Is Kuwait rethinking its oil expansion plans?

The steep drop in international oil prices in the last quarter of 2018 may have prompted a review of the cost of KPC’s expansion plans.

WASHINGTON - Kuwait may be reassessing plans to spend $500 billion by 2040 to boost the Gulf producer’s oil sector capacity but it said it would increase capital expenditures to stimulate the domestic economy.

While lauding Kuwait’s economic growth, the International Monetary Fund (IMF) cautioned that unless the Gulf state enacts steep fiscal reforms, there will not be adequate savings to maintain the current lifestyle enjoyed by Kuwaiti nationals.

In January 2018, Nizar al-Adsani, CEO of state oil firm Kuwait Petroleum Corporation (KPC), announced the company planned to implement energy projects totalling $500 billion over the next two decades, which included expanding Kuwait’s crude production from about 3.1 million barrels per day (bpd) to 4.75 million bpd.

KPC’s other goals were to grow Kuwait’s natural gas output from 200 million cubic feet per day to 2.5 billion cubic feet per day and to raise the Gulf state’s refining capacity to 2 million bpd from 800,000 bpd. “To achieve these targets, KPC plans to spend $114 billion in capital expenditure over the next five years and an additional $394 billion beyond that to 2040,” Adsani said.

Kuwaiti Oil Minister Khaled al-Fadhel has thrown cold water on those ambitious plans. He was quoted in local media as saying that, while he was not opposed to the expansion programme, the projected dollar amount to be spent was “optimistic.”

The steep drop in international oil prices in the last quarter of 2018 may have prompted a review of the cost of KPC’s expansion plans. Friction between the Kuwaiti government and parliament stymies progress on major initiatives.

In addition to reassessing its oil sector plans, KPC appears to be in a consolidation mode, with reports that the state energy firm is considering merging four subsidiaries — Kuwait Foreign Petroleum Company, Kuwait Oil Tanker Company, Kuwait Gulf Oil Company and Kuwait Integrated Petroleum Industries Company — into larger units. KPC is also mulling streamlining its eight business units into four.

While the state oil firm may be reining in its expansion programme, the Kuwaiti government boosted spending for fiscal year 2019-20, which begins April 1. The budget forecasts spending to rise 4.7% to $74.1 billion, with anticipated revenues of $53.7 billion. The deficit, which is calculated after 10% of revenue is dedicated to the Gulf state’s Future Generations Fund, is estimated at $25.4 billion.

“The new budget aims to drive economic growth by maintaining a high capex ratio of 17%,” while “tightening controls to curb wasteful spending and continue to gradually introduce fiscal reform,” said Kuwaiti Finance Minister Nayef al-Hajraf.

The IMF touted the recovery of the Gulf producer’s economy in 2018 and sees further growth in the short term but the organisation strongly advised Kuwait to embrace deep economic reforms that are a source of conflict between the Kuwaiti government and the national assembly. The IMF said Kuwait’s economy grew 1.7% in 2018 after a 3.5% contraction the previous year and should expand 2.9% in 2019.

The IMF reported that Kuwait’s non-oil growth will get a strong lift from the acceleration of “capital project implementation,” with the Gulf state’s non-oil growth increasing from 2.5% in 2018 to 3.5% in 2020. However, the fund warned, the government needed to tackle greater reforms or Kuwait would be unable to maintain current living standards for future generations.

The IMF said the Kuwaiti government must curb its elevated public wage bill — accounting for 18% of GDP — by encouraging Kuwaiti nationals to turn to the private sector for employment.

It called for the government to phase out fuel, electricity and water subsidies. The Gulf country’s fuel and utility subsidy costs total 5.3% of GDP. In addition, the IMF recommended broadening the country’s profit tax and implementing a luxury goods tax.

Highlighting Kuwait’s solid financial situation, the fund noted: “Ample financial assets, low debt and a sound banking sector allow Kuwait to undertake the needed reforms from a position of strength and at a measured pace.”

The elimination of energy-related subsidies and the notion of new taxes on citizens are extremely unpopular in Kuwait, with the government facing resistance from parliamentarians on such suggestions. The national assembly is considering a measure to reduce petrol prices after the government cut fuel subsidies three years ago.

It was pushback from parliament that has delayed Kuwait introducing a 5% value added tax until fiscal year 2021-22, though the Gulf country is expected to implement a “sin” tax on sugary drinks and tobacco in fiscal year 2020-21.

Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.

This article was originally published in The Arab Weekly.