KUWAIT - Foreign Help.

The upstream oil sector in Kuwait is functioning better than in July 1990, the month before Iraq's invasion which led to serious damage in the fields and related facilities. Major improvements were made in the past seven years thanks to assistance from Western companies, mainly US firms, contracted by KOC. New oil gathering centres have been installed in the main fields. Now foreign contractors are installing gathering centres in the southern and northern fields (see profiles in Part 2 next week).

Santa Fe, another KPC unit for exploration and drilling acquired by Kuwait in 1981, is working in this sector for KOC, along with the foreign contractors.

Under a five-year contract with KOC signed in September 1991, Santa Fe drilled many new wells and worked over existing wells. Santa Fe now has five rigs working in the emirate. From April 1991 to end-1992, it used to have about 20 rigs in Kuwait. Four additional rigs were provided in 1997 by other companies. Santa Fe's Rig 180, the largest in the Middle East and able to drill to 30,000 feet, will begin operations in June 1999.

Most of the foreign contractors are from the US. Bechtel has managed the first two phases of reconstruction and rehabilitation work for the entire oil sector since March 1991. Parsons Engineering Corp. has managed the third phase and is responsible for all of KOC's projects under a contract first signed in 1993. Parsons' latest contract, for five years to end-2001, was signed on Sept. 21, 1996 and was said to be worth about $80m.

For the first time in decades, KPC in 1992 opened the upstream sector for participation by foreign firms. But this was limited to service contracts, while the companies involved are still hoping to have production sharing agreements (PSAs) as Iraq is offering. Kuwait's constitution, however, does not allow concessions or PSAs.

The IBBC Offer: A new committee of senior executives from the oil ministry and KPC has worked out a 20/25-year "incentivised buy-back contract" (IBBC) with the help of Coopers & Lybrand. This is an alternative to a PSA. Expected to be approved by parliament before end-1999, the IBBC gets KPC to retain the risk of crude oil prices and the foreign operators will bear the reservoir and operating risks, as follows:

A. The foreign company, preferably a consortium or a big multinational, fill fully finance all capital and operational expenditures, manage the operations, increase the fields' recoverable oil reserves, expand oil production capacity to agreed targets, and employ and train Kuwaitis. The company or group must be big enough to provide the most advanced technology and provide corporate finance. There will be no exploration.

B. The foreign company, or group, must lift the crude oil output of the fields it has developed on commercial terms and during the IBBC period.

C. In return, the company will get in cash: (1) a fixed service fee on a per barrel basis for oil produced; (2) two incremental per barrel fees, one for attaining production targets and maintaining low costs and one for increasing recoverable reserves; (3) a full recovery of actual capital expenditure; and (4) an annual capital recovery allowance.

Seven oil fields are on offer and they exclude Burgan. KPC prefers to have only three groups, or very big multinationals, to develop the fields under three IBBCs: one for Raudhatain and Sabriya in the north, one for Ratqa, Bahra and Abdali in the north and centre; and one for the western fields of Minagish and Umm Gudair. Their combined capacity must be expanded from about 670,000 b/d now to 1.43m b/d by 2005, with extra capacities to begin coming on stream before 2003.

The world's biggest oil companies have received copies of the draft IBBC and should send their proposals to KOC. Oil Minister Shaikh Saud in late 1998 held meetings with US and European oil majors. His first meeting was with Sir John Browne, the CEO of BP/Amoco which has recently acquired Arco to become the world's second oil giant. In the US he met with the CEOs of the proposed Exxon-Mobil combine, Chevron, Texaco, Conoco and other firms.

The biggest IBBC will be for Raudhatain and Sabriya. Their capacities os to rise from 400,000 b/d to 750,000 b/d within five years, requiring an investment of $5 bn. KPC prefers to sign the IBBC with a partnership of BP Amoco Arco and Exxon-Mobil. The group would be by far the biggest in the world. The IBBC for the other northern fields requires $2 bn for capacity to rise from 80,000 b/d to 150,000 b/d. The operators in the northern IBBCs will also have to fund a crude oil export terminal on Bubiyan island and a town there to house employees working on their projects.

The companies already involved in Kuwait's upstream, which KOC describes as being its "strategic partners", are the following:

BP was the first to sign a service contract with KOC in July 1992, which has been renewed. The company is helping KOC in Raudhatain, Sabriya and Bahra. It has worked on Burgan. In addition, it provides advice to KOC on its exploration activities, production, gathering and transport. Under another 36- month deal signed in December 1993, BP has provided technical services and reservoir studies for Umm Gudair and Minagish. BP Amoco uses its intranet to tap the expertise of its reservoir engineers worldwide to advise KOC on decreasing the amount of water produced at Burgan.

Chevron signed its service contract on Aug. 8, 1994, which was renewed on Jan. 19, 1998. The US major is provides technical help for Burgan. BP and Chevron's Gulf Oil unit had found most of Kuwait's oilfields before their KOC was nationalised in 1975. With that long experience, their services now are valuable to KOC. Chevron has sent more than 35 of its engineers and scientists to Kuwait. Some of them are reservoir engineers who formerly worked in Kuwait for Gulf Oil, which Chevron bought in 1984. Its contract covers exploration, production, oil gathering and transportation.

Shell is studying with KOC the offshore, under a service contract signed in September 1995 and renewed since then. Work began with a joint KOC-Shell team reviewing all available information about the offshore areas. There is emphasis on seismic surveys done in the past. Shell is KPC's main client for crude oil, lifting 100,000-150,000 b/d in recent years.

Exxon signed an 18-month contract on Oct. 6, 1996 to help KOC draw up a plan to develop the field of very light oil in the western region of Karaa' Al Maru, which KOC discovered in October 1995 (see OMT). Exxon is KPC's second main customer for crude oil, lifting about 100,000 b/d.

Total signed a three-year service contract on July 9, 1997 for help in the onshore Divided Zone where the operator, Texaco, is expanding its two fields (see Part 2). Total's E&P partnership in Iraq for the Nahr Umr giant has been a matter of concern to Kuwait.

To Kuwait, the value of the service contracts with Chevron and BP could not be weighed in dollar terms. The head of KOC's planning, Ahmad Al Arbeed, has said work by the two companies by end-January 1995 had resulted in a 250m barrel increase in Kuwait's proven oil reserves. This is way above the dollar value of their service contracts.