US embassy cable - 05KUWAIT4481

UNCLAS SECTION 01 OF 02 KUWAIT 004481 
 
SIPDIS 
 
SIPDIS 
 
LONDON FOR TSOU 
DOE FOR PRICE/PI AND SALERNO/PI 
DOE FOR MWILLIAMSON, JGELSTHORPE, AWOMACK 
STATE FOR EB/CBA,EB/ESC/IEC, NEA/ARPI 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EINV, EPET, KU 
SUBJECT: KUWAIT RESPONSE: BARRIERS TO OIL INVESTMENT 
 
REF: SECSTATE 189760 
 
1.  Summary:  The entire local oil industry in Kuwait is 
state-run and the Kuwait Constitution expressly forbids 
foreign companies from investing in the natural resources of 
the country.  U.S. companies can neither purchase local oil 
companies nor obtain equity oil.  There are some very limited 
opportunities for investment in the refining and 
petrochemical sector.  While there is no law expressly 
forbidding the marketing of petroleum products by foreign 
companies, the subsidies provided for local products make it 
virtually impossible for any company to profitably import 
petroleum products.  End Summary. 
 
Purchase of Local Oil Companies Or Equity Oil Not Allowed 
--------------------------------------------- ------------ 
 
2.  U.S. oil companies have been active in Kuwait since the 
1930s, when the Gulf Oil Corporation (later merged into 
Chevron) first discovered oil in 1938 in the Burgan field, 
the world's second-largest oilfield.  Kuwait nationalized its 
oil industry in 1975 by purchasing the interests of the 
international oil companies and foreign companies have been 
barred from direct ownership of any local natural resources 
since that time.  This includes a restriction on ownership of 
companies and/or ownership or control of indigenous oil 
reserves. 
 
Joint Petrochemical Venture Only Current Outlet for U.S. FDI 
--------------------------------------------- --------------- 
 
3.  In the petrochemical sector, the one instance in which a 
U.S. company has been allowed to invest in a local production 
facility is in the Dow Chemical - Petrochemical Industries 
Corporation (PIC) joint venture known as EQUATE.  Originally 
established in 1995 as a joint venture between PIC and Union 
Carbide, Dow Chemical later acquired Union Carbide and is now 
an active partner in the venture.  PIC and Dow both hold a 
42% stake in the venture, with 10% held by the Boubyan 
Petrochemical Company and 6% held by Al-Qurain Petrochemical 
Company, both publicly traded companies on the Kuwait Stock 
Exchange.  The company produces polyethylene and ethylene 
glycol, which are marketed primarily to Asia, Europe and the 
Middle East.  The venture has been extremely profitable for 
Kuwait, opening the GOK's eyes to the potential of its 
petrochemical sector.  Three new projects - an Aromatics 
plant, a second Olefins project and a Styrene plant - will 
bring together the original three investors again, allowing 
Dow a bigger foothold in the market. 
 
Investment in Refineries Not Allowed, Yet 
----------------------------------------- 
 
4.  Although the current refining capacity is completely 
GOK-owned and operated, a new planned fourth refinery holds 
out the prospect of private investment in the refining 
sector.  It is not yet clear whether this private investment 
would be limited to Kuwaiti participation.  It remains 
unclear who would invest in a sector not seen as very 
profitable and how much management control they would 
actually be given.  Recent discussions concerning possible 
Kuwaiti investment in U.S. refining capacity may provide an 
opportunity to broach the subject of reciprocal investment by 
U.S. companies in the Kuwaiti refining sector. 
 
