Project Kuwait: A sell off or sell out?

Nick Wilson looks at the controversy that swirls around a government plan to give the majors a big say in Kuwait’s oil industry.

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By  Nicholas Wilson Published  October 4, 2005

Project Kuwait|~|Project-K-photo-2.gif|~|Reform is in the hands of the Kuwait Parliament|~|This month Kuwait’s parliament is set to vote on a bill that would for the first time in decades de facto give foreign firms a percentage of the oil they find. It divided legislators and ignited a fiery debate that has blazed across the nation’s front pages for nearly a year.

Yet the government’s proposed green light for Project Kuwait would only allow access to four oil fields that account for less than 20% of the nation’s output.
So why all the fuss?

Its opponents say the move would let foreigners help themselves freely to Kuwaitis’ birthright: oil, lots of it, and would set a precedent.

Its proponents say it will boost production and generate more wealth than ever for the tiny country that sits on top of 10% of the world’s proven oil reserves.

Some analysts, however, think it is the government astutely playing geopolitics: let foreign oil prospectors go digging along the border, and should Iraqi tanks rumble over their wells, the majors’ governments will hear their cries and run to Kuwait’s