KUWAIT RESPONSE: BARRIERS TO OIL INVESTMENT

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
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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
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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