Friday, May 4, 2012

Kuwait Moves From Seasonal to Year-Round Imports of L.N.G.

May 4, 2012
It seems an irony but it's quite probable that by 2013 Kuwait will start year-round imports of liquefied natural gas (L.N.G.). The irony is based upon the fact that Kuwait owns at least 1 percent of the world's natural gas reserves, i.e., 1.8 trillion cubic meters (TCM)  the majority of which is associated gas. Given these numbers the country should be in the position of avoiding gas imports.

Instead, in Kuwait in the first decades of the country's hydrocarbon era, natural gas being mainly associated gas was considered a big problem for the oil sector, a trouble when extracting crude. In practice, in the past, associated natural gas ended up being flared or burnt when extracting oil. The initial idea of utilizing gas for energy purposes started to be discussed in Parliament only in 1969. After a couple of years, when on October 28, 1971, the Kuwaiti Parliament reconvened after the summer break, gas nationalization was the moment's hot topic. Then, by order of the Parliament the gas industry was de facto nationalized. The result of the nationalization was a relevant increase in the utilization of gas. Recent years have brought important economic growth, which raised the country's gas requirements. The next-to-last step was for Kuwait in 2009 starting to import seasonally (from April to October) L.N.G. in order to satisfy summer's skyrocketing electricity demand. So, gas cargoes from Australia, Russia and Trinidad arrive now to a $150-million floating terminal in the Persian Gulf waters. The final step seems to be in 2013 year-round imports.

Natural gas is used as a feedstock in the petrochemicals industry and for electricity generation. Subsidized prices very common within the G.C.C. countries do not attract investments (especially foreign investments) and at the same time do not curb energy waste. According to the Oxford Institute for Energy Studies, for several years Kuwait's power stations burnt gas at subsidized prices ranging between $0.5 to $2.5 per million British thermal units (B.T.U.). Recently, the Ministry of Oil increased domestic prices, but they are still very low in comparison with Asia's natural gas rates, which averaged in April 2012 more than $16 per B.T.U. In practice, in Kuwait, final prices are not able to cover the costs of investment, production, transmission and distribution. Moreover, intraregional early gas deals like those bringing gas through the Dolphin Pipeline from Qatar to the U.A.E. and then to Oman at current rates would be literally underpriced. For instance, the U.A.E. paid $1.25 (in Abu Dhabi) to $1.50 (in Dubai) per B.T.U. while the Omani price was $1.44. Things are already changing. In fact, when some years after the initial Dolphin deal the U.A.E. requested an additional deal with favorable prices, Qatar replied asking for the payment of the international price (around $11 per B.T.U.).

What is interesting to understand is the real changeover in dealing with gas in Kuwait. In fact, now natural gas is not considered anymore a disgrace when pumping out of the ground crude oil. Kuwait has recently initiated a spending spree worth $90 billion aimed at expanding both crude oil upstream and downstream sectors. This spending spree should increase oil production capacity to 4 million barrels per day (bbl/d) by 2020 from the current 2.5 million bbl/d in 2010. But, given the presence of associated gas in crude oil fields, increasing oil production means in Kuwait increasing also the output of gas. Continuing to rely only on associated gas will not be sufficient, so Kuwaiti authorities are propping up the exploration for additional gas reserves in order to satisfy the country's ever-increasing natural gas needs. "We hope we'll discover more gas so we'll have less dependence on imports" told last April to reporters the C.E.O. of state-owned Kuwait Petroleum Corporation (K.P.C.) Farouk al-Zanki. He then added that the main goal for the Emirate is "to use gas for power generation so we can maximize oil exports". In fact, burning oil for power generation could sensibly reduce the Kuwaiti Treasury income. With reference to gas the final goal is to increase gas output from the current value around 1.13 billion cubic feet per day (bcf/d) to 4 bcf/d by 2030. This gas increase would reduce Kuwait's dependency on imports.

Summing up, in order to develop Kuwait's still embryonic natural gas industry and consequently tackling the ever-more-occurring gas shortages, today's strategy is based upon two pillars:

A)Exploring and then developing domestic non-associated natural gas fields (medium- to long-term implementation)
B)Importing natural gas with different means of transportation (short-term implementation).

Statistics specify that during summer the consumption rate between oil and gas is 60 percent the former and 40 percent the latter, which means a total of 250,000 barrels of oil equivalent per day (BOE/d) of both fuels. Last April, Kuwait imported about 400 million cubic feet per day (MMCF/d) of L.N.G. and the Mina Al Ahmadi gas port receives five L.N.G. cargoes every month according to a source with the K.P.C. Data show that gas shortages became crystal clear in 2009 and now the only available short-term solution for avoiding blackouts is to bring in L.N.G. cargoes all year-round.

In the long run, the first option for increasing the production of non-associated gas could be to develop gas fields from North Kuwait. Another possibility could be exploring offshore, but Kuwait's fiscal and political situation do not proactively work toward this target. In the northern part of Kuwait in 2006 was discovered the Jurassic non-associated gas field possessing an estimated 35 trillion cubic feet (TCF) of reserves. Preliminary studies completed by Schlumberger and Shell suggest considering the field as one of the most challenging fields in the world in light of two factors: the geological composition and the technical complexities. Shell is developing the Jurassic Gas Field through its February 2010's five-year enhanced technical service agreement (E.T.S.A.) valued at $700 million. The production targets were grandiose (i.e., 17 million cubic meters a day (MMCM/d) of gas by the end of 2013, and 30 MMCM/d by 2016), but current output is still low.

In the long run, another possible solution for increasing Kuwait's quantity of non-associated gas is the Dorra Gas Field, which is located offshore in the Partitioned Neutral Zone (P.N.Z.), which is the neutral zone between Kuwait and Saudi Arabia. Three countries are sharing this gas field: Kuwait, Saudi Arabia and Iran (the latter calls the field Arash). Kuwait and Saudi Arabia announced plans to start production by 2017 when they would be able to produce a quantity of gas between 500 MMCF/d to 800 MMCF/d. Iran for the moment only said that it would develop by itself its own side of the field. As to the current political tensions between Arab countries on the one side, and Iran on the other side, it's highly presumable that the development of this gas field won't be void of disputes between the three neighboring countries.

An additional step could be to implement a common G.C.C. gas strategy and the development of a regional gas grid. In fact, currently only Qatar, out of the six G.C.C. countries is not short of gas. Bahrain, Kuwait, Oman and Saudi Arabia have all a negative gas balance. "We need to cooperate to see if we can come up with a gas network. We have to optimize our resources" remarked last month Mr. Zanki.


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