Kuwait plans products trading unit, as award nears on final refinery contract
Thursday, Aug 10, 2017
Kuwait Petroleum Corp. (KPC) confirmed plans in late July to establish a trading business.

The move follows a trend set by its less conservative regional peers to venture into the sector and their shared drive to maximise the value of oil production in the face of a weak global market.

The timing, and the stated intention to restrict the new firm’s activity to petroleum products rather than including crude, also reflects particular local circumstances. Commissioning is nearing on two long-delayed projects set to almost double Kuwait’s refining capacity by the end of the decade and as KPC’s international downstream subsidiary finally realises expansion plans.

A final piece of the refinery contracting jigsaw is expected to be put in place imminently – in the form of the award of the package covering installation of pipelines to feed the greenfield refinery belatedly under construction at the southern port of Al-Zour.

KPC’s acting managing director of global marketing, Imad al-Abdulkareem, revealed in remarks carried by the state-run KUNA news agency on July 26 that the firm was considering the formation of a commercial offshoot for trading in petroleum products. He said this would “maximise the added value of KPC’s hydrocarbons production and add more service to operations in the service of the corporation and its customers”.

Reports elsewhere indicated that the government firm had been in discussions with IOCs including BP, Royal Dutch Shell and France’s Total.

The former pair are already working closely with KPC’s core subsidiary, domestic upstream operator Kuwait Oil Co. (KOC), under so-called enhanced technical services agreements (ETSAs). Talks were also said to have been conducted with Swiss-based global trading giants Glencore and Vitol.

After years of stasis, development of Kuwait’s refining sector suddenly accelerated from early 2014 as the two flagship projects, worth a combined total of US$30 billion and due to take capacity from 736,000 bpd to 1.4 million bpd by early next decade, moved into the construction phase.

The Clean Fuels Project (CFP) will integrate the existing Mina Abdullah and Mina al-Ahmadi refineries and raise combined capacity to 800,000 bpd, while the greenfield refinery at Al-Zour will add a further 615,000 bpd – much of which is envisaged being exported.

Kuwait’s domestic consumption was only around 350,000 bpd last year, according to OPEC’s latest annual statistical bulletin, although a substantial portion of the new output will replace lower-quality fuels in supplying the country’s expanding power generation sector.

Meanwhile, Kuwait Petroleum International (KPI), KPC’s overseas downstream subsidiary, bucked a long trend of unrealised expansion pledges in November by acquiring a 50% stake in a joint venture (JV) with Muscat-owned Oman Oil Co. (OOC) to develop and own a new 230,000 bpd refinery planned at Duqm on Oman’s east-central coast.

In early August, KPC also delivered the first 2 million barrels of crude to Vietnam’s new 200,000 bpd Nghi Son Refinery in Vietnam in preparation for the latter’s long-delayed commissioning by the end of the year. KPI owns a 35.1% stake in the facility alongside PetroVietnam (25.1%), Idemitsu Kosan (35.1%) and Mitsui Chemicals (4.7%), both of Japan.

Despite the logic of increasing the value extracted from the huge refining capacity hike, the move into trading – which still requires the approval of the KPC board and the government’s Supreme Petroleum Council – could attract hostility from an opposition-dominated parliament perennially suspicious of the executive’s financial competence and probity.

Other regional firms have already moved into trading. OOC established Oman Trading International (OTI) as a JV with Vitol in 2006 to trade in both crude and products and became fully state-owned in 2015 when the State General Reserve Fund acquired the Swiss-based firm’s stake.

Saudi Aramco followed suit in 2012 – creating wholly owned Aramco Trading to trade the increasing volumes of refined and petrochemical products being manufactured under the kingdom’s own downstream expansion programme.

More recently, Baghdad-owned State Oil Marketing Organization (SOMO) has established Dubai-based LIMA Energy in JV with Litasco, the international trading arm of Russia’s LUKOIL, to market Iraqi crude.

More akin to KPC’s apparent intent is a plan by Emirati counterpart Abu Dhabi National Oil Co. (ADNOC) to set up a trading unit in co-operation with an IOC or trading house. This was revealed in early July as the company unveiled a wide-ranging ‘expanded partnership initiative’ aimed at bringing in foreign investors all along the value chain to assist in the overarching aim of maximising revenue from every crude barrel.

BP, Shell, Total, Glencore and Vitol are again reported to have engaged in talks over the venture – which, unlike KPC’s, is envisaged handling both crude and products.

The Kuwaiti firm’s more immediate priority of ensuring the timely completion of the US$16 billion new refinery at Al-Zour requires the award of the final major engineering, procurement and construction (EPC) contract relating to the landmark scheme. This covers the installation of around 500 km of oil and gas pipelines primarily designed to feed heavy crude feedstock from the oil-processing hub at Al-Ahmadi south to the new facility.

The package – first tendered by KOC in 2014 and retendered earlier this year – is anticipated to be let shortly to Italy’s Saipem, which submitted a low bid of US842 million in late June – narrowly below an offer of US$846.7 million from South Korea’s SK Engineering & Construction.

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