The Petroleum Economist Energy Strategy Forum
Financing Future Kuwaiti Energy Projects
26th January 2016
Sheraton Hotel, Kuwait
Very warm greetings to all of you this morning
It gives me great pleasure to welcome you all here today to this Second Energy Strategy Forum.
Low oil prices have been a prominent feature of the market since the second half of 2014, and could stay lower for longer; posing challenge to our industry, but providing an opportunity to structural reforms, to achieve long-term benefits for countries.
Global exploration and production (upstream) spending is forecast to fall from about 850 billion dollars in 2014, by more than 20%, in 2015, while the level in 2014 over 2013 had increased by 3%. It will take time, probably two years for these changes to have an effect on future supplies. Global upstream spending is expected to decline by 18% in 2016. This would be the first time since 1986, that consecutive declines in spending were recorded.
It is a common sense that mature producing fields globally have an average decline rate of around 5%, while world oil demand will continue to expand at a range of 1 – 1.5 million barrels per day annually , which means that the world markets would need some 5 – 6 million barrels per day of new crude annually. This shows the importance of continuity of investments in the upstream globally for the sake of stable markets, and to avoid volatility as well as spikes in oil prices.
Producers of crude oil have financial surpluses and tend to redistribute income via investment. The scale of the global effect is significant. That boost is then amplified if it generates a subsequent lift in confidence, encouraging companies to invest and spend.
We, at Kuwait Petroleum Corporation recognize that it is also a great risk if we do not make investments.
The Kuwaiti oil sector strategic directions to 2030, which covers a spectrum of various functional areas, do cover in detail the road map to support the Kuwait Development Plan through full program to enhance the role of the oil sector to support the Kuwait economy in ways to create adequate jobs, promote and train Kuwaitis, and diversify away from oil. KPC focus is on the petrochemical sector as a means to diversify.
We anticipate an expenditure of 100 billion dollars over the next five years to achieve this target, of which half of it is already committed to specific identified projects.
We strongly believe that national caliber is of great importance to ensure competitive edge for KPC and execute the strategies; hence, we have undertaken various training programs to promote overall capabilities, technical as well as leadership.
Kuwait Petroleum Corporation (KPC) is well recognized as one of today's top ten oil companies, and a leader in providing safe, secure and clean energy to the global markets.
KPC will continue its role in the market, KPC has set the 2030 strategy, which required launching many mega projects including investing in refining/petrochemical outside Kuwait, as well as building Al-Zour refinery and Clean Fuel Project, besides increasing the daily crude oil production to reach 4 million barrel per day by 2020.
All that being said, KPC will look into each project separately since each project has its own characteristic and economics, which gives KPC the capability to explore different financing options such as Corporate Loans or Project Financing for the projects outside the country through Reserve Base Lending (RBL), and cash flow base financing.
As you are all aware, financing will increase the internal rate of return (IRR) of the investment.
Moreover, it will give KPC the opportunity to utilize the cash for other projects, which lessen the prudent in the overall 5-year CAPEX program.
KPC being there in this arena will familiar itself in the capital and financial market.
In addition, local financing has great impact in the local economy.
More importantly, financing will help in establishing more discipline culture in KPC subsidiaries by funding their projects on a stand-alone basis based on their cash flow.
Furthermore, among the drivers and in line with our strategy, is to engage the private sector to contribute effectively in stimulating productivity and local economy.
Financing will be through different means; (1) the Export Credit Agencies, (2) Commercial Banks, (3) and Financial Institutions both locally and internationally.
In this regards, KPC has succeeded in signing Memorandum of Understanding (MOU) with K-sure and KOEXIM, the Korean Credit Agencies, totaling US$ 11bn to finance the upstream, downstream, petrochemical and transportation activities of KPC and its subsidiaries.
KPC will continue in this direction and work closely with the international ECAs such as the Japanese and the European ECAs to strengthen the relationship.
KPC also is studying other means of financing such as Bonds, Sukuk, project bonds and this will open up the possibility of KPC being rated by the major international credit agencies.
I wish to emphasize that along those lines stipulated in my earlier remarks, we will have the financial requirements as well as the technological expertise with the signing of the Enhanced Technical Services Agreement during the first Quarter of 2016.
In conclusion, it is essential to highlights that the oil sector is facing the challenge of weak prices, and recognize its role within Kuwait to rationalize the overall unit costs in line with the guidelines that were outlined recently by HH the Amir of Kuwait Sh. Sabah Al-Ahmed AL-Sabah, and hence we would address the issues of revisiting the structure costs objectively while maintaining profitability and commerciality.
I am sure the discussions and deliberations today will be of great value to the oil and gas industry.
Thank you for your attention.