Kuwait wants major international oil companies to develop its northern oil fields, but it will allow the process to take place slowly, carefully and under extremely tight restrictions.
As an indication, Kuwait's National Assembly received last April a draft of the legislation that will allow outside oil companies to work within the country's borders, and at press time, that group still had not passed a final version of the bill.
The bill's general outline is fairly clear. Kuwait's constitution doesn't allow foreign ownership of the country's mineral resources. That puts production-sharing agreements and ownership plans with royalty or tax payments out of the picture immediately.
Other countries faced with the same situation have chosen to pay international companies a fee for each barrel they produce. That allows the nation to continue ownership and the investing company to earn a profit. In some cases, that fee is flexible, riding up or down generally in step with overall oil prices and usually set at a level to guarantee the contract operator a pre-established rate of return.
A US government analysis suggested the new operating service agreements would include allowances for capital recovery and incentives for increasing reserves.
Even with those modifications to comply with the constitution, opposition in the parliament is active and has stalled the passage of the enabling legislation. Some delegates don't like the way the government is handling the project, and others just don't want foreign involvement at all. In some cases, those delegates have asked to look at each step in the involvement of foreign countries instead of delegating operating authority to executive branch agencies.
Invitations
Meanwhile, anticipating eventual acceptance, Kuwait Petroleum Corp. (KPC), Kuwait's umbrella company for oil and gas operations, said in a January announcement, "Kuwait has sent out to qualified international oil companies as approved by the Supreme Petroleum Council (SPC) the initial process protocol (IPP) document, which details the process forward."
Although it didn't reveal the names of those qualified companies, the word is out. The companies are BP, Chevron, Conoco, ENI, ExxonMobil, Shell, Texaco and TotalFinaElf. Kuwait has big fields, and it wants big operators to run them.
Some of those companies already work in Kuwait under technical service agreements designed to increase field production, and Kuwait has credited those agreements with major improvements in its production capacity.
Qualification doesn't completely lock out other companies. Kuwait chose nine other companies that could participate in the activities but only as nonoperating participants. Those companies weren't named either, but observers believe Phillips Petroleum Co. and Repsol YPF are on that list. Under those rules, BP might become operator of a field with Chevron and Phillips as participants.
Once the IPPs went out to qualified companies, the nation planned to open an elaborate version of a data room. That room would present the available information about the northern fields that will be offered to foreign investors, and it will include the country's 25-year model for what has been nicknamed Project Kuwait.
After examining the data and the plan, oil companies will reply to Kuwait's request for proposals with their plans, and the SPC will pick the best offers.
Fields
The northern fields available for participation reportedly will be Raudhatain, Sabriyah, Abdali, Bahra and Ratqa. Bahra may not appear in the final package.
Raudhatain holds 6 billion bbl in proven reserves, and Sabriyah holds another 3.8 billion bbl. Both fields have been producing medium- to light-grade crude since the 1950s
Production from Ratqa was a major reason, if not the prime reason, for Iraq's 1990 invasion of Kuwait. That field is a southern extension of Iraq's supergiant Rumaila field, and Iraq accused Kuwait of stealing billions of dollars worth of its oil through 11 wells along the border. At the end of the Gulf War, a UN team officially placed all 11 wells under the Kuwaiti flag.
Security is one of the main reasons experts offered for Kuwait's decision to invite outside oil companies to develop the northern fields. If oil companies from the United States, the United Kingdom, the Netherlands and France are operating the fields, those nations will be more likely to step in to protect their home-based companies than to protect strictly Kuwaiti ownership. Kuwait doesn't want to see another 70,000 troops under the Iraqi flag burning its oil wells.
Kuwait already has made it clear that it would like to raise production from those fields from 400,000 b/d to 900,000 b/d by 2005. Raudhatain produces about 250,000 b/d, and Sabriyah about 160,000 b/d.
Chevron said in an official statement, "We are interested in the north area of Kuwait as this satisfies Kuwait goals and targets. Obviously, the Kuwaitis are looking at agreements that will not violate their constitution, and we look forward to participating with them."
