High oil prices are generating wealth for Kuwait and facilitating a massive construction programme. How is the country’s electricity infrastructure placed to cope with the new demands that will be made upon it?
Kuwait is enjoying the good times. The country may be dwarfed in size by its neighbours Iraq, Iran and Saudi Arabia, but its current sizeable economic boom is yielding a sense of confidence not seen for 20 years. A record number of construction projects are in the pipeline and with these new developments will inevitably come a requirement for more electricity.
Strong oil prices are bankrolling Kuwait’s current construction boom
Kuwait is on course to post a 2004 budget surplus of at least $21.9 billion – the state’s sixth surplus in a row – and there is every prospect that the trend will continue in 2005. Inflation, which in the past has been a problem for Kuwait, stands at just over two per cent. Currently unemployment remains low although with a population growth rate of four per cent, this remains a potential problem for the future.
The economic numbers look good despite some structural weaknesses remaining. In particular, the government’s lack of resolve to drive through economic liberalization plans has created uncertainty in the mind of potential investors. A number of sell-offs under a privatization programme were announced and subsequently postponed in 2004. Economists have also argued for the introduction of income tax law if direct foreign investment is to be attracted. Both issues were put back on the political agenda this year and draft laws are pending.
What the government has done, is to ease restrictions on building regulations and this, combined with the perceived reduced territorial threat, has seen a return of capital and a construction boom in Kuwait. The many new projects include new residential and tourist developments, an urban transit system and a new seaport. Most of these projects are proceeding on a build, operate, transfer (BOT) basis – a route best suited to speeding through new developments and allowing Kuwait to catch up with many of its neighbours in the region, following two decades in the investment wilderness.
Kuwait’s prevailing financial prosperity has been achieved on the back of record oil prices, rising gross domestic product and low inflation. Inward investment in the country, for so long deterred by its strategic vulnerability and the aftermath of the Iraqi invasion, is on the increase and is leading to a surge in economic optimism in Kuwait.
Kuwait has oil reserves of 94 billion barrels, which is nearly ten per cent of the world’s total crude oil. The country’s economy is heavily dependent on oil with gross domestic product (GDP) largely driven by compliance with OPEC quotas and the international oil price. In 2001 the total value of exports was $5.0 billion with $4.6 billion accounted for by oil. Oil production costs are among the lowest in the world at around $1 a barrel and Kuwait is currently pumping around 2.3 million barrels per day (b/d). With sky-high energy prices and increased production, the local Global Investment House is now predicting total export levels rising 30.8 per cent this year to $27.4 billion of which 25.1 billion relates to oil.
The Kuwait Petroleum Corporation (KPC) controls Kuwait’s oil industry. This was established in 1980 to bring together all the state-owned elements of the oil sector and in the Gulf region has the third largest output after Saudi Aramco and Abu Dhabi National Oil Company (ADNOC). KOC has rights to around 150 000 b/d in the Neutral Zone with the rest belonging to Saudi Arabia.
“Project Kuwait”, a plan to double oil production capacity from Kuwait’s five northern oil fields to 900 000 b/d has been mooted since 1994. The $7 billion scheme would considerably increase the participation of international oil companies. Parliamentary opposition to increased foreign involvement has meant the project has made little headway, however a new draft law enabling the scheme was recently submitted to the National Assembly. If approved, the scheme could be implemented by year-end. KOC’s goal is to increase oil production to four million b/d by 2020 involving an investment programme costing up to $40 billion. Kuwait has three oil refineries with a total capacity of around 920 000 b/d and plans have been approved to build a fourth.
Producing 8.3 billion m3 in 2002, Kuwait produces a relatively small amount of natural gas but plans to increase production and imports especially for use in power generation and water desalination. Kuwait plans to establish gas pipelines to Qatar and Iran as well as re-open a pipeline linking Kuwait to Iraq’s Rumaila gas field.
Kuwait’s electricity industry is the responsibility of the country’s Energy Ministry, formed in 2003 through the merger of the Water and Electricity Ministry and Oil Ministry.
Kuwaitis enjoy very low subsidized power prices, which has not encouraged energy efficiency. Per capita consumption of electricity is among the highest in the world, with heavy use of air conditioning and a requirement for large quantities of desalinated water. Demand for power has been growing rapidly in recent years and is expected to continue increasing at a 7-9 per cent rate in coming years. Although oil remains the largest fuel source for power generation, the energy ministry wants to increase the use of gas rather than see it flared off as a waste product of the oil industry.
Kuwait’s five power stations (Doha East, Doha West, al-Subiya, Shuaiba South and Al-Zour South) have a total installed capacity of 9.3 GW however increasing demand has necessitated the construction of additional generating capacity. It has been reported that Kuwait will need to invest around $4 billion over the next ten years in order finance a programme of expansion of an additional 3400 MW. The construction of two new power plants is planned under this programme, the 2400 MW Al-Zour North plant and the 1000 MW Al-Zour South II plant.
In July 2004, consortia were invited to pre qualify for the contract to build Al-Zour North. The estimated $2.4m project calls for the construction of a steam plant of five turbines, each with a capacity of 500 MW. The project will include a desalination element using both multi-stage flash and reverse osmosis technologies to produce 682 million litres of water per day.
Germany’s Siemens is the engineering, procurement and construction (EPC) contractor on the Al Zour South plant, 80 km south of Kuwait City. Siemens g390m ($512m) turnkey contract includes the provision of eight SGT5-2000E (formerly called V94.2) gas turbines, associated generators and instrumentation and control, the first of which were connected to Kuwait’s power grid in time for 2004 summer peak period. The power plant can run on both gas and diesel oil and was completed and officially opened in March 2005.
Kuwait has a relatively modern electrical system, however, an unplanned power outage in November during maintenance work on a transformer led to the shutdown of the country’s three oil refineries.
It has an interlocking computer-controlled grid with multiple redundant circuits to permit automatic switching and avoid loss of service when problems occur. All power is routed through a control centre at Jabria and distributed using approximately 4000 transformer sub-stations and 3000 miles of above and below ground high voltage transmission lines. Fuel is provided to the power plants through pipelines leading from the oil refineries.
Kuwait has agreed to take part in a proposed grid link-up with other Gulf Co-operation Council (GCC) countries. By interconnecting their electricity grids the six GCC countries will be able to access spare capacity in order to met peak demand periods and reduce the need for additional generating capacity. The first phase of the project will link the electric grids of Saudi Arabia, Kuwait and Bahrain at a cost of $1.2 billion. The six countries concerned decided to involve the private sector in building and operating the interconnected system. A company has been formed, responsible for project construction and operating and maintainence once it goes into service with the share of the governments in this company not exceeding 35 per cent.
Kuwait has some of the lowest power prices in the world and the government may reduce subsidies in order to try and cut its present electricity waste. Current high oil prices should generate the finance for additional investment needed in the electricity infrastructure. The current expansion plans for generating capacity, along with the added security of supply offered by the planned grid interconnections, should enable demand to be met in the coming years. It does however remain a possibility that, with both growth and construction plans mushrooming in Kuwait, expansion plans for power generation may needed revisited sooner than planned.
As the economic impact of the invasion by Iraq fades and confidence in the country returns, Kuwait is likely to see increased foreign investment. If there is a cloud on the horizon, then it is the domestic security situation in the light of a series of shootings in January. The security focus is now on the home grown threat rather than a threat from across the border. MEE