Kuwait Oil Sector
Oil has been and continues to be the State of Kuwait’s most precious
natural resource. By virtue of the Kuwaiti Constitution, the State
owns and controls all oil resources in Kuwait. The State alone has
the power to exploit, utilize and safeguard those resources (Article
21, Kuwaiti Constitution, Law No. 1 of 1962). As such, the right to
concessions and/or monopolies for the exploitation of Kuwait’s
natural resources, including oil, may be created only by virtue of a
law and only for a limited time (Article 152 and 153, Kuwait
Constitution).
At the time the Constitution was drafted to include these
provisions, the private sector and foreign oil companies owned
interest and had rights in Kuwait oil resources pursuant to various
concessions. In 1975, through a series of agreements and
legislation, these rights reverted back to the State of Kuwait,
represented by various State agencies and/or State wholly-owned
commercial companies, including Kuwait Petroleum Corporation (KPC),
Kuwait National Petroleum Company (KNPC), Petrochemicals Industries
Company (PIC) and Kuwait Oil Company (KOC).
KPC was established in 1980 as a public corporation and is the major
player in the Kuwaiti oil sector. In general, its objects are to
engage in all activities relating to the petroleum industries and
hydrocarbonic materials in all their stages, as well as all related
industries, both within and outside Kuwait (Article 3, Law No. 6 of
1980). Included in the many activities in which KPC may engage in
achieving its objects is the right to form partnerships with other
companies or entities that engage in similar activities and that may
assist KPC in realizing its objects (Article 5, Law No. 6 of 1980).
Historically, KNPC, KOC and PIC were partially owned by the State in
conjunction with private investors. KNPC was established by Decree
in 1960, as a 60/40% partnership between the State and the private
sector, respectively. Its objectives were to engage in the oil
industry inside and outside Kuwait and to engage in any stage of oil
production, including exploration of petroleum and natural gas,
refining and transportation. PIC was established in 1963 between the
State and local private investors as a commercial company for the
purpose of establishing a petrochemical industry for Kuwait.
Finally, in 1974, the State entered into a Participation Agreement
with BP Limited and Gulf Kuwait, creating KOC. The current objects
of this entity are the exploration, exploitation, refining and
production of oil for the local market and for exporting purposes.
Through a series of legislation in the mid 1970s aimed at
nationalizing the oil sector, KNPC, KOC and PIC became fully owned
by the State. Ultimately, by virtue of the 1980 law establishing KPC,
all of these companies were transferred to KPC.
As part of the nationalization effort, Kuwait created several public
entities/bodies whose purpose is to set policies for and monitor the
activities of this crucial sector, including the Supreme Petroleum
Council. This Council, established by Amiri Decree in 1974, is
tasked with setting the general policies of the oil sector, within
the framework of the national economic and social development plan.
The nationalization process culminated in 1986 with the formation of
the Ministry of Oil as a separate Ministry from the Ministry of
Commerce & Industry. The Ministry exercises policy-making powers in
conjunction with the SPC and performs a supervisory role over all
public institutions that are related to the oil sector in Kuwait. As
such, the Minister of Oil is the Chairman of KPC and a member of the
SPC. To date, this remains the corporate and governmental structure
of the oil sector in Kuwait.
In recent years, the Kuwaiti government has proposed the development
of its northern oil fields with the participation of international
oil companies (IOCs). As explained by the KPC Deputy Chairman and
CEO in his presentation at the November 1999 Conference on "The Role
of International Oil Companies in the Development of Oil Fields in
Kuwait," the key objectives of the Northern Oil Fields Development
Project (Project) are: (1) to achieve cost savings and improve
efficiency, (2) to train and create job opportunities for Kuwaitis,
(3) to acquire modern management techniques and (4) to encourage
strategic and economic ties with IOCs. There are four main
principles, according to the presentation, that would govern the
relationship with IOCs. First, the relationship must be consistent
with the Kuwaiti Constitution. Second, Kuwait must retain ownership
of all petroleum produced and revenues therefrom. Third, title to
crude oil and gas will not transfer to IOCs. Fourth and finally, the
relationship will be reflected in an Operating Service Agreement (OSA),
a service type relationship having been determined to best meet
Kuwait’s objectives in the Project. Under this OSA structure, Kuwait
will maintain sovereign control over production and strategic
management, while the IOC will maintain control over the operational
management, acting as a contractor or service provider and employing
a set quota of Kuwaiti labor. The IOC will incur 100% of the capital
and operating costs and will be compensated with a variety of fees
designed to cover these costs, provide behavior based incentives and
reward performance achievements. The types of fees envisaged in the
economic model so far include an ‘old oil’ fee to be paid on
production that could be produced by KOC; a ‘new oil’ fee to be paid
on production above the old oil curve; a gas fee; and an allowance
for the recovery of actual capital incurred and one for annual
capital investments. At the time of the November 1999 presentation,
the government was anticipating the award of one OSA to a
multi-national consortium of IOCs.