It also reportedly plans to offer its western Minagish and Umm Gudair fields for foreign investment at some later date. That probably will depend on its experience in the north.
Off limits
Conspicuously absent from the list of oil fields that foreign countries may exploit are the fields in Kuwait's supergiant Burgan complex in southwestern Kuwait.
The Burgan complex, with 70 billion bbl of reserves, usually is ranked the world's second largest oil field, behind Saudi Arabia's Ghawar field. That complex includes Burgan, Magwa and Ahmadi fields. South Magwa alone holds at least 25 billion bbl of oil.
That complex produces roughly 1.6 million b/d of oil.
Kuwait can produce 2.141 million b/d under Opec quotas, but it already has set plans to increase that production to 3 million b/d by 2005, and the northern fields are part of that production-improvement plan.
One recent study by the Kuwait Institute for Scientific Research said the country can continue producing oil at a rate of 2 million b/d for the next 132 years, but official sources put the reserve level at 96.5%, or 10.8% of world reserves in an area slightly smaller than the northeastern US state of New Jersey.
Capital plan
This year, KPC and its subsidiary companies plan to spend US $7.6 billion on upstream and downstream projects. The domestic upstream Kuwait Oil Co. will get $5.85 billion of that budget, or more than 75%, said Oil Minister Sheikh Saud Nasser al-Sabah.
Among items in that capital budget is the development of the five fields near the border with Iraq, in partnership with foreign oil companies.
Kuwait also is conducting seismic surveys on Bubiyan, its largest island in the Persian Gulf and adjacent to Iraq. The government said initial analysis looks promising, and it plans exploratory wells to test production potential.
Until now, the country has experienced bottlenecks in its infrastructure. It had 26 oil-gathering centers before the Gulf War, and all of them were damaged. Repairs to the last of those centers should be completed early this year at the Minagish and Umm Gudair fields in the southwest.
It also has completed a major renovation and is building new tanker mooring buoys at Mina al-Ahmadi, more oil storage capacity and more pumping stations.
Natural gas
If all goes well with the northern oil fields, more opportunities may open for international oil companies. For example, Kuwait wants to significantly increase its use of natural gas, particularly for generating electricity. It produced only 330 Bcf in 1998, and most of that gas was produced in association with oil production.
If it can produce more gas, it would free up more crude oil for export.
It has a memorandum of understanding with Qatar that allows it to import gas from Qatar's North field. ExxonMobil is studying the feasibility of moving some of that gas - the amount hasn't been disclosed - to Kuwait.
Kuwait also signed an agreement with Iran to import gas through a pipeline, but that agreement hasn't been solidified either.
In July 2000, Kuwait and Saudi Arabia agreed to share equally any production from the offshore Dorra gas field, but Iran also claimed that field, and it still hasn't agreed to any kind of sharing arrangement.
Government officials in Kuwait would like to produce more gas internally, by reducing the flaring of associated gas from its oil fields and through new drilling. Some of that exploratory drilling to significantly deeper formations has taken place in Raudhatain field.
Another reason for inviting outside companies in may lie in the Kuwaiti economy. The nation offers its citizens a good living with a lot of no- and low-cost programs helped by the 80% contribution to government revenues from oil exports. Kuwait also has set aside $50 billion against the time it can no longer count on oil to support the nation.
The depressed oil prices of 1998 and 1999 served as a wakeup call encouraging the government to begin reducing government subsidies.
It has started privatizing industries outside the oil segment of the economy to reduce subsidies. Most of that activity has taken place in health care, electricity generation and telecommunications. A healthy citizen involvement in nongovernment businesses would take a lot of pressure off the federal budget.
The government also wants to protect Kuwaiti jobs and expand horizons for Kuwaiti workers. Some 93% of the citizens work in state-owned organizations or the government. By cutting subsidies and increasing revenues, it should be able to cut its budget deficits.