KUWAIT - Part 2 - Profiles Of The Oilfields.

Kuwait Oil Co. (KOC), the upstream unit of state-owned Kuwait Petroleum Corp. (KPC), is to raise the emirate's sustainable oil production capacity from 2.7m b/d to between 4-5m b/d by 2020. Parliament is yet to pass a law allowing foreign firms to operate most of the emirate's oilfields.

Three consortia of international oil companies (IOCs), the biggest in the world, will compete to fund expansion of seven fields under 20/25-year "incentivised buy-back contracts" (IBBCs). The IBBC is the closest alternative to a PSA as Kuwait's constitution does not allow production sharing deals or concessions. Under a $7 bn "Project Kuwait" programme, the IBBC gets KPC to retain the risk of crude oil prices and the winning consortium will bear the reservoir and operating risks. The consortium will share the rewards of cost reductions (see background in 2001 survey of Kuwait in Vol. 56, Nos. 21-22). A model operator service contract (OSA) and the fiscal terms were in 2002 done by KPC and approved by the Supreme Petroleum Council (SPC - see background in Vol. 60, No. 22).

More than $55,000m will be spent over the next 15 years in raising Kuwait's oil production capacity, boosting gas supplies and developing its downstream industries. KPC's refining arm Kuwait National Petroleum Co. (KNPC) is negotiating with Western and Asian firms about taking a 20% stake in Kuwait's fourth refinery, which is proposed to have a capacity of 600,000 b/d and will cost about $5 bn. The decision to bring in a foreign partner marks a departure for the local refining sector, which is wholly controlled by KNPC (see Downstream Trends).

KPC's CEO Hani Hussain says IOCs could eventually be involved in all the oilfields, which have been affected by water flooding. He expects water production in the oilfields to rise and pose an environmental as well as technological challenges. Earlier this year he was quoted as saying: "We have to learn how to deal with heavy oil. As we reach our [oil production] target of 4m b/d, a sizeable proportion will be heavy oil... IOCs with their experience and expertise can complement us. They have a different way of doing things". He hopes that parliament will vote for Project Kuwait - which involves increasing production from four northern fields by 450,000 b/d to 900,000 b/d over a 20-year period - by end-June, before the summer recess from July.

Speaking on the sidelines of the Second MEED Major New Project Opportunities in Kuwait conference on May 17, Hisham Al-Refa'i, executive assistant managing director for Project Kuwait, said the National Assembly's Economy and Finance Committee was about to make a recommendation, giving the legislature just over a month to pass the enabling bill before the start of the summer recess. "We are confident that the committee will recommend the bill", he said, adding: "We have 45 days, but we are very optimistic". The long-awaited legislation has been delayed for more than seven years because of parliamentary opposition.

The consortia competing for Project Kuwait are led by the following majors: ExxonMobil (37.5%) with Shell (32.5%) as second operator, and non-operating ConocoPhillips (20%) and Maersk (10%); BP (65%) with non-operating Occidental Petroleum (25%) and Indian Oil Corp. (10%); and ChevronTexaco (50%), with Total (20%) as second operator, and non-operating PetroCanada (10%), Sibneft (10%) and Sinopec (10%).

KPC has made major changes in the oil sector since last summer. The group has awarded or tendered a number of contracts to modernise the upstream sector, sold off non-core activities and assets. Steering through the changes is a new generation of executives. Last August, the top position at all three of the state's main oil firms changed hands, bringing in Hani Hussain to succeed Nader Sultan as CEO of KPC, Farouk Al-Zanki as chairman and MD of KOC and Sami Al-Rasheid as chairman and MD of KNPC. Together with Energy Minister Shaikh Ahmad Al-Fahd Al-Sabah, appointed in 2003, they have provided much needed impetus for change (see who's who in Part 5 - OMT No. 25).

