Financial Times: Field work: why Kuwait's rulers are being forced to ponder a new pact with big oil

By Carola Hoyos
Published: January 24 2006
As Saleh al-Ajmi clasps the antiquated little red wheel on oil well B473, the vast, dusty expanse of the world's second largest oil field unfolds behind him.
“I love Burgan,” the Kuwaiti engineer says with a pride and tenderness usually reserved for girlfriends, not oil fields. But Burgan has earned his devotion. It is perhaps the world's best-behaved reservoir. It has produced more than 28bn stock tank barrels of oil in the last 60 years with only minimal investment in new technology.
Oil rises to the ground naturally and once there, gravity sends it down Burgan's gentle slope to the storage tanks below. Mr al-Ajmi and his colleagues have had to do little more than watch and maintain the equipment that was installed by the Anglo-Iranian Oil Company (now BP) and Gulf Oil (now Chevron) in the 1940s and 1950s and bequeathed to Kuwait when the industry was nationalised in 1975.
But the days of easy oil are over. Even the great Burgan field is beginning to falter and will no longer compensate for stalling oil production in the north of the country, where the oil fields are ageing more quickly. After many years in which it did not have to look beyond its borders for help, the country is being forced to seek the advanced equipment and managerial skills only foreign oil companies can supply.
“We will need the technology,” Mr al-Ajmi acknowledges, although he is more reluctant to concede that Kuwait's state oil company will also need foreigners to run what has been named Project Kuwait. Last month Sheikh Ahmad Fahad Al-Ahmad Al-Sabah, Kuwait's oil minister, warned: “For production to reach 4m barrels a day by 2020, it is a must. It is a must from the technical side.”
Kuwait is not alone. From the Middle East to the North Sea, and Alaska to Latin America, the large oil fields on which the world has come to rely to fuel its economic expansion since the second world war are requiring increasingly advanced technology and know-how to coax their last oil barrels to the surface.
Whether or not Kuwait and its fellow petrostates, in particular Saudi Arabia and Mexico, invest enough – in many cases by turning to foreign companies for support – will be the biggest factor in determining the oil price in the coming decades. Iran and Iraq are the other key players but there foreign investment is necessarily limited by international politics and security issues. So companies and consumers alike have particular reason to worry about the outcome of the Kuwait debate.
It has also underlined the recent shift in the balance of power between national and international oil companies. The national oil companies are flexing their muscles at home and, increasingly, abroad, arguing that service companies such as Halliburton and Schlumberger can give them all the technical support they need. But Kuwait and other countries whose oil reserves cannot be reached without sophisticated technology reveal the flaws in that model.
Meanwhile, being allowed back into Kuwait is arguably as important for the future of the big international energy groups as Project Kuwait is for the country itself. ExxonMobil, Chevron and BP each lead a consortium of companies that have already agreed to bid on the 20-year project.
They must remain on tenterhooks for some time longer, however. Parliament had been due to begin debating the issue yesterday. But the succession dispute set off by the death of Sheik Jaber Al-Ahmad Al-Sabah, the country's emir, has again delayed matters, with oil industry insiders warning that Project Kuwait could be pushed back a year if the turmoil leads to a change of energy minister.
Technocrats first mooted Project Kuwait in 1991. But the country was too busy rebuilding the wells and equipment torched by Saddam Hussein's army in the retreat from its invasion the previous year. Most of Burgan's facilities had been ruined, 445 wells were set ablaze and another 191 were damaged.
Mr al-Ajmi still remembers the 45 days of occupation when his wells were surrounded by unexploded mines and he made his daily inspections under the disconcerting gaze of Iraqi soldiers. To this day Gathering Centre 14 stands as a monument to the destruction – a graveyard of charred and mangled pieces of metal jutting out against the power blue sky like huge Victorian paper silhouettes. “I had worked at this gathering station from 1988. I remember every place of it, each piece. Where the control room was,” says Mr Al-Ajmi, his voice trailing off as he turns away to point his sunglasses to the empty spot where it once stood.
It was February 1993 before Kuwait's oil industry was back to pre-war levels. But it would take another decade to convince Kuwait's ruling elite to back the $8.5bn plan to almost double the oil production of the northern fields with the help of international companies.
Nader Sultan, the former chief executive of Kuwait Petroleum Corporation and adviser to seven past oil ministers, recalled that one, seeking support for the plan, liked to ask: “Why would you want to be the camel? A major oil company can be the camel while you can sit on it and ride it.” (Today the camel race is fiercer than ever as Kuwait and its neighbours compete to cash in on the high demand and oil prices generated by China's growth.)
