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Wednesday , February 26 2020

What is the right crude price for Kuwait’s future projects?

KPC’s estimate of $98 for oil too optimistic

Kamel Al-Harami Independent Oil Analyst

WHAT is the right price for Kuwait’s future projects? – This is the current argument between Kuwait Petroleum Corporation (KPC) and State Audit Bureau (KAB) concerning the realistic oil price for the coming eight years in order to agree and accommodate KPC’s request to borrow or finance their future projects.

This is in line with other international oil companies and the recent Saudi Aramco’s experience of exposing its balance sheet and showing some debts in their books. KPC forecasts the oil price to be around the $98 level in 2028, but the bureau estimates it to be $70 a barrel. This is a big gap of $28 per a barrel.

The $70 level is provided by Kuwait government to finance the budget estimates. Both sides are trying to prove their point, while KPC is pushing for the bigger figure in order to get a fast approval from State Audit Bureau. However, it is difficult to forecast such a high number of oil price for the coming seven years, knowing that the oil price next year will not be strong and will stay in the $60 level.

The main concern is the production cost to increase from KD 2.3 billion to KD 6.2 billion by 2028, and to increase oil production from 3.1 million by end of 2023 to 3.6 million of equivalent oils in 2028. Another concern is that our Kuwaiti oil industry never achieved its target on time. We are still struggling for a sustainable level of three million barrels, which should have been achieved almost more than ten years ago. We are still waiting for that moment. As soon as Kuwait oil embarks on borrowing from outside financial market, all eyes will be on us. Any delays or hiccups that are likely to occur in the system will affect our grading and financial standards position in the global market.

This could be the reason why the State Audit Bureau is more conservative or for KPC with the worst case scenario for oil price, like Russia which estimated to be in the level of $ 25 per barrel in the coming year. KPC should not be very optimistic about the oil price, considering the current situation of oversupply and the absence of two other major producers in the market like Iran and Venezuela, which are bound to come back. Iraq has been pushing for its production to reach more than six million barrels.

So, OPEC will face its own internal fierce completion alone, while Nigeria is still to comply with OPEC-plus’ reduction. Russia on the other hand barely complies or sticks to any reductions, as its oil companies are quite concerned about losing its market share in light of the shale oils and other oil producing countries globally.

KPC’s future price estimate of $98 for oil is too optimistic. It must revise the estimate and bring it down in order to have meaningful discussions with its lender. Also, it has to be careful with its estimated completion dates of its projects, because its history in this regard is awful.

By Kamel Al-Harami Independent Oil Analyst

email: naftikuwaiti@yahoo.com

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