Strong world oil demand combined with Kuwait's status as a low-cost producer puts it in a strong position. But KOC will not be able to go it alone as its ageing fields require enhanced oil recovery (EOR) systems with IOC assistance. MEED on May 27 quoted Zanki as saying: "Kuwait will play a major role in supporting the world's economic engine... However, while we have been blessed by abundant, easy and low-cost oil, as with the rest of the world Kuwait's oilfields are now maturing. The era of 'easy oil' is coming to an end, and we are shifting from primary recovery to an era of enhanced oil recovery. Water injection is increasing and production rates are in decline. We must find ways and means of extending these fields' production life".

Rising water cuts are particularly worrying. Low reservoir pressures and water injection programmes are likely to see water cut rates increase from less than 10% today to 70% by 2020, while oil output diminishes. Zanki said: "We are producing 300,000 b/d of water. We project a 20-fold increase in water production to 6m b/d by 2020. Water management is a growing concern".

Project Kuwait is controversial, but KPC has made clear that if Kuwait is to compete and retain its status as a major oil producer, it has to be taken. Hussain said at the MEED conference: "People in the oil sector have a responsibility to our country and the people of Kuwait to produce in the best and most efficient way the crude oil we think the market will require. So we will do our best to implement Project Kuwait as it is best for our country. As for other areas, let us handle Project Kuwait first, then we will see".

Apart from Project Kuwait, KOC has its own programme. By adding to proven reservoirs, implementing best practice to reservoir management and reducing gas-flaring and effluent water disposal, KOC believes it can significantly increase capacity. Zanki estimates that $20,690m will be spent over the next 15 years on the upstream, in addition to $6,660m worth of projects already under way. The search for natural gas is a priority. Kuwait needs 1,000 MCF/day of natural gas to meet its requirements, but has no non-associated gas fields. Zanki said: "We must have gas. I believe we will find gas and I believe it will be commercial. We are very optimistic about future requirements. Maybe we need to start more aggressive development of the deep wells in northern Kuwait. We've got just as much gas from oil wells as from gas wells".

Current production, including Kuwait's share of output in the Divided Zone, is averaging 2.7m b/d, up from 2.4m b/d in early 2005. Before Iraq's August 1990 invasion of Kuwait, the emirate had 26 oil gathering centres (GCs) capable of handling 4m b/d of production. The sustainable capacity within Kuwait then was 2.25m b/d and its share of capacity in the Divided Zone (DZ) was 200,000 b/d. In the early 1970s, Kuwait's sustainable capacity was 4m b/d, including its DZ share. There were about 1,100 wells by August 1990. In the final phase of the land war to liberate Kuwait, in late February 1991, Iraqi forces under Saddam Hussein's Baathist regime torched most of them - damaging about 800 wells. Of the 26 GCs, three were destroyed, three were seriously damaged, six were damaged but not beyond repair and 11 had slight damage. Immediately after liberation in late February 1991, the government set in motion a programme for the oil sector in parallel with programmes for the other sectors.

Phase I, called Awdah (return), was managed by Bechtel under a two-year contract and included a big number of contractors from the US, Europe and other parts of the world. It included fire-fights by several teams, drilling new wells, and repairing GCs and various other installations. Completed by early 1992, Phase-1 cost more than $2 bn. Phase-2, Ta'meer (reconstruction), mostly managed by Bechtel and involving re-construction of both upstream and downstream facilities under a $6.5 bn budget, was completed in 1994. Phase-3, completed in 1995, involved reconstruction, development and expansions for both the upstream and downstream sectors. The manager for this was Parsons Engineering Corp.

In March 2004, KOC appointed Amec of the UK as project manager for its southern oil-fields, a post previously held by Bechtel and Parsons. In August 2004 KOC renewed a 1997 contract with Total under which the French major provided technical assistance in the Divided Zone (shared equally by Kuwait and Saudi Arabia) as well as in onshore oil exploration in Kuwait itself.

