Kuwait's Oil Challenges and Energy Diversification: Striving for Stability and Sustainability

Kuwait, a country with the sixth largest proven oil reserves in the world, has experienced significant wealth and a high standard of living due to its abundant hydrocarbon resources. Since the post-Second World War era, when oil exploration began, Kuwait has emerged as the largest oil exporter in the Gulf region by 1952, establishing itself as the most developed country in the area during the 1960s and 1970s. However, the country’s oil prosperity has also led to political tensions, particularly with neighboring Iraq.

In an effort to weaken oil prices and gain a competitive advantage over Iraq, Kuwait increased its oil production by 40% in the 1990s, surpassing its OPEC output quota. Iraq retaliated by accusing Kuwait of stealing its oil from the Rumaila field, which is situated near the border between the two countries. This accusation eventually led to the invasion of Kuwait by Iraq and the Gulf War of 1990-1991. The conflict, although short-lived, resulted in severe environmental damage caused by burning oil fields and deliberate oil spillage. Over 700 wells were capped, and more than a billion gallons of water were used to extinguish the fires, incurring a cost of over $1.5 billion. The fires and resulting oil lakes also hindered access to production areas and known oil reserves, leading to a loss of up to 5 million barrels per day (bpd) during the nine-month firefighting period.

To address the environmental consequences of the Gulf War, Kuwait Oil Company (KOC) awarded a tender in 2012 for soil remediation. This remediation effort aimed to restore the affected areas and recover significant crude oil volumes. The estimated cost of this project, which would be funded by the United Nations reparations fund, was approximately $3.5 billion, and it was expected to take several years to complete.

Despite its reliance on oil and its immense reserves, Kuwait has faced challenges in coping with falling oil prices and has struggled to fully exploit the potential of its oil resources. Unlike other oil-rich states that have successfully diversified their economies away from hydrocarbons, Kuwait has been slower in diversifying its economic base. Nevertheless, along with Qatar and the United Arab Emirates (UAE), Kuwait possesses strong fiscal buffers that are expected to sustain its economy in the long term. According to the International Monetary Fund (IMF), these three countries can maintain their current economic stability for over 20 years, whereas other hydrocarbon-dependent nations such as Oman, Algeria, Saudi Arabia, Bahrain, Libya, and Yemen may struggle to sustain their economies beyond five years. However, as Kuwait’s oil fields mature and basins decline, there is an increasing urgency to overhaul the country’s infrastructure and explore costlier unconventional extraction methods to access harder-to-reach reserves.

One major initiative aimed at increasing national oil production is Project Kuwait. This multi-billion dollar development project seeks to raise Kuwait’s daily oil production to 4 million barrels by 2020. The project focuses on expanding the capacity of four northern oil fields: Raudhatain, Sabriya, Ratqa, and Abdali. However, the involvement of international oil companies (IOCs) in the project has faced opposition from the state-run KOC and its supporters. While KOC acknowledges the need for IOC participation to achieve the goals of Project Kuwait, resistance to involving external entities persists. In 2014, Kuwait Petroleum Corporation (KPC) subsidiary Kuwait Oil announced a $4.3 billion contract awarded to five international oil companies to develop the Ratqa field, with the aim of producing 60,000 bpd by 2018-2019. Additionally, the Kuwaiti government introduced a new law on Public-Private Partnerships to launch projects across various sectors, including petrochemicals, refineries, and other downstream infrastructure.

Kuwait’s proven crude oil reserves account for approximately 9% of the world’s total reserves, and the Burgan Field within the country is the second largest oil field globally. Kuwait ranks as the eleventh largest oil producer, contributing around 7% of global production, and the seventh largest oil exporter. Oil comprises about 43% of Kuwait’s total GDP, and the government has ownership and control over the development of the industry. The Kuwait Petroleum Company (KPC) serves as the umbrella organization responsible for managing the country’s diverse oil interests. The KPC oversees various entities known as the K-Companies, with the Kuwait Oil Company (KOC) handling crude oil exploration and development, and the Kuwait National Petroleum Company (KNPC) operating refineries nationwide.

