KUWAIT - Kuwaiti Export Capacity Expanding.

An expansion of oil storage facilities and other logistics at Mina Ahmadi by end-2005 will enable Kuwait to export up to 3m b/d of crude oil. Kuwait's oil refining sector will have a massive upgrade programme to improve as well as increase the range of products.

The programme, to cost more than $2.25 bn and to be completed by early 2005, will maximise the high-value products at the country's three oil refineries and keep pace with tighter clean-fuels restrictions. The refineries will have the flexibility to respond to growing world demand for high quality products, with exports to reach 750,000 b/d by mid-2004. During the March-April war in Iraq, the priority in Kuwaiti supplies went to the US and British forces.

KPC's goal is to meet world demand for higher quality distillates, particularly in Asia which is the main market for Middle East export refiners. This involves converting heavy fuel oil to low sulphur gasoil/diesel, naphtha, and kerosine.

Kuwait's traditional markets east of Suez have lowered acceptable levels of sulphur content. India, the largest market for Middle East gasoil/diesel, has reduced its sulphur content requirement from 0.5% to less than 0.2%. Japan limits the sulphur content of gasoil/diesel consumed in its market to 0.05% - the limit imposed in the European Union in recent years. The other Asian countries are gradually imposing such standards. One focus for KPC is to produce 0.005% sulphur grades.

Middle East gasoil and diesel account for over half of Asia's total mid-distillates imports, with Kuwait and Saudi Arabia being the main exporters. KPC wants to maintain its leading position in exports. New storage tanks at Mina Ahmadi in 2004 will allow blending to customers' specifications, including those of the EU (see the refining sector in DT No. 22).

Kuwaiti Marketing: With a flexible sales system and pricing, KPC has had no problem in its marketing of crude oil and petroleum products on both side of Suez. KPC has a stable relationship with term clients. Oil products marketing is done partly with the aim of KPC acquiring downstream assets in countries where competition is tough.

KPC's strategy is focusing on big potentials east of Suez, such as India and China. Asia will become by far the biggest oil market in the world during this decade. KPC, Saudi Aramco and other Gulf NOCs are monitoring the economic fundamentals of this market.

Of KPC's crude oil exports, over 60% move to Asia. Almost 22% are going to Europe and South Africa. The US market takes the rest. Term clients on both sides of Suez account for over 90% of total crude oil exports, with the rest moving to KPC's trans-national systems in Europe and east of Suez. Kuwait's export crude, a blend 31*API with over 2.5% sulphur, is relatively rich in distillates.

In addition, KPC's overseas trading unit buys about 150,000-200,000 b/d of non-Kuwaiti crudes and sells them to term clients, down from 450,000 b/d in mid-1995. These include crudes being processed by non-KPC refineries.

Shell, helping KPC's upstream unit KOC in offshore exploration under a service contract (see Gas Market Trends 21), lifts 100,000 b/d of Kuwaiti crude. ExxonMobil takes less and is helping KOC to develop a field of very light oil in western Kuwait. ChevronTexaco, helping KOC in Burgan and other fields and producing oil onshore in the Divided Zone, is among the lifters. Most of the majors buy Kuwaiti crude mainly for their Asian markets.

Indian Oil Corp. (IOC) is the biggest Asian client of KPC for both crude oil and products. It often lifts about 100,000 b/d of crude and a big volume of distillates. Japanese term clients include Cosmo Oil, Idemitsu and Japan Energy. Other Far Eastern clients include Taiwan's CPC, South Korean companies and ChinaOil. Oil products are sold on term basis to Pakistan, India, Bangladesh, Sri Lanka and the Far Eastern markets.

Pricing of crude oil from Kuwaiti terminals to the West is at parity to Saudi Aramco's Arabian Medium. For sales to eastern buyers, the formula is directly based on the monthly average spot prices of Dubai and Oman crudes.

KPC pricing of oil products from Kuwait to both sides of Suez follows spot market quotations. Most term deliveries are priced at a premium over Platt's Middle East spot price assessments, plus a premium taking into account formulae applied by Saudi Aramco, Caltex in Bahrain and other Middle East export refiners.

Like Saudi Aramco and other export refiners in the Gulf, KPC imposes a premium on products' spot prices when demand is strong and offers discounts when demand is weak. The company has term contracts for naphtha, gasoil/diesel, jet fuel and kerosine. The rest of the Kuwaiti refineries' exports is sold on spot basis.

Products sold by KPC's trans-national system overseas are priced according to the retail price trends in each country. In almost all cases, prices are in local currencies. Sales from overseas units are mostly done by KPC retailers, such as the Q8 petrol stations (see DT 24).