Arabia in the key Asian export markets at that point to the degree that it was selling oil to buyers in Asia at the widest discount to the comparable Saudi grade for 10 years. Additionally, Kuwait had been increasing the difficulty for Saudi Arabian Chevron (SAC) in obtaining work permits to operate in the Zone, jeopardising SAC’s ability to move ahead with its full-field steam injection project in Wafra that was intended to boost output of heavy oil there by more than 80,000 bpd.
The recent focus of Kuwait, then, has been on projects that do not involve Saudi Arabia, with the additional major benefit that such non-Saudi-reliant revenue streams will allow it to properly leverage the international investment potential it accrued from its inclusion in 2018 to the benchmark FTSE Russell’s emerging-market indices. For some considerable time thereafter, the Boursa Kuwait enjoyed a period as the darling of Middle East-focused investors, with Kuwaiti stocks outperforming most of their Persian Gulf peers at that point. At around the same time, MSCI – the giant of all such benchmark indices – said that it might announce the upgrade of the nation to emerging market status in 2019, putting Kuwait in the front rank of Middle East investment prospects, alongside Saudi Arabia, the UAE, and Qatar, and a move expected to generate billions of dollars of much-needed international investor inflows into the country.
Earlier this year, though, as a result primarily of the COVID-19 outbreak, MSCI put this new listing on hold until at the earliest November of this year. Nonetheless, as MSCI made clear that the postponement was only due to the COVID-19 pandemic – and that the Boursa Kuwait continues to meet all the necessary criteria for a classification in its emerging markets indices – Kuwait wants to ensure that there are no financial questionmarks hanging over it that may postpone the listing further. This MSCI action would enable Kuwait to broaden and deepen its capital markets, assuring would-be foreign investors of a more liquid capital markets base from which to operate and also affording Kuwait the opportunities to raise capital, not just through new share issues but also eventually through future sizable corporate and state bond offerings. This, in turn, would provide funding for Kuwait’s to achieve its cornerstone economic plan (‘Project Kuwait’) of increasing crude oil and condensate production to four million barrels per day (bpd), up from just 2.5 million bpd currently, and to significantly begin to diversify its economy away from dependence on hydrocarbons exports.
In this vein, the Kuwait Oil Company (KOC) announced recently that it intends to issue tenders for the purchase of 24 rigs to support plans to expand its oil and gas output capacity. Although the KOC previously announced in September 2019 that it would order these 24 ‘HP750’, ‘HP550’ and ‘HP1000’ rigs, the tender was postponed for internal reasons, but with the financial crunch it now faces, Kuwait is moving forward with the key oil and gas projects that require the new hardware. In particular, export operations for the first shipment (500,000 barrels) of heavy crude for the global market began recently from South Ratqa, with the KOC’s chief executive officer, Imad Sultan, adding that the strategy is to secure production of at least 60,000 bpd of heavy oil from the South Ratqa field in Stage 1.
This crude oil output is on the proviso that it is processed at the new Al-Zour refinery in order that it can contribute to the production of low-sulphur environmental fuel and supply it to power plants in Kuwait, as well as being available for export. “Also, this production will be added to the heavy oil that is currently being produced from the Umm Niqa field in northern Kuwait, which has been going since 2016, that amounts to 15,000 barrels of heavy oil per day, so totalling 75,000 barrels per day,” Sultan underlined. This feeds into last week’s statement from the KOC that it is moving forward with the parallel development of three new fields in the western region of Kuwait, namely ‘Umm Rass’, ‘Kara’a Al Marw’, and ‘Kabd’. Specifically, to begin with, the KOC has obtained approval to float a tender to build and operate two new Jurassic production units, which will enable Kuwait to reach free gas production capacity of 850 million cubic feet per day, and the production of approximately 250,000 bpd of light crude.
By Simon Watkins for Oilprice.com
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