Business as usual with modificationsJune 11, 2020
Assaf Al Salem, managing director of Al Tharwa Al Muttahida General Trading & Contracting, talks to The Energy Year about the strength of Kuwait’s economy, its ability to weather low oil prices and the government’s early actions to combat the spread of Covid-19. Al Tharwa provides services in equipment trading, EPC contracting and chemicals, and focuses on partnerships with international firms.
How has your company been coping with the crisis, and how have you adjusted your operations to face this unprecedented challenge?
We are a subsidiary of a larger group, and our mandate is to represent large multinational companies in Kuwait. In the past, that was done by providing an agency mandate, but today we are more of an active consultant – and less of a silent agent – in charge of facilitating approvals and tenders of companies involved in the mega-projects sphere. We have low overheads, as the companies we represent have their own staff and rely on us for specific tasks.
Given the nature of Kuwait, a lot of our work is in Arabic for Customs clearance, work permit requirements, etc. The companies we represent have the financial strengths and capabilities to keep going for a few months, so at the moment it’s so far so good. We have no red flags, and the oil industry in Kuwait is quite stable despite issues with oil prices. We also rely on downstream in our approach with IOCs and future business developments.
Would you say that the downstream segment is more resilient in the face of this crisis than the upstream?
If I were to go more specifically in downstream, I would say that downstream demand has reduced in certain sectors but has remained strong in others such as paraxylene, propylene, polyethylene and materials supplied to segments like packaging, plastics, etc. A lot of the personal protective equipment is experiencing a strong demand today. These are not offsetting reduced demands from areas like the automotive and other very petrochemicals-dependent sectors, but there is support there, and at the same time we experience a lowering of feedstock prices.
There is a way that economics can work, especially if China goes back on line supporting the demand. At the same time, many petrochemical factories in the US are experiencing a strong lack of capex, so we are witnessing balancing on the supply as well as on the demand side. It’s definitely less gloomy than the upstream.
The margin for producing high-density polyethylene used in tubs and pallets has rallied to roughly USD 500 from less than USD 250 in late-2019 when regional margins were pressured by the US-China trade row and worries about its impact on manufacturing across Asia.
While insufficient capital is becoming a concern worldwide, Kuwait remains strongly capitalised. Does that leave room for rebalancing?
Absolutely. Many of the IOCs we work with are thankfully in very strong financial positions. They have shifted their capex from upstream to downstream. For the state of Kuwait, the same happened: the 2040 Kuwait plan was aiming for 4 million bopd. That has been reduced to 3.2 million.
That capex was shifted to petrochemicals and energy projects including wind and other renewable energies. We see an alignment of strategies between many of the IOCs and state-owned companies. This was already happening before, but the coronavirus situation has accelerated that movement, and it will create many deeper synergies between IOCs and NOCs.
Did you experience a variety of reactions from the international players you work with in the face of the crisis?
This situation highlighted to us the fact that before, collaboration was based on low feedstock from state-owned companies and specific technologies, expertise and know-how from IOCs. Right now, what is dominating the scene is resources, specifically investment resources. EPC companies are suffering due to staff shortness, and there is an opportunity for these types of entities to share one another’s resources. There is now an emphasis on the synergies and ways of saving money to make money.
There are calls for energy paradigm shifts on the back of this crisis. Do you foresee such changes, or will the old world be back as soon as the turmoil ends?
We may see an acceleration on the renewables in Europe and the US. These projects are very capital intensive and the returns are more on a societal level than from a capital point of view. What people realise through this coronavirus pandemic is that the environment has improved all over the world and that the quality of the air has improved dramatically due to the industrial shutdowns. It is one way of convincing people of the way forward.
But as resources are becoming scarcer, these projects are also expensive and capital intensive. Companies need to look at the overall benefits of such projects, but not from a purely financial point of view. Companies have not dramatically reduced their renewable projects side because they do understand the importance of these projects in society.
We are experiencing a perfect storm of oil prices crashing and the global pandemic taking hold of the world economy. Meanwhile, Kuwait has agreed to production cuts in line with its OPEC commitments. How do you square this equation of low prices, reduced demand and reduced production, and where do you draw your optimism from?
The oil market has had a month of significant recovery. Since the historic cuts by Saudi Arabia and Russia took hold and the US shale industry began to contract, crude prices have jumped around 70% and seem to have established a floor at USD 30 a barrel and a trading range of around USD 35.
That is nowhere near enough for oil-producing states that count on energy revenue to fund their budgets. But it is a move in the right direction after the carnage of “Black Monday.” It shows that the oil market can be at least partly regulated by supply actors, even in the midst of the most savage demand destruction in history because of global economic lockdowns.
Kuwait has the lowest break-even point with regards to the oil prices. The cost of production is very low, which puts Kuwait in a very unique situation. Kuwait never went to the debt market. That puts the country in a very good situation. On the other hand, Kuwait has a very high wage bill on the back of diversification. The country has a very unique opportunity to diversify its oil and gas industry into petrochemical projects specified to the requirements of the new world after coronavirus. Kuwait could be in a unique position to supply the world.
The other source of realism is that oil is experiencing negative pressure on prices, with storage being in large demand. Meanwhile, the IOCs and Kuwait have set a crisis budget of USD 25 per barrel. So, things will be able to continue, capex will not be eliminated and new projects will happen. It’s business as usual with some modifications. With oil now at USD 16 as of early-May 2020, I don’t see it as impossible to see support from the demand from China in June or July and a lot of this oil finding buyers.
We are definitely in a short-term crisis in addition to a long-term decline, but for Kuwait, USD 25-30 per barrel is not as big of a disaster as for other countries.
How do you rate the reaction of the Kuwaiti public authorities to the crisis?
Kuwait was one of the first countries to close its borders and go for bold moves such as fully quarantining certain areas. That allowed the country to contain the spread. The overall response has been sufficient to contain the spread. The overall response is quite sufficient. They are taking experience and observations from a team that came from China to specifically learn how processes inside the hospitals should be because a lot of the medical staff were being affected. Hopefully thanks to that, hospital beds won’t be overwhelmed, and hopefully we will peak soon and start the decrease like the other countries.
How long can the energy business community of Kuwait hold on through this crisis?
The duration in which some companies can survive really depends on the stance that the Ministry of Finance takes in Kuwait. The ministry needs to direct the central bank to fully support the local banks in a contingency financing method to allow liquidities for all companies that have been suffering through this pandemic, which is basically all companies. We are waiting for this to fully materialise.
Their approach has been to try to increase overall support for the country by trying to secure some of the country’s reserves that are held in various ministries and oil companies. However, more traditional approaches such as immediate aid packages for private companies is the best way forward without bureaucracy and the red tape. I am very sure that the people in charge at the Ministry of Trade and the Ministry of Finance place emphasis on Kuwait’s private sector because it is one of the ways in which Kuwait can diversify its economy in addition to mega-petchem projects.
The private sector today represents about 7% of the Kuwaiti economy, and it needs to be supported, continue to grow and become the beating heart of Kuwait’s local economy.
Are there any talks of possible delays on the Olefins 3 tenders or any of the mega-projects coming up?
Right now, there is no news of any delays. It’s because the Kuwaiti strategy of diversification into petrochemicals is very essential to the survival and future financial strength of the country. The opportunity is a very large one for the country because of the feedstock, the international customers, etc. Also, from an investment point of view, these projects will come on line in three years once they go through FEED, construction, etc. We will be in a post-corona world then.