Amid output hikes by producers, glut in international markets and bleak demand growth forecasts, oil prices have fallen to their lowest since 2009. On Friday, Kuwait oil dropped a further 84 cents to reach US$31.30 per barrel from $32.14 per barrel a day earlier.
Lower crude oil prices and slightly lower oil production cut the government’s oil revenues by almost half in the first six months of fiscal year 2015/16 (FY15/16). With oil prices likely to remain relatively low for the immediate future, Kuwait’s oil revenues are expected to reach $46.7 billion by the end of FY15/16.
According to a report by the National Bank of Kuwait (NBK), total government revenues were $27.7 billion in the six months to September of FY15/16 — down 45 percent y/y. It is now estimated that FY15/16 will close with a deficit of $5.3 billion or 4.3 percent of GDP, with spending projected to decline by 15 percent and revenues likely to decline by 33 percent by the end of the revenue year.
Meanwhile, the International Energy Agency (IEA) has revised down its forecast for global oil demand growth in 2016 from 1.3 million barrels per day to 1.2 million barrels, continued oil supply glut in the international market and historically high oil inventories, the prospects for revival in oil prices in 2016 looks unlikely.
Forecasts for oil prices over the next few years have also been lowered, echoing the trend in the futures markets. With Brent currently averaging $55.9/barrel for the year as a whole, most analysts expect the oil price to remain at the lower end of the $54 -64 per barrel range next year before rising slowly towards the upper limit in 2017 as the supply-demand mismatch begins to unwind more significantly.
In revising down global oil demand growth for 2016 the IEA was taking cue from the International Monetary Fund’s (IMF) recently released World Economic Outlook, which projected a slightly weaker-than-expected global recovery in 2015 and 2016 on account of more pronounced slowdown in emerging markets, especially China.
However, lower revenues have not stopped Kuwait from going ahead with its development projects. The total value of projects awarded in Kuwait in 2105 climbed to $30 billion by the end of the third quarter. Kuwait’s project market, which has lagged behind other Gulf Cooperation Council (GCC) states in the past, emerged second only to Saudi Arabia in terms of the value of contracts awarded so far this year.
The revival in projects market came on the back of contracts being awarded for several projects, including the New Airport Terminal and the New Refinery at Al-Zour, as well as over $1 billion worth of road upgrades in southern Kuwait.The new Al-Zour Refinery project, for which Kuwait National Petroleum Company (KNPC) signed a $13 billion contract in mid-October, is expected to be completed in 45 months. Once operational, the refinery will have a capacity of 615,000 barrels per day.
In line with Kuwait’s development plan, the government has also shifted its focus to developing the country’s northern region, where it hopes to create a new urban center. The Public Authority for Housing Works (PAHW) has begun distributing plots in South Al-Mutlaa City. Set for completion in 2018, the City with 29,000 residential units will be the largest in the northern Kuwait. Work is also underway at the $1.3 billion Al-Jahra Hospital, which is managed by the AmiriDiwan
On another brighter note for the construction sector, private investment in this sector picked up. Kuwait’s flagship Public-Private Partnership (PPP) project, the Al-Zour North Independent Water and Power Production (IWPP) Phase I remained well ahead of schedule, with three of the plant’s five turbines already operating. In view of this, the Kuwait Authority for Partnership Projects, which oversees PPP projects in the country, has called for bids to Phase-2 of the project.
The awarding of essential new tenders notwithstanding, with declining revenues from oil and bleak prospects for a recovery any time in the near future, Kuwait will have to rein in some of its more ambitious projects, including the Boubyan Island Development project and the Silk City project north of the city.