As Kuwait moves to ramp up oil production, it is preparing to take advantage of rising demand in Asian markets and stable oil prices. However, there are concerns that the country could be
draining off its hydrocarbons reserves quickly and spending too much on subsidies and social support schemes and not enough on investments, Global Arab Network reports according to OBG.
On October 11, Hani Abdulaziz Hussein, the minister of oil, announced that production from Kuwait’s fields, which has recently been increased to 3m barrels per day (bpd), would be further bumped up to 3.2m bpd by 2015. “The current daily average production is 3m barrels, but Kuwait can produce more,” he told reporters.
The staged rise is part of a longer-term programme that envisions production being pushed up by one-third of current rates, to 4m bpd by 2020, plans that Farouq Al Zanki, the CEO of the Kuwait Petroleum Corporation, said in late September were on track.
There are some concerns that Kuwait’s plans to boost production will exhaust reserves within a few generations, rather than the almost 110 years currently estimated for the oil fields at an output level of around 2.75m bpd.
As of late October, Kuwaiti crude was trading at just over $106 per barrel, which is expected to continue through the medium term. Government officials see $100 as a fair and equitable price. On October 15, Hussein said that he expected oil prices to remain stable, or at worst, ease only slightly, over the next five years. Any reduction in consumption by Europe would be offset by a rise in demand from Asian markets, he said at the Asia Cooperation Dialogue Summit.
There are signs that this rise in demand from the East has begun, with South Korea sharply increasing its imports of Kuwaiti oil. Data issued by the Korea National Oil Corporation on October 22 showed imports of Kuwaiti crude jumped 6.8% year-on–year (y-o-y) in September, hitting just under 11.3m barrels, representing 14.4% of oil imports, up from the 13.1% for the same month in 2011. For the first nine months of 2012, the increase was even more marked, with shipments up 35% y-o-y to total 100.87m barrels, the equivalent of 368,000 bpd.
In part, this increased call on Kuwaiti oil is due to the tightening of the embargo on sales from Iran, with many countries boycotting Iranian oil in response to US-led sanctions. South Korea is a case in point, having halted its imports of Iranian oil, which had averaged 295,000 bpd as of the end of July.
While demand is still high, and in some markets rising, many analysts are predicting a falling off in oil requirements for the remainder of the year and into 2013 due to the slowing of the world economy. Another factor to be taken into account is the increasing output from Libya and Iraq, both of which have entered a period of recovery. Even with Iran’s contribution to global oil sales restricted, international production is likely to increase in 2013.
That said, even during and after the 2008 global recession, demand for Kuwaiti crude remained constant. This is one reason why oil still underpins the national budget, accounting for 91.6% of state revenues. In the 2012/13 financial year, oil earnings represented KD12.77m ($45.4bn) of an estimated total revenue of KD13.93m ($49.5bn), according to KUNA, the Kuwait News Agency.
The present budget, according to bills passed by the Cabinet of Ministers on October 21, foresees expenditure of KD21.24bn ($75.5bn), a rate of spending that will leave a shortfall of KD7.3bn ($26bn). However, Kuwait has projected a budget deficit every year for the past 10, and has always ended up posting a surplus. This is because the price of oil in the 2012/13 budget is calculated at $65 per barrel, according to former finance minister Mustafa Al Shamali.
Despite the impending surplus, the IMF has suggested the future economy would be better served if the government reduced overall spending, particularly on public sector wages, subsidies and social support schemes. In May the IMF warned that Kuwait would have to dedicate all of its oil revenue and savings to servicing its recurrent spending programme if it did not trim outlays. In early October, Mohammad Al Hashel, the governor of the central bank, warned that the state needed to cut spending on wages and other costs and direct more funding to capital expenditure and investments.
In the short term, however, Kuwait’s efforts to increase oil production should bode well for the state’s bottom line. With a global recovery expected to kick in next year and beyond, it is probable that the international market will soak up most – if not all – of the country’s planned increased output. (OBG)