A growth period for KUFPEC

What was the idea behind altering KUFPEC’s long-term strategy?
Previously, the company had invested in a variety of projects around the world. The idea for us is to high-grade the portfolio by shedding a lot of the smaller, non-core assets and concentrating on a smaller number of large assets with world-class operators that provide learning. Our present strategy has not changed much from that perspective.
Our previous strategy called for us to reach production of 200,000 boepd by 2020. The significant and persistent downturn in oil prices and the wide gap between expectations of sellers and buyers during the period of 2015, 2016 and 2017 created very few opportunities for us to grow without taking undue risks. We saw that acquisition valuations done during the downturn were simply too dependent on expectations that oil prices would quickly rebound. We kept our powder dry during the downturn, but it impacted our growth; we were not able to grow as fast as we originally thought.
When we looked at our strategy again in terms of technology and capability transfer in our overall global strategy, we thought that we could target a production of 150,000 boepd by 2020 instead due to the types of projects that we prioritised during this period and the mix of assets that we have.
There was significant uncertainty during this low period. We did not want to maintain a commitment to 200,000 boepd with all the capital outlays that it required. We will do another review in 2020, and every year we do a health check of the strategy. If the situation in the market provides the opportunities for us to grow even faster, we will. In the meantime, we have decided that 150,000 boepd by 2020 is a good target.
We want to maintain 12 years of reserve life at 150,000 boepd for 20 years, from 2020 to 2040. This comes out to about 650,000 boe of total, constant reserves. We need to make significant additional investments in high-quality assets to achieve this goal.
We prioritise assets that provide opportunities for us to deploy our – or our sister companies’ – expertise in technology and reservoir management, or those projects that allow us to gain such learnings to deploy them in Kuwait. Every project that we execute, however, must stand on its own legs financially. We will not enter into a project or investment for purely strategic reasons if it does not stand up financially. In the end, we have to show our shareholders that we are delivering value.

Have your production rates increased on producing assets in the last year?
The year 2017 was good for us from a production point of view. We weathered the price downturn that started at the end of 2014 by upgrading our portfolio, high-grading it and moving to the high-value assets that have always been successful for KUFPEC. Our production numbers increased. We started last year at around 60,000 boepd and reached a high of about 87,000 boepd in the same year. We reached 100,000 boepd in 2018.
We are proud that we are approaching production of 25,000 boepd from Norway, having come from almost zero production from the country at the beginning of 2017. This is due to the efficient start-up of the Gina Krog and Sleipner facilities. Production remains strong from those assets, and the price uptick over the past few months has added additional value to that asset, even more than we had modelled.

What international markets do you think will bring you the most activity moving forward?
Our focus right now is to grow in places where we have a footprint. A project that fits ideally within our future growth prospects is the Kaybob Duvernay shale gas and condensate project in Alberta, Canada. That is an asset that will carry the company for the next few decades. It was a fantastic acquisition that we made at the right time. We will be drilling a few thousand wells, with a multi-year ramp-up in production, all while providing our engineers world-class experience in shale development.
In the MENA region, the essential focus is Pakistan, which remains the largest producing country within our portfolio and it is where we have traditionally done very well. We are the second-largest international company working in Pakistan and we continue to look for growth opportunities there through exploration. We have an excellent working relationship with the government of Pakistan and also with the state-owned companies.
In China, we have been active for a few decades at the Yacheng facility, where we remain joint-venture partners. We are looking for opportunities to grow the gas capabilities around that asset. Over time, the gas production profile of the existing fields will drop. We will need to replace that gas, and that is why we are committed to doing additional exploration in nearby fields that could be tied to the facility.
In Southeast Asia, our focus covers Indonesia and Malaysia. We have been in the Natuna Sea for years and it has been fantastic for us. Malaysia is also a very strong growth prospect for us.
Additionally, Australia is one of the central focuses for us over the growth period. The major addition we are looking forward to in 2018 is Wheatstone’s second train. Once that comes on line in Q2 2018, we will be producing well in excess of 100,000 boepd on a corporate level.