In 2014, the oil sector contributed $96.15 billion to Kuwait’s GDP, experiencing a decline of 1.7% compared to the previous year. Crude oil and gas extraction contributed $92.34 billion, dropping by 0.9%, while oil refining contributed $3.82 billion, showing a significant decline of 15.8%. Falling oil production, which averaged 2.88 million bpd in 2014, was a key factor in the decline of the oil sector. Since 2011, oil production has gradually decreased, and refining activity also experienced a 16% decline in 2014. Kuwait had 1,760 oil-producing wells in 2014, down from 1,794 in 2013 and 1,667 in 2010. The country’s refining capacity remained at 936,000 barrels per calendar day (b/cd). In terms of refined petroleum products, Kuwait produced 918,300 bpd in 2014, a decrease of 7.43% compared to 2013. These products included gasoline, kerosene, distillates, residuals, and others. Furthermore, Kuwait’s demand for petroleum products increased from 379,600 bpd in 2013 to 388,200 bpd in 2014. In terms of exports, Kuwait exported 750,000 bpd of petroleum products in 2014, compared to 805,000 bpd in 2013. Notably, Europe received 296,000 bpd, North America received 7,000 bpd, and Asia and the Pacific received 447,000 bpd. Kuwait’s crude oil exports totaled 1.99 million bpd in 2014, down by 3.1% compared to 2013.

In addition to its vast oil reserves, Kuwait possesses significant natural gas reserves estimated at 63 trillion cubic feet (1.78 trillion cubic meters). However, due to legislative indecisiveness regarding involving foreign partners in the nationalized sector, Kuwait has largely remained an untapped market for international oil companies interested in exploiting its gas discoveries in the northern region. Consequently, Kuwait became a net gas importer in 2009. The country faces electricity shortages and chronic blackouts, especially during the summer months when increased demand strains the capacity of its five power plants. While natural gas exploration remains in a political deadlock, the government approved the construction of several power plants and desalination facilities in August 2015 to enhance electricity generation capacity. These plans include the expansion of the gas-fired integrated water and power plant in Az-Zour North, the development of the oil and gas-fired Khairan power plant, and the construction of the Al Abdaliyah hybrid power plant, which incorporates solar energy. The government has set a target to increase dry natural gas production to 2 billion cubic feet per day by 2030 to reduce reliance on foreign imports during peak summer months.

Similar to the oil sector, Kuwait’s natural gas sector is under the ownership of KPC, prohibiting joint ventures and product sharing agreements with international oil companies. However, the government has utilized technical service agreements for more challenging natural gas exploration projects. For instance, in 2010, Royal Dutch Shell signed such an agreement to develop the Jurassic fields, which contain an estimated 35 trillion cubic feet of reserves. In 2014, Kuwait’s marketed natural gas production reached 15 billion cubic meters, a decrease of 7.9% compared to 2013. The country consumed the equivalent of 630 billion cubic feet of natural gas in 2013. Kuwait imported 571 million cubic meters of natural gas in 2014, primarily from Qatar and Nigeria.

Kuwait faces significant challenges in meeting its electricity demands. In 2013, the country had an installed generation capacity of 15.7GW, with a capacity factor of 44%. Peak demand reached 12.1GW in 2013, and the rate of annual growth in generation capacity has not kept pace with demand since 2004. In 2011, Kuwait ranked as the world’s fourth-largest electricity consumer per capita. Currently, approximately 70% of power generation relies on oil, while only 28% comes from gas. The country’s main motivation to shift away from this energy mix is both environmental and financial. Using crude and heavy oil for electricity production is more costly compared to natural gas, and Kuwait, heavily reliant on oil export revenues, cannot afford to continue burning oil for domestic consumption.

To address the electricity shortfall, the government aims to increase installed capacity to 25GW by 2020, exceeding the anticipated peak demand of 22.5GW and maintaining a reserve margin of over 10%. The majority of this planned capacity will be fueled by natural gas or oil. Additionally, Kuwait has set a goal to generate 15% of its energy from renewable sources by 2020 through the installation of up to 100 solar facilities. One of these projects, located in the Shagaya desert zone west of Kuwait City, is expected to generate 70MW of energy and is scheduled for completion in 2016.


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