Kuwait’s hydrocarbon industry has truly become the backbone of the country’s economy. But the country’s natural gas shortage, and looming budget defecit could threaten its posture
Over the last century, the GCC has seen some of the most rapid economic growth in the world. This has been primarily due to heavy spending on infrastructure, supported by lofty earnings from oil, and more recently, from gas exports. The region’s GDP grew from $192 billion in 1980 to $1.5 trillion in 2012, making it one of the per capita.
Nestled in the booming region, at the tip of the Persian Gulf on the border of two giants, Saudi Arabia and Iraq is the small, oil-rich State of Kuwait.
With 102 billion barrels of proven crude oil reserves, Kuwait holds the world’s fifth largest oil reserve, making it a top producer and net exporter of oil and gas globally. Petroleum accounts for nearly 50% of its GDP; 95% of export revenues, and approximately 95% of government income- with a budget surplus 30% of GDP.
Its journey towards economic prosperity and political autonomy however, did not come without its challenges. The Iraqi invasion of Kuwait in 1990, and the ensuing Gulf War, reiterated the importance of the country’s oil wealth to the rest of the world.
Since 1990, the country has managed to rebuild a functioning economy. More recently, the government rolled out an agenda which it calls the ‘National Development Plan’, aimed at developing more sophisticated infrastructure that can diversify the country’s economy away from the oil and gas sector.
Under the project, the country looks to build a new metro, railway and other multi-billion dollar projects such as Silk City, an urban area in Kuwait’s north, according to a report by The National.
While the Kuwaiti government has come a long way to create such ambitious plans, there is much skepticism over the country’s ability to execute. Despite its oil wealth, the country is facing a major natural gas supply shortage in the face of soaring demand for electricity.
Numerous observers have pointed to the exceptionally low gas prices as the root cause of excessive energy consumption, especially in the summer months. The looming natural gas shortage in Kuwait, and in other countries across the GCC, to reconsider its gas pricing strategies.
The country was found to have one of the highest rates of energy consumption per capita in the world, according to a 2013 report by Capital standards, an independent ratings agency. According to the Ministry of Electricity and Water (MEW), annual electricity consumption rose by 20% between 2009 and 2013, up from 10,000 MW to 12,060 MW in 2013.
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Today, natural gas remains a major source of fuel for Kuwait’s power plants and desalination facilities. In order to meet demand from these two sectors, as well as that from the petrochemicals industry, the Kuwaiti government had committed a portion of its oil revenues to long term liquefied natural gas (LNG) purchases.
In fact, earlier this year, in mid-May, the Kuwait Petroleum Corporation (KPC) signed a five-year LNG supply deal with BP worth an estimated $3bn. The contract was closed only a few days after KPC signed a six-year, $12bn LNG agreement with Royal Dutch Shell. Kuwait will also receive LNG supplies from Qatargas.
KPC told media that Kuwait was set to import up to 2.5m tonnes of LNG annually from the deals. The three suppliers will deliver 32 shipments per year between them, 18 of which will come from Shell. Qatargas will send eight shipments and BP six. In a separate move, Kuwait’s oil minister said in early June that the country was ready to sign an agreement with Iran to secure natural gas supplies, talking on the sidelines of a rare visit by Kuwait’s emir to Iran.
Regulators in Kuwait will be more hard pressed to justify sending natural gas allotments away from the power plants and towards the petrochemicals industry unless the sector can continue to prove that it adds value to the local economy.
At the same time, the country has, in recent months also shown signs that it is willing to readjust its energy policy. Recently the government announced that it would end subsidies on diesel fuels in order to counter looming concerns of a financial defecit. Last May, the government reported that public expenditure outpaced revenues and could lead to a budget deficit by 2017/2018 if not checked.
Oil Minister Ali Al Omair told parliament that ending subsidies on diesel would save around $1 billion a year out of $18 billion worth of subsidy payments.
This decision by the government of Kuwait is based on one of several recommendations by a committee it set up last October to review subsidies on all services and commodities. Kuwait has had a budget surplus in each of the past 14 fiscal years, which has helped the OPEC member increase its sovereign wealth fund to over $500 billion. Oil revenue increased from $46 billion in 2005 to $106 billion in 2013.
In March 2014, the deputy CEO for gas and exploration at the Kuwait Oil Company, Menahi Al Enezi, said that the country hoped to increase production from current rates of 1.35bn cfd to 4bn cfd by 2030. However, efforts have been hindered by problems at the partitioned neutral zone, a hydrocarbon-rich region shared by Kuwait and Saudi Arabia.
Kuwait is also keen to up the focus on harnessing its natural gas reserves, which it recognises as representing a cheaper and cleaner alternative energy source. The state held an estimated 63trn cu ft of natural gas reserves at the end of 2012, according to the BP Statistical Review of World Energy 2013. However, less than 1% was being extracted annually, in part due to the technically-challenging fields in which the reserves are located.
With the cost of imports set to reach almost $20bn over the next five to six years, expansion of domestic production looks to be the most valuable long-term supply option for the state and its private partners.