Are you looking into entering the US market?
Our North American hands are relatively full right now with our Canadian asset. However, we continue to look for opportunities where we can expand our unconventionals knowledge – not just in gas and condensate, but on the oil side as well.
We think the deals that have been done in the US over the past few years for the prime acreage in Texas and other places were done at some rich valuations, valuations we did not think were justifiable from an economic point of view. The assets that we are interested in will usually be the more expensive ones that companies do not want to give up.
The type of opportunity that we are mostly interested in is one in which we partner with a reputable operator and co-develop a field, as opposed to a company selling out of an asset.

What kinds of experience and deals are you providing Kuwaiti companies?
An essential focus of our strategy is how we can provide technology and capability transfer to the upstream sector in Kuwait. We do that through a close collaboration and partnership with KOC and KGOC [Kuwait Gulf Oil Company] to provide opportunities for their engineers in our projects around the world.
We built in the right for us to second engineers and other experts into the acquisition agreement for the Canadian Kaybob Duvernay project. This is not for training, but to be part of the asset team. This is important for KOC because it gives them exposure to practices and capabilities of an IOC on a world-class scale and exposes them to a type of resource that exists in huge quantities but has not been developed in Kuwait, that being shale.
On the downstream side, one of our KNPC colleagues has been working at the Wheatstone LNG facility in Western Australia with a top-notch IOC and a world-class EPC contractor. His experience provides tremendous value to KUFPEC and to his company, KNPC, especially now that KNPC is executing multi-billion-dollar refinery revamp projects.
Just as important – if not more important – is the knowledge transfer of reservoir development practices that KOC will ultimately have to do. Most of our production comes from offshore operations, and KOC has only recently gone into offshore. There is a lot of learning that we can share with them, either in terms of technology or how to develop offshore fields. We will concentrate on this as part of our strategy.
As part of the process of thinking holistically among K-companies, we are looking with our siblings at PIC [Petrochemical Industries Company] to take some of the gas that we are producing and use it in their petrochemical crackers in Alberta to extract the full value out of the hydrocarbon, as opposed to selling it into a pipe where we get less revenue.

Will your gas sales benefit Kuwaiti companies such as KPC?
About half of the gas that we produce out of the Wheatstone facility is already sold on long-term supply agreements. The other half is sold in a long-term supply agreement, but we added a break clause in that agreement so that we would be able to supply a base quantity of secure supply if and when KPC needs it.
As it stands now, the gas is sold on these long-term agreements at price levels and commercial terms that are very favourable to us as a seller and KPC as a buyer because they are able to go out and secure long-term supply agreements at more buyer-friendly terms. It makes sense for us to keep selling it to our customer and for them to keep buying off the market at a lower price. However, we recognise that we are in this project for the next two decades and probably longer. The market may change over time, and once it does we are able to quickly supply base quantities of gas.
That has been helpful for KPC. The marketing team there knows that they have KUFPEC LNG in their back pocket when they sit down to negotiate terms with other sellers; they can get LNG from KUFPEC and are not really beholden to market terms.
Typically, you will not take molecules from Australia and deliver them to Kuwait because of the distance and the boil off in the transportation. In cases like that, what we would do is swap with Japan or Korea and do swaps with our suppliers coming out of the Middle East or other places. That is a win-win situation. It is something we will look at once KPC decides it wants that type of gas.

Are you looking to expand into more gas developments?
Wheatstone is our only LNG asset at this time. If new opportunities come along, that is another story. However, we will continue to look for ways to increase capacity at Wheatstone if we find additional gas. That remains the central focus for us in our exploration activities in offshore Western Australia. Having fields that can deliver more gas to the Wheatstone facility could justify building a new train, which will always be cheaper than beginning a greenfield project. The resultant LNG would therefore be advantaged.

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