Marketing Allowed, But Who Would Bother? 
---------------------------------------- 
 
5.  Kuwaiti law forbids foreign companies from investment in 
the exploration and production of petroleum products in 
Kuwait, but does not expressly forbid the marketing of 
petroleum products.  The subsidies provided by the GOK for 
local fuel products, however, would make it virtually 
impossible for any company to profitably import products and 
compete with the local products. (Note: Other foreign 
products, such as lubricants and motor oils, are available 
and sold in the local market.)  Super unleaded gasoline, for 
example, is price-controlled and sells for $0.84/gallon.  The 
Kuwait National Petroleum Company (KNPC), which runs the 
gasoline stations throughout Kuwait, is in the process of 
privatizing its 120 gas stations and creating three competing 
chains of 40 stations each, with local private investment. 
Foreign direct investment in these newly privatized gas 
stations is not currently allowed. 
 
Commercial Framework for U.S. Involvement in Energy Sector 
 
KUWAIT 00004481  002 OF 002 
 
 
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6.  No commercial framework exists for U.S. or other foreign 
company involvement in the energy sector.  The Kuwaiti 
Constitution specifies, in Article 21, that "natural 
resources and all revenues there from are the property of the 
State.  It shall ensure their preservation and proper 
exploitation."  Article 70 of the Constitution specifies that 
any "treaties" involving natural resources must be ratified 
as a law by the National Assembly.  Article 152 further 
specifies that "no concession for exploitation of a natural 
resource may be granted except by a law and for a limited 
period." 
 
7.  Recognizing the need for foreign technical expertise in 
its oil sector but wanting to set limits on the actual 
participation of the companies, the GOK promulgated law 
number 67 of 1964 which deals with public energy sector 
tenders.  The Kuwait Oil Company (KOC) added a number of 
stipulations to this law, concerning the conditions for 
foreign companies to be contractors for the oil sector.  The 
stipulations include: that the company participates through a 
public tender; that the company is represented by a Kuwaiti 
agent or partner; that the company must abide by GOK labor 
rules, including mandatory hiring quotas for Kuwaitis; and 
that any disputes between the contractor and KOC come under 
the exclusive jurisdiction of the Kuwaiti courts.  A number 
of foreign oil companies, including U.S. companies, have 
technical service contracts with various elements of the GOK 
oil industry. 
 
8.  In 2001 the National Assembly approved a Foreign 
Investment Law which permits 100% foreign ownership of local 
companies in certain sectors.  In 2003 the law was clarified 
and the specific sectors where 100% foreign ownership would 
be allowed were identified.  Oil and gas exploration and/or 
production was ruled as off limits and not eligible for a 
foreign investment license. 
 
9.  The Parliament is expected to vote this session on a law 
enabling KOC to sign an Operating Service Contract (OSC) with 
a consortium of foreign oil companies.  This law would permit 
foreign experts to further develop and exploit Kuwait's 
northern oilfields.  If the bill passes, KOC will present a 
contract document to three consortia, each of which includes 
a U.S. company.  The consortia will bid on this contract and 
the winning consortium will be granted the right to operate 
the northern oilfields.  The winning consortium is expected 
to make investments totaling $7 to $8 billion for development 
of the fields and management of the reservoirs over the 
lifetime of the proposed twenty-year contract.  The 
consortium's return will be cost recovery plus a per-barrel 
fee.  Although this law appears not to contravene the 
Constitution, the project has been mired in controversy for 
almost ten years.  Some parliamentarians and others view the 
proposal as permitting foreign companies control over 
Kuwait's natural resources. 
 
Cumulative and Annual Inflows of U.S. FDI 
----------------------------------------- 
 
10.  The only recent U.S. FDI in the oil and gas sector would 
be Union Carbide's 42% contribution to the $2 billion EQUATE 
petrochemical plant and facilities in 1995, and then it and 
Dow Chemicals' contribution to facilities upkeep and 
maintenance.  The joint venture achieved its first profitable 
quarter in December 2000, and has been profitable since, so 
the actual inflow of additional investment into the facility 
by Dow is minimal.  With the three new joint venture 
petrochemical projects expected to begin construction soon, 
we can expect additional inflows of U.S. FDI over the next 
few years. 
 
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LEBARON