Oil Production Costs Triple in Kuwait; Parliament Demands Answers
Global Insight Perspective
Kuwait is in the middle of an oil-related political crisis: the oil minister is under pressure for having fraternised with disgraced ruling family members, and for having tried to maintain the secrecy around Kuwait's oil reserves before being forced to climb down and lower the figures, and now production costs seem to have tripled rapidly.
It seems the foundations of Kuwait's whole energy policy are crumbling. MPs are now positing three scenarios: either the age of Kuwait's fields has caused production costs to treble over six years, threatening to spiral out of control; inefficient cost-controls and the inclusion of other costs in reporting have led to overspending; or there has been deliberate overstating and graft.
Kuwait's oil policy and industry will have to be thoroughly reformed and laid open to scrutiny if it is to recover from such a total loss of confidence in it—not least from Kuwait's own population. Whatever angle one takes, the royal family is unlikely to escape untarnished, so there is a great deal of interest in sweeping the affair under the carpet; the imbroglio even poses uneasy questions about its Gulf Cooperation Council (GCC) neighbours, where transparency is lower still.
Deadlock and Stagnation
The Kuwaiti body politic has been locked in a bitter internal feud over recent years, encompassing virtually every sector and deadlocking the rich and otherwise stable state during a time of booming oil revenues. Neighbouring countries have all embarked on large development projects, and while Kuwait has come up with ideas, almost every one of these has stalled on an inability to reach agreement and get contentious issues—between parliament and government, and also within parliament— out of the way, leaving the country losing ground and importance in almost every non-oil sector to its neighbours.
Kuwait is in many ways the quintessential oil state. The fact that the reserves—the actual assets under management for an oil state—had to be revised after a lengthy one-year battle between parliament and government has thoroughly shaken the already-weak confidence of the general population in the royal family and its total control over the oil sector (see Kuwait: 14 May 2007: Kuwait Announces National Oil Industry Shake-Up; Halves "Proven" Reserves). The Iraqi invasion in 1990 and the subsequent clean-up that followed revealed several large-scale graft cases involving the highest echelons of Kuwaiti royalty; for instance, a former oil minister implicated for treating state money like personal funds. The royal family's fight to preserve total secrecy over the country's oil industry further reinforced resentment and bitterness among parliamentarians and their electorate, and in the end the government had to back down in the face of an increasingly assertive parliament or suffer complete political deadlock. The momentum, however, is with the parliament, and further pushes for transparency in the oil sector have been launched with broad parliamentary support.
This weekend's revelation in parliament, based on an earlier Al-Shall report, that Kuwait's oil production costs have been rising by a rapid 18% over the past seven years—trebling from US$1.4 per barrel (/b) to US$4.42/b, will again violently shake the foundations of Kuwait's oil policy. As an oil state, it has taught its own citizens that there is so much oil that there is no need to worry about the future. If the reserve cut suddenly made everyone question how much might be left, the rising production costs will probably more than treble that sense of urgency. If the fields are maturing so quickly that costs are rising by around 18% every year, then even the short and medium term wealth of Kuwait is threatened. If on the other hand, one of the other two scenarios proves to be true—that costs have been badly controlled and come to include other financial posting; or that costs are overstated and funds are disappearing elsewhere—then it will only serve to show that the problems in the oil sector are deep-rooted indeed and require total reorganisation to solve. Kuwait is producing about 2.4 million b/d, which would mean that the US$3/b production price increase since 2001 costs the state an additional US$2.6 billion annually.
As the pressure is rising, Oil Minister Sheikh Ali al-Jarrah Al-Sabah will be questioned by parliament on 25 June, which could potentially lead to a vote of no confidence. This would be very hard to bear for the government, where the oil minister holds one of the most important and strategic posts, and brings the risk of the whole government falling. The investigation up to this point was bound to centre mostly on the oil minister's relationship with disgraced ex-ministers accused of corruption, but also to a certain extent the reserves downgrade and its implications for Kuwait's production rates. Now, however, it is bound to involve the rising production costs, and a political crisis—possibly not lessened even by Sheikh al-Jarrah's resignation—looks likely.
Outlook and Implications
The country's oil policy is in tatters. Indeed, from the public's point of view, the whole basis of Kuwait's cradle-to-grave welfare state system has been shaken to its core, since the idea of apparent never-ending wealth can suddenly no longer be relied upon. If production costs are rocketing by 18% per year, calculation of a time when Kuwaiti oil will no longer be economical to produce is possible, which in itself represents a sea-change. More directly, however, it poses some very important questions, captured succinctly in the investigation by parliamentarians and based on the Al-Shall report.
In addition, it poses an even more uncomfortable question internationally. Is the Kuwaiti reserves and production costs saga just an isolated Kuwaiti episode, or is it to some extent representative of any other, or all of the neighbouring Gulf Cooperation Council (GCC) states, which lack inquisitive parliaments fighting for transparency? If it is proved to be the latter, then the foundations of much of the world's energy reserve calculations would be unstable indeed, making the case for demands of greater transparency to be aimed internationally at all the countries in the region.
Kuwait: 26 April 2006: Kuwaiti MPs Join in Reserves Debate; Demand Production Proportionate to Proven Reserves
Kuwait: 1 December 2006: Kuwait: Reserve Issue to Be Kept Under Wraps in Kuwait; Expansion Plans Under Review
Kuwait: 23 January 2006: Kuwait Disputes PIW Reserve Figures; Restates Own Estimates
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