Kuwait’s reputation teeters on the precipice

Author Michelle Meineke

Kuwait’s energy growth will stagger to a halt if the Opec member’s top brass cannot bring decades of political bickering to a close — or at least reach an accommodation. The quarrel that has simmered between state-owned oil firm KPC and the oil ministry since May almost triggered a wave of resignations within KPC and crippled oil minister Ali Saleh al-Omair’s credibility. Anywhere else such discord would be considered extraordinary. It says a lot that in Kuwait today this is seen as business as usual.

Kuwait’s energy growth will stagger to a halt if the Opec member’s top brass cannot bring decades of political bickering to a close — or at least reach an accommodation. The quarrel that has simmered between state-owned oil firm KPC and the oil ministry since May almost triggered a wave of resignations within KPC and crippled oil minister Ali Saleh al-Omair’s credibility. Anywhere else such discord would be considered extraordinary. It says a lot that in Kuwait today this is seen as business as usual.

But, this time round, the severity of the row goaded a rare intervention from Kuwait's emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah, as he publicly acknowledged that an ill-functioning oil sector means an ill-functioning Kuwait. The significance of al-Sabah’s decision to wade in was not lost on international energy firms. Investors are increasingly wary of Kuwait because of its reputation for missing project deadlines and the fragmented energy policy that has resulted from constant political reshuffling. Some nine oil ministers have clashed with KPC in nearly as many years.

And this all comes against a background of years of trench warfare between parliament and government over policy, projects and alleged improprieties.

The scourge of political interference in Kuwait’s energy sector has caused decade-long delays to critical developments intended to sustain the country’s competitive edge within the Mideast Gulf and beyond. Disputes over budgets mean that plans for major projects, such as the 615,000 b/d Al Zour refinery, have gathered dust and KPC’s earlier “can do” attitude to the targeted 4mn b/d of production capacity by 2020 has been replaced with doubt. Actual production is around 2.7mn b/d, with capacity hovering around 3mn b/d.

To add to the woes, production is also being constrained by a dispute between Kuwait and Saudi Arabia over the jointly operated Neutral Zone. A Saudi-instigated shut-in of their shared 300,000 b/d Khafji field on 20 October last year was followed by the Kuwait-triggered shut-in of the Wafra field in May, where output had tumbled to 180,000 b/d in March from 225,000 b/d last October.

Doubts over Kuwait’s ability to bolster its upstream capacity have been exacerbated by delays to BP’s and Total’s efforts to sign enhanced technical service agreements. ExxonMobil pulled out of the process last year. KPC’s insistence that contracts will be signed this year has been met with scepticism.

Still, the optimism that was injected into KPC with the appointment of chief executive Nizar Mohammed al-Adsani in May 2013 has endured. Al-Adsani is well respected and has a gravitas that buffers KPC against constant attempts by the oil ministry to flex its influence in the firm’s boardroom — efforts that are backed by al-Omair’s position as KPC chairman.

Oil has been central to Kuwait’s economic narrative since the giant Burgan field was discovered in 1938, with exports from 1946 kick-starting Kuwait as an oil producer.  Oil has repeatedly dug Kuwait out of economic hardship, driving recovery after Iraq’s invasion and the Gulf War of 1990, for example.

Kuwait’s reliance on oil abides, although the country has tried to dilute it through foreign investments by the Kuwait Investment Authority. Oil still accounted for 89pc of Kuwait’s total export revenues in the first quarter of this year. But the treasury is grappling with lower oil prices, and Kuwait posted its first budget deficit since 1999 in the 2014-15 fiscal year.

While the country’s dinar remains strong, the IMF’s growth forecast of 1.7pc for Kuwait is unimpressive compared with other members of the Gulf Cooperation Council (GCC). The IMF expects Qatar and the UAE to post 7.1pc and 3.2pc growth, respectively. It puts Saudi growth at 2.8pc this year.

Kuwait initially led the charge within the GCC to curb costly energy subsidies by implementing cuts to diesel and kerosine prices in January. But plans to roll out wider cuts — including gasoline — were postponed. Kuwait's decision to join the Saudi-led coalition against rebel Houthi fighters in Yemen in March, along with issuing an emergency oil plan to protect the country's biggest asset against attack in late March, put public sentiment on edge. Tensions were exacerbated by a rare suicide bombing at a Shiite mosque in Kuwait City on 26 June.

Cutting subsidies was considered too politically hazardous before the UAE's subsidy cuts in late-July reignited Kuwait’s competitive streak. Kuwait now hopes to introduce wider subsidy cuts in January in a bid to help offset the detrimental impact of lower oil prices.

For more information, please contact OilBlog@argusmedia.com

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