KUWAIT - The KPC Board Of Directors.

Members on KPC's board of directors have a three-year term. The current board was approved by the council of ministers in August 2004. A new board is to be formed in August or early September 2007. Its main current members are the following:

Shaikh Ali al-Jarrah al-Sabah, KPC chairman since the summer of 2006.

Sa'd al-Shuwaib, acting deputy chairman and CEO of KPC and CEO of PIC.

Sami al-Rushaid, KPC MD for refining and local marketing and CEO of KNPC.

Ahmad al-'Arbeed, CEO for Project Kuwait and CEO-designate of a firm to manage the northern oilfields.

Farouq al-Zanki, KPC MD for E&P and CEO of KOC.

Abdullah Hamad al-Roumi, MD for transport and CEO of KOTC.

Jamal al-Nouri, KPC MD for international marketing and ex-CEO of KPI.

Abdul-Hadi al-Awwad, CEO of Kuwait Gulf Oil Co. (KGOC).

Sa'd al-Shuwaib, with a reputation for tough management, has taken on Shaikh Ali al-Jarrah's call for a thorough overhaul at KPC with the aim of brining in new blood. His other priority is Project Kuwait. These are on top of his responsibilities as CEO of PIC (see down26KuwtWhoJun25-07).

The cost of producing crude oil in Kuwait has increased sharply over the past five years, according to a report published earlier in June 2007 by the local al-Shall Consulting. According to official data released in the 2007/08 state budget, crude oil production costs rose from KD0.4 ($1.38) a barrel in 2000 to KD1.27 ($4.38) a barrel this year, a compounded annual growth rate of 18%. The steep increase means Kuwaiti crude is among the most expensive to produce in the Middle East - far higher than in the UAE and Saudi Arabia. The statistics are worrying given that the vast majority of Kuwait's crude oil comes from traditionally less costly fields.

Al-Shall attributes the increase to one of three possibilities: that Kuwait's reservoirs are declining and it is more costly to extract crude from them; that indirect costs have been added to those of production; or that there are deliberate errors in computing the cost.

Kuwait's reservoirs are maturing, with heavy crude oil coming into play. KOC has not denied that it has to use expensive enhance oil recovery (EOR) systems to maintain the output. Water cuts are increasing, requiring expensive methods of disposing of effluent.

Earlier this year, Shaikh Ali al-Jarrah launched an investigation into discrepancies between crude oil produced and the actual amount exported, after an external audit revealed that 19.4m barrels of crude oil produced over the past three years was unaccounted for. The news came at the wrong time for the beleaguered Shaikh Ali al-Jarrah as MPs want him to quit.

Project Kuwait executives have warned of rising water incursions into the fields. They say if IOC help is not called in, output in the north will drop from 700,000 b/d later in 2007 to less than 300,000 b/d by 2025. They have warned since 2005 that water cut rates will rise from below 10% then to 70% by 2020, making production much costlier if new technology is not used.

Forecasts suggest operating costs could rise to almost $7 as a result over the same period. IOC participation will, over the 20-year lifetime of their operating services agreement yet to be signed, substantially lower operating costs through superior reservoir management practices. There are other benefits from a role by the IOCs.

The IOCs will be able to develop more challenging reservoirs, beyond the technological capabilities of KOC, and transferring this technology to the upstream operator. A minimum local staff contribution of 60% will ensure that Kuwaitis develop the necessary technical and managerial skills.

Even the most vociferous among Project Kuwait's opponents - an uncommon alliance of liberal, conservative and nationalist MPs - accept that KPC and its units lack the technology and expertise to push ahead with the state's ambitious plans. But they say there is no guarantee any of the projected benefits will be achieved, and that refusal to make public the exact contractual model to be signed with the successful IOC consortium means KPC and Project Kuwait executives are trying to hide something.

MPs have been demanding, under article 152 of the constitution, that they be allowed to scrutinise in detail the terms of the offer to be made to the consortia. If this happens, government officials suggest parliament could be dissolved to force the measure through.

