The viability of changing the energy mix in Kuwaiti electricity production: A fiscal assessment

In an effort to increase oil export revenue and to meet local electricity demands, the Kuwaiti government is planning to replace the majority of crude and petroleum products with imported liquefied natural gas (LNG) in its power generation by 2030.  The basic motivation for this plan is that it will enable freeing crude and petroleum products for exports, thereby offering large fiscal advantages, which are necessary given concerns over sustained low oil prices since mid-2014.  Increasing the share of LNG in power production is also expected to boost the government’s local diversification efforts in energy-intensive industries (such as petrochemicals), reduce emissions, and improve air quality.  Al-Sayegh and Fattouh (forthcoming) claim that, while importing LNG is costly, it is yet more affordable than burning liquids in the power sector, making it a price that the Kuwaiti government “is willing to pay.”

These claims are juxtaposed against a unique backdrop of energy reality in Kuwait:  highly subsidized electricity prices; a fundamental challenge of reforming these prices; large and growing share of domestic consumption of crude oil and petroleum products; high costs of incorporating LNG in the power system; and volatile oil and gas prices internationally.  This paper quantitatively assesses these claims by examining the fiscal advantages of the proposed substation of oil with LNG in power production in Kuwait.  The analysis reveals that the financial viability of this plan depends largely on growth rates of local energy demand as well as international prices of oil and LNG.

By: Manal Shehabi