But with eight changes of oil minister in 15 years Project Kuwait went from delay to delay. Finally, at the end of last year, the majority in parliament looked ready to agree – only for the vote to be delayed yet again.
The outcome remains far from assured. Kuwait is rare in the Middle East in having a powerful parliament. But the absence of political parties means the government does not have a built-in majority. Leo Drollas, deputy executive director at the Centre for Global Energy Studies, the London-based consultancy, asserts: “What you are seeing in Kuwait are the problems with democracy.”
Many parliamentarians opposing the project hope to wring favours from the government in return for their support. Much, however, will depend on whether the oil minister stays in his post as the succession battle between rival members of Kuwait's ruling family unfolds. If he remains, Mr Nader forecasts he will be able to push the issue through parliament by this summer.
But while the politicians procrastinate, the technical challenges engineers face at Kuwait's northern fields, 100 kilometres from the capital, grow ever larger. The fields make up 10 per cent of the country's reserves and produce about 500,000 barrels a day, one-fifth of Kuwait's total output. By 2025, Kuwait hopes they will make up closer to one-quarter of production so that more of Burgan's oil can be kept for later generations.
Estimates suggest that, by using sophisticated technology, the amount of oil ultimately recovered from the field could be boosted from 40 to 60 per cent of available reserves. It is a statistic to gladden the heart of international oil companies, including Europe's BP and Royal Dutch Shell, and the US's ExxonMobil and Chevron, which have honed their skills in places such as the US Gulf of Mexico and the North Sea.
This expertise is the best hope of persuading countries such as Kuwait that the companies must again be given access. Removing, cleaning and disposing of the millions of barrels of water the north fields will produce every day as they come to the end of their lives, is more than Kuwait's oil company can handle, its engineers and executives say.
Kuwait's experience in other fields has shown engineers that one delicate task – pushing oil to the earth's surface by injecting this water back into an ageing reservoir that has lost its natural pressure – is also better left to well-practised international oil companies (IOCs), says Hosnia Hashim, a senior executive of Kuwait Oil Company.
If they are kept out, not only will there be serious delays but some reserves may be lost entirely, warns Ahmed al-Arbeed, head of Project Kuwait. One analyst, Stewart Johnston, of Cambridge River Associates, the consultancy, adds: “The three most important things international oil companies can provide for national oil companies are: access to advanced technology, teaching employees how to use that technology, and creating jobs.”
It is crucial for the oil majors' future that they win the day. With few, if any, big oil fields left to find, the big western companies are facing shrinking production and reserves. They are forced to venture into riskier spots such as the harsh terrain of Siberia's Sakhalin island where extracting a barrel of oil can cost 6-7 times as much as it does in Kuwait.
Returning to Kuwait would not be an immediate boon because the contract's terms are too restrictive. But regaining a foothold in the Middle East is of great strategic importance, explains Alastair Bee, who spent six years working in Kuwait for BP.
“[For] any big oil company, having part of its portfolio in the Middle East is a big plus because 10 years on, it's the place to be.” Kuwait, Iran, Iraq, United Arab Emirates and Saudi Arabia hold two-thirds of the world's oil reserves. UAE has reached out to foreign oil companies for help.
But for big corporate oil, Saudi Arabia, home of the world's biggest oil reserves and Ghawar, its largest field, is the grand prize. It is for this reason that Saudi Arabia has long bristled at the idea of needing outside help. Its fields face some of the same challenges as those in Kuwait. But Saudi Arabia, unlike its smaller neighbour, has had a stronger drive to make Saudi Aramco, its state oil company, the most sophisticated in the world.
When Gulf Oil and the Anglo-Iranian Oil Company left Kuwait, “they left us with the body, but took away the brains”, Khalid Yousef Al Fulaij, head of Kuwait Oil Company in the 1990s, famously declared.
But in Saudi Arabia, Exxon and Mobil left behind some of the brains – Saudi Aramco had inherited expertise from its foreign counterparts. The kingdom has been working to advance its industry through training, international exchanges and technology research ever since. It can now argue more robustly than any other oil state that its national company needs no help. Kuwait is far from being able to make the same claim.
For now, the talk is only of letting foreigners into the northern fields, but Mr al-Arbeed told the Financial Times last month: “If North Kuwait is a success, everyone will be happy to see another success in other reservoirs.” Perhaps not everyone will rejoice. Mr al-Ajmi is fiercely proud of what he and his colleagues have achieved, especially since 1991.
As he bends down to inspect a puddle of crude oil below his well, he maintains that Kuwaitis could handle Burgan without help. As his head pops back up, he is holding a sample of oil. He sniffs it and says: “Hmm, smells . . beautiful.”