Most of the oil reserves in northern Kuwait are in geologically more complex Mauddud carbonate and layered sandstone Upper Burgan reservoirs. Project Kuwait's Executive Assistant Managing Director Hashem al-Rifa'i on May 17, 2005, told a conference in Kuwait: "These reservoirs are significantly pressure-depleted due to a lack of aquifer support and now require pressure maintenance. As a result of low reservoir pressures and water injection programmes, these wells will ultimately produce significant volumes of water and require artificial lift to maintain production rates".

Rifa'i then said: "Parliament has a right to meddle with the [enabling] bill, but not the right to examine the contractual clauses", with the government and KPC saying they have nothing to hide. Rifa'i added: "[Project Kuwait] is an operating services agreement whereby the IOCs produce oil, provide all investments and fulfill the goals in return for pre-agreed service fees designed to create incentives for the IOCs to produce efficiently. It is designed to fit the constitutional requirements in the state of Kuwait. IOCs will therefore have no ownership to Kuwait's natural resources. The IOCs will have operational control under the state's oversight".

The project's critics say there has been little public access to the final financial model, with the government publishing only a general framework. What has been announced is that the IOCs will cover all capital and operating costs. In return for delivering the crude oil at agreed points, the IOCs will receive fees in cash to compensate them for their investment in addition to an "adequate" profit. If savings are determined to have been made, the IOCs will share in the cost savings. Any profits they make will be subject to a 25% tax.

Potential disputes centre on what constitutes profit and how cost savings will be determined. The exact remuneration model is as yet undecided and will be the subject of negotiation between KPC, the government and the IOC consortia. Another potential stumbling block is the peak production period. The IOCs, which have had access to field data, say it may be no longer than three to five years, while KPC claims it could be as long as 10 years. The issue may be the biggest bone of contention during contract negotiations.

Annual reports written by IOCs as part of their technical service agreements (TSAs) with KOC on the condition of the northern fields have repeatedly warned of the reservoirs' deteriorating condition.

The Oil Ministry has been keen to stress that any eventual agreement will benefit all involved. IOC commitment to Project Kuwait will be guaranteed by requiring the operator and its partners to contribute all capital and operating costs, while any windfall profits will be mitigated by the cost savings share mechanism and the imposition of tax.

"An important objective of Kuwait is to ensure a long-term relationship with the IOCs and optimal economic performance", Rifa'i said, adding: "If Kuwait would simply pay fees from the first day of operation, IOCs will have a positive cashflow from day one. IOCs would not be exposed to risk. It is precisely the exposure to risk that provides the incentive to IOCs to achieve superior management. It is for that reason that the operating service agreement (OSA) includes a provision that unless a specific cumulative amount of oil is produced, the fees will be reduced to 10% of their value. This will create a significant negative cashflow in the first three years. This feature will ensure that only IOCs which achieve high production at low cost will achieve an attractive rate of return".

Rifa'i explained: "Our fiscal model is based on a combination of cost and production fees which acknowledge the technical uncertainty around the scale of future operating costs. Production-based fees will be based on production volumes, i.e., dollar a barrel. IOC revenues would be delivered from actual production levels. In other words, more production will mean more revenue, regardless of costs incurred. As for cost-related fees, these will be fees made as cash payments based on 50% of actual permissible costs incurred by the IOCs, and would be independent of production volumes. The use of cost recovery reduces the magnitude of production-based fees".

Kuwait is one of the few states in the world to have had no upstream IOC participation since nationalisation, with the constitution prohibiting foreign ownership of its natural resources. Senior officials from the Oil Ministry, KPC and KOC have been brought out to sing Project Kuwait's praises. The project, it is argued, is not just a move to bring the sector into the 21st century, but absolutely necessary if current output capacity is to be maintained. Central to the government argument is that most of the current production from the northern fields has been "easy oil". The fields are rapidly maturing. KOC does not have the technical capability nor the expertise to maintain the current production level of 550,000 b/d once the easy oil is depleted.