Kuwait steers spending towards downstream oil and gas

OXFORD BUSINESS GROUP

Kuwait’s latest budget will focus capital expenditure on downstream oil and gas activities during FY 2017/18 in a bid to create jobs, offset falling crude export revenue and capitalize on rising regional demand for refined products.

The government is taking steps to expand private sector participation in economic development, including through three planned power projects and a US dollardenominated bond issue - a first for Kuwait. Combined with efforts to boost value-added oil and gas production, these moves should help foreign investment and state revenue expand steadily over the medium term.

In its latest budget announcement, the Ministry of Finance (MoF) forecast Kuwait’s oil revenues would rise by 36 percent in FY 2017/18 to reach KD11.7 billion ($38.7 billion), just below the KD12 billion ($39.7 bil- lion) recorded in FY 2015/16. This should see the budget deficit narrow from KD9.7 billion ($31.8 billion) in FY 2016/17 to KD7.9 billion ($25.9 billion) this year.

As energy receipts recover, the ministry foresees a 6 percent spending increase to KD21.1 billion ($69.8 billion), up from KD19.9 billion ($65.8 billion) the previous year, with KD3.4 billion ($11.3 billion) earmarked for capital expenditure. On making the budget announcement, the MoF told media petrochemicals and refineries will be the focus of state investment in order to create new jobs and support medium-term refining targets.

Total capital expenditure on hydrocarbons projects reached $44.3 billion in the two years to February, the highest level in the region, according to research firm MEED Insight. Chief among these projects are the $15 billion AlZour Refinery and $14 billion Clean Fuels Project, which will raise the state’s refining capacity by more than 50 percent to 1.4m bpd by 2020. Another big project, the $10 billion Olefins 3 petrochemicals plant, currently in the pre-execution phase, will house Kuwait’s third olefins cracker, significantly surpassing production from Olefins 1 and 2, which came on-stream in 1997 and 2009, respectively. Olefins 3’s annual production capacity, according to industry press, will include 1.4m tons of ethylene, 450,000 tons of low-density polyethylene, 450,000 tons of high-density polyethylene, 625,000 tons of ethylene glycol and 450,000 tons of polypropylene.

Downstream investments of this nature should help the country capitalize on rising regional and global demand for refined products. In March 2016 US-based Stratas Advisors forecast global ethylene demand would rise by 20.2 percent in the two decades to 2035, driven by growth in Asia and North America. According to US-based energy consultancy IHS, refineries in the Middle East will need $20 billion in investment in the years to 2025 to meet anticipated new demand for refined products, on top of a reported $40 billion already committed for the period.

Opportunities in utilities and bonds

Rising downstream production will complement several recently launched economic reforms. These aim to boost state earnings and increase private sector participation in economic development by offering new ways to invest in capital markets.

In late January Essam Al-Marzouk, Minister of oil, announced plans to further privatize the Al-Zour North One independent water and power project (IWPP) in 2017. Three private firms - France’s Engie, Japan’s Sumitomo and Kuwait’s AH Al-Sagar & Brothers - hold a combined 40 percent stake in the project, which offers 1500 MW of generation capacity. According to Al-Marzouk, another 50 percent will be sold via an initial public offering scheduled for November of this year. Only Kuwaiti citizens will be able to buy shares. Other opportunities are expected in 2017 for foreign utilities investors. The government has unveiled plans to develop three new power plants under a PPP model, and in November the Kuwait Authority for Partnership Projects announced its intent to invite advisory proposals for Al-Zour North’s third phase during the first half of the year, and for the Al-Khiran IWPP before 2018.

To help finance its spending plans, the state has said it will issue its first-ever sale of US dollar-denominated debt, raising up to $10 billion this year. Although the issuance was delayed in late 2016 as a result of geopolitical uncertainty, it is now in the final planning stages and expected no later than April or May, according to international press reports. Saudi Arabia’s similar move in October 2016, with a $17.5 billion debut sale, attracted $67 billion in investor bids, an encouraging sign for Kuwait’s fiscal stabilization in 2017.