There are differing viewpoints among the Members of Parliament in
Kuwait on the need for and the feasibility of involvement by IOCs in
the Project. One view is that Kuwait does not need the assistance of
IOCs in meeting its targets for the development of the northern
fields and, if it does, then the government shoulders the blame for
not developing local skills to undertake the task to be given to the
IOCs. Another commonly held viewpoint is that, while IOC assistance
is needed for the Project, the government must present all aspects
of the relationship to Parliament for approval. Those who advocate
this position believe that the government should present Parliament
with full information on the technical, economic and other relevant
details of the relationship and that Parliament should vote on the
pre-qualification and award procedures and the actual agreements,
all of which should be adopted by a law. A third viewpoint is that
Parliament need only ratify the agreements by Law.
Keeping in mind the objectives of the State, as well as the various
positions of the Members of Parliament, the SPC has recently
approved a draft law on the Project. This law reiterates the
Constitutional principle that natural resources belong to and should
be protected by the State, yet provides that contracts may be
entered into with foreign investors (i.e., IOCs) for the purpose of
developing operational oil fields. In essence, the law provides
that, prior to any agreement, the foreign investor must obtain a
license setting out the permitted activities; the geographical
location; the term, not to exceed 30 years; the terms and conditions
for transfer to another investor, including a foreign one; and, an
undertaking by the foreign investor not to harm the State’s national
interests. This license must remain in force throughout the life of
the OSA, which in most instances may not exceed 20 years, and is
granted by the SPC upon the recommendation of the Minister of Oil.
Pursuant to the draft bill, the OSA will set out the terms and
conditions of the work to be performed, the objectives to be
achieved and the manner of achieving them; the parties’ rights and
obligations; the initial term; the percentage of local labor to be
used by subcontractors, and an undertaking by the foreign investor
to use local suppliers in satisfying its requirements of goods and
equipment. The foreign investor may not receive non-monetary
compensation for its services and must employ a percentage of its
labor from the local Kuwaiti market. Significantly, the draft
provides that the Minister of Commerce and Industry may exempt the
foreign investor from the requirement of having a local agent or a
majority Kuwaiti partner. In terms of rights granted to the foreign
investor under the draft, the foreign investor may transfer or
assign its investment to another foreign investor, it may repatriate
capital and profits, and is entitled to compensation, should the
State take over the Project. Moreover, it may avail itself of one or
more of the following benefits, upon the approval of the Minister of
Oil:
- An exemption from taxes and
tariffs throughout the life of the OSA;
- An exemption from customs
duties;
- An appropriation of real estate
and lands for the purposes of the Project;
- An exemption from restrictions
on imports and exports; and
- Benefits of double taxation
treaties and treaties protecting foreign investment.
Finally, the penalties for violating
the terms of a license or OSA under the draft bill include warning,
withdrawal of privileges or withdrawal of the license and
liquidation of the investment.
The next step in the life of this bill and, more importantly, the
Project, is the presentation of the bill to the Cabinet and,
ultimately, to the Parliament for final approval. Once approved, the
law must be published in the Official Gazette of Kuwait, at which
point it will become effective. KPC had originally set August as the
deadline for the conclusion of this process. Whether or not it would
succeed largely depends on the government’s approach to Parliament
and Parliament’s conviction that the Project may result in a win-win
situation.
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