KPC’s proposed financial plan to create disastrous scenarios

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‘KPC will be forced to cancel some contracts’

KUWAIT CITY, Oct 12: The scenarios proposed by the Public Debt Committee concerning the Kuwait Petroleum Corporation’s financing plan, which include reducing the capital spending of the corporation and its subsidiary companies, and increasing its implementation range beyond five years, will have disastrous results, reports Al-Anba daily quoting informed sources. They clarified that this is because the volume of capital spending in all of the presented scenarios is not sufficient to cover the expenditures for the capital program that has been committed by the corporation.

This will result in the cancellation and postponement of the projects that were approved by the Supreme Petroleum Council, intended for implementation, and linked to the achievement of strategic objectives for the oil sector. The sources explained that the share of the exploration and production of crude oil and natural gas inside Kuwait by the Kuwait Oil Company (KOC) from the volume of the capital agreement during the five-year plan, according to the scenarios presented by the representatives of the Public Debt Management Committee, amounts to KD four billion.

This is much less than the capital spending required to maintain production levels. The current crude oil production of 2.8 million barrels per day, which is estimated to be worth KD 11 billion, will drop to 1.8 million barrels per day at the end of the five-year plan.

The sources said the decline in Kuwait’s production levels to low levels will have negative impacts and lead to huge losses resulting from the cancellation of major projects. This will also lead to losses of expected returns from operating those projects, and consequently diminish the profits that the company transfers to the state, as well as shake the confidence of foreign investors in the Kuwaiti market.

This will increase the need to hedge them in the future to participate in oil projects, which means the loss of competent and experienced contractors to develop future projects. They revealed that the repercussions of reduced spending does not stop at this point, but would continue to enter the spiral of judicial, commercial and financial claims as a result of the damages incurred by contractors. Additional costs resulting from preserving and storing equipment for capital programs, which will be completed in the future, will be incurred.

The sources stressed that most of the capital projects are in the field of exploration and production of crude oil inside Kuwait, which have been committed to drilling contracts or detailed engineering, supply and construction contracts. It would be difficult to change the method of payment and to extend them to 12- 16 years.

The contracts that have been committed, especially with major capital, are in the advanced stages of implementation and are expected to operate within a year or two at most. They indicated that these programs will contribute to maintaining the increase in production levels and refining capabilities of the corporation.

However, the failure of the corporation to fulfill its obligations towards contractors will result in a decrease in the state’s oil revenues equivalent to KD 20.4 billion during the period of the five-year plan and the inability to provide the necessary quantities of oil required for refining projects inside Kuwait. This particularly concerns Al-Zour Refinery, which will require the corporation to import fuel and liquefied gas in order for it to be able to meet the needs of the Ministry of Electricity and Water to generate electricity. This will negatively affect the state budget.

Cancellation
The sources revealed that KPC will be forced to cancel some contracts for the sale of crude oil with a number of customers who are linked to Kuwait by a group of common interests, due to the low levels of production, which will impact Kuwait’s global reputation.

They explained that KPC raised a number of observations during the meetings, namely the assumptions presented by the Public Debt Management Committee are based on assumptions that differ completely from KPC’s capital and operational assumptions, which fall within the core of the work of the KPC that is the body of jurisdiction.

Examples are not limited to crude oil and natural gas prices, profit margins, production costs, rates of exchange on capital programs that have been developed by KPC based on extensive studies and in coordination with international consultants specialized in this field, including operational plans for the operations and projects of subsidiaries.

Therefore, it is difficult to compare results of the Public Debt Management Committee with the results provided by KPC. The sources went on to explain that KPC held many meetings before obtaining the approval of the Council of Ministers to proceed with the borrowing plan.

It provided all the information that was requested by the representatives of the Public Debt Management Committee, on the basis of which the committee submitted its recommendations to the Council of Ministers. The Council of Ministers in turn issued its approval to KPC to move forward with its financing plan. Therefore, KPC believes that the current stage must focus on the procedures for implementing the plan and ensuring its success, in light of the fact that the institution is in dire need of dealing with the expected deficit in the disclosure of the corporation’s cash flows.

The time factor is an important factor for the implementation of the financing plan to meet the needs and obligations of KPC. The scenarios proposed by the representatives of the Public Debt Management Committee were based on the assumption of reducing the capital spending of KPC and its subsidiary companies, and increasing the time period of spending to reach a minimum of 12 years. This is considered as not applicable because of its serious negative effects on the production rates and the fact that it is not in line with the strategic directions approved by the Supreme Petroleum Council. According to the plan of KPC (basic case), capital spending amounts to KD 27.7 billion for a five-year spending period, and the percentage of bonds out of the total financing plan is 50 percent.

The profits due are estimated at KD 8.4 billion to be paid within five years except for the 2013/2014 profits, which amount to KD 1.3 billion. As for the future profits, it is required to keep the profits of the 2018/2019 fiscal year, provided that the payment of the profits of the coming years will start in increasing rates of 25 percent and 50 percent, 75 percent and 90 percent respectively.

The Public Debt Management Committee presented three scenarios to KPC. The first scenario is that the volume of capital spending is estimated at KD 20 billion, with a spending period of 16 years, and the profits due are KD 8 billion to be paid within five years. Also, 50 percent of the future profits are distributed to the state for a period of six years, then 40 percent with a two-year grace period.

The second scenario is that the volume of capital spending is estimated at KD 18 billion with a period of spending for 15 years and with the same accrued to future profits mentioned above in the first scenario. As for the third scenario, the volume of capital expenditures amounts to KD 14 billion, with a period of spending for 20 years and with the same accrued to future profits mentioned above in the first and second scenarios.

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