Even before the current spate of Saudi-led lunacy in the shape of the oil price war with the two biggest oil producers in the world loomed into view, Kuwait’s 2020/21 budget projected a KWD 9.2 billion (US$30 billion) deficit. This will be the sixth year of enormous deficits for the country due to initially production curbs due to the OPEC+ deals and then to plummeting oil prices thanks to the Saudis. Kuwait’s Finance Minister, Mariam al-Aqeel, underlined at that point that the budget breakeven price was US$81 per barrel of Brent, but now of course it is much higher, in keeping with all other OPEC members that followed Saudi Arabia into the ranks of the intellectually bereft.

Al-Aqeel added that the government was likely to try to fill the gap from the state reserve fund to finance the deficit because the National Assembly has so far refused to approve a public debt law that would raise the ceiling on maximum public debt to KWD25 billion dinars. In short, Kuwait, like all of Saudi Arabia’s followers, is in deep trouble and needs every source of revenue it can get, beginning with new oil exports from the Partitioned Neutral Zone (PNZ) that it shares with Saudi.

In this context, Kuwait’s Oil Ministry announced last week that the first shipment of Al Khafji crude oil from joint operations in the PNZ has been exported, and a tanker carrying two million barrels of crude oil is headed to Asia. This shipment comes some five years after the Saudis closed the joint operations in the PNZ for the official reason that the site was not compliant with new environmental air emission standards issued by Saudi Arabia’s Presidency of Meteorology and Environment Authority. According to this ‘august’ agency, a gas leak had sprung in one of its 15 platforms (in addition to producing around 280,000-300,000 barrels per day [bpd] of crude just before its closure the site also produced around 125 million standard cubic feet per day of associated gases). The real reason was that Saudi wanted to show its neighbour who was boss as Kuwait had been increasing its competition to Saudi Arabia in the key Asian export markets at that point to the degree that it was selling oil to buyers in Asia at the widest discount to the comparable Saudi grade for 10 years.

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Additionally, Kuwait had been increasing the difficulty for Saudi Arabian Chevron (SAC) in obtaining work permits to operate in the Zone, jeopardising SAC’s ability to move ahead with its full-field steam injection project in Wafra that was intended to boost output of heavy oil there by more than 80,000 bpd. When Saudi started talking again about levels of oil production and capacity that it has never produced or sustained, respectively, then Saudi’s need to find all the oil it could finally allowed for the re-opening of the PNZ for Kuwait.

Kuwait’s big budget deficits began in the very year that Saudi closed Khafji – in 2014 - as it effectively wiped out its spare capacity in one fell swoop. Additionally, the closure made it all the more difficult for Kuwait to achieve its cornerstone economic plan (‘Project Kuwait’) of increasing crude oil and condensate production to four million bpd by the end of this year, up from just over three million bpd currently. These production targets included the expansion of PNZ production, which at minimum was designated to produce 350,000 bpd this year.

The first year after Saudi shut the PNZ, Kuwait produced just 2.5 million bpd of crude oil and about 200,000 bpd of non-crude liquids, with about half of that crude oil production coming from the Burgan field in the southeast region of the country, which has a sustainable production capacity of 1.7 million bpd. Given that for that year – the first full year of Saudi Arabia’s last disastrous attempt to destroy the then-nascent U.S. shale oil industry - petroleum exports accounted for around 90 per cent of Kuwait’s total export revenues, it is little wonder that Kuwait found its budget spiralling out of control.

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Kuwait then redoubled its efforts to attract international investors into its oil sector, with the initial phase of this development plan being focussed on broadening and deepening its capital markets. This development template not only assures would-be foreign investors of a more liquid capital markets base from which to operate but also affords the host country the opportunities to raise capital, not just through new share issues but also eventually through new good sized corporate and state bond offerings down the line. The core of this strategy was to develop the equities markets towards the aim of inclusion in the key indices used as benchmarks by the international investment community, and initially these plans were proceeding well.

In September 2018, most notably, Kuwait acceded to the FTSE Russell’s emerging-market benchmarks, and the Boursa Kuwait enjoyed a period as the darling of Middle East-focussed investors, with Kuwaiti stocks outperforming most of their Persian Gulf peers at that point. At around the same time, MSCI – the giant of all such benchmark indices – said that it might announce the upgrade of the nation to emerging-market status in 2019, putting Kuwait in the front rank of Middle East investment prospects, alongside Saudi Arabia, the UAE, and Qatar, and a move expected to generate billions of dollars of much-needed international investor inflows into the country.

As it currently stands, though, following Kuwait’s adherence to the latest Saudi adventure and the coronavirus outbreak, news emerged from MSCI last week that the agency is to postpone entering Kuwaiti companies’ stocks into its Emerging Markets Index from May to November, at least.

By Simon Watkins for Oilprice.com

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