Kuwait ties oil deals to output targets

Kuwait ties oil deals to output targets

By Andrew England in Kuwait City

Published: May 21 2008 04:12 | Last updated: May 21 2008 04:12

The state-owned Kuwait Petroleum Corporation is, for the first time, negotiating performance-related contracts with international oil companies as it seeks to boost oil and gas production.

Saad al-Shuwaib, KPC’s chief executive, told the Financial Times the company hoped to increase oil production from about 2.6m barrels per day to 3m next year – 12 months ahead of its original target. But it would require technical assistance from international groups to meet goals of 3.5m bpd by 2015 and 4m by 2020.

Middle East states have been under US pressure to raise production as oil prices have hit new highs. Saudi Arabia has said it will boost output by 300,000 bpd. Kuwait says it will follow the lead of Opec, the oil producers cartel, when it comes to increasing exports.

KPC is also in talks with several large groups to form a partnership in a gas project, as Kuwait looks to harvest gas that is not a by-product of oil exploration,for the first time. KPC hopes to begin producing the free gas from fields in northern Kuwait this month, with production of 175m standard cubic feet per day. The goal is for production to rise to 600m cu ft during 2011 and 1bn cu ft per day by 2015.

International oil companies working in Kuwait – which has about 10 per cent of the world’s proven oil reserves – have been restricted to basic, short-term service contracts since the industry was nationalised in the 1970s.

A plan drawn up in the 1990s, known as Project Kuwait, designed to enable large companies to be awarded 20-year “operating services contracts” has been repeatedly blocked by parliament. In 2003, three consortia – led by BP, ExxonMobil and Chevron – pre-qualified for the project but the scheme has been stalled because of political disputes.

Sheikh Sabah al-Ahmad al-Sabah, the emir, dissolved parliament amid complaints that MPs were blocking the government’s work, prompting elections, which were held on Saturday.

While the new contracts – dubbed “enhanced technical service agreements” – will be some way off the Project Kuwait idea, they will, for the first time link technical and commercial arrangements to performance.

Mr Shuwaib said the new contracts had a “different scope” for delivery. “It’s not like before, where it was technical assistance. Now it’s technical plus performance and its very important for us to meet our milestones and to meet our strategic plans.

“We need them to help us by using their best technology and best people.”

He hoped new gas and oil contracts would be finalised in the coming months.

Alex Munton, an analyst at Wood Mackenzie, the energy consultants, said any sign that international companies might be offered the opportunity to become more involved in operating with better terms would represent a key change for the country. But the devil would be in the detail of the contracts.

“The negotiating dilemma is making the contracts attractive without igniting any fears that this is going to give [international groups] ownership of resources, which would not be accepted politically,” said Mr Munton. “There’s no way the likes of Exxon and Shell are going to dedicate a lot of resources and equipment without there being some long-term financial incentive behind them.”