SK Engineering & Construction recently won the second package on KOC's facilities upgrade and replacement programme, after having received a letter of intent for the KD 357m ($1,231m) engineering, procurement and construction (EPC) contract. The Korean contractor was low bidder last November for the contract, which covers the replacement of existing underground crude oil and gas flowlines in the south and south-east and the upgrade and rehabilitation of nine (GCs) and one booster station (BS). In late April, UAE-based Petrofac Int'l was awarded the KD 199m ($686m) first package covering seven GCs and two BSs.

These are part of a $2,150m programme, for which KOC is receiving funds from KPC. Once completed, projects under this programme will raise crude oil output capacity by 10,000-20,000 b/d. Petrofac's job covers GCs 3, 4, 6, 7, 8, 21 and 23 and BS 140 and 150. SK's job covers GCs 1, 2, 9, 10, 11, 16, 17, 19 and 20 and BS 170.

In March Petrofac won a five-year performance-based maintenance services contract covering KOC facilities in the north and west of Kuwait. The $125m deal was the first of its kind to be awarded to an international contractor in Kuwait. Under the contract, Petrofac provides integrated maintenance management and services to improve equipment availability and reduce repair costs. Petrofac is also establishing warehouse and workshop facilities to carry out the work. Evaluation of its performance will be carried out through a five-point system.

The job covers maintenance of 16 KOC facilities including GCs, BSs, gas steam and water injection plants, water gathering and pumping stations, wellheads and pipelines in the northern and western fields. Two other companies - the Wood Group of the UK and Kellogg Brown & Root (KBR) of the US - bid for the work late last year.

KOC is evaluating bids for three packages on its flowlines modernisation programme. The four-year contracts, which involve supply and replacement of up to 1,400 kilometres of six-inch-diameter carbon steel pipe running from KOC's oilfield wellheads to their requisite manifolds and gathering centres, are expected to be awarded in the autumn. MEED said on May 20: "All the submitted prices are understood to be above budget". For the first time, according to MEED, KOC has inserted an escalation clause into the tender documents. "Connected to the steel index price, the clause allows the successful contractor to claim additional costs should the price of steel rise".

Combined Group is low bidder, at KD 25.8m ($89m), for the largest of the three contracts covering the northern oilfields. According to MEED, its offer was about 24% lower than the bid of KD 32m ($110m) submitted by Heavy Industry Engineering & Shipbuilding Company (Hiesco). House Of Trade was ranked third on the price, with MEED putting its offer at KD 35.9m ($123.8m). Six other local firms priced the work. Combined Group is also low bidder at KD 14.5m ($50m) for the package covering the western fields. However, the tender documents stipulated that bidders can only win one contract, meaning that Hiesco's second-ranked bid of KD 15.9m ($55m) made it the frontrunner for the job. Al-Meer Technical Services Co. was ranked third on price, at KD 19.2m ($66m). According to MEED, ten firms submitted bids.

For the south and eastern fields package, Mechanical Engineering & Controls Co. (MECC) was low bidder at KD 23.8m ($82m), 5% lower than the offer of KD 25m ($86m) submitted by Combined Group. Hiesco ranked third on price, at KD 25.3m ($87m). Nine companies bid for the work, according to MEED.

                     KUWAIT'S PRODUCTION CAPACITY, 2005-2020
                            2005          2005-2020
                          deg. API       '000 b/d       '000 b/d
Greater Burgan*             30-38          1,580          2,150
Raudhatain                  34.4             450            550
Sabriya                     36                90            200
Abdali, Bahra & Ratqa       22-30             40            150
Minagish & Umm Gudair       34 & 22-26       200            530
Capacity Within Kuwait      31.5           2,360          3,580
Divided Zone*               26-28            340            425
Total Kuwait                -              2,700          4,005

*Greater Burgan's capacity includes 200,000 b/d of production from a Marrat formation beneath Burgan, Magwa, Minagish and Umm Gudair. By 2020 Greater Burgan could produce 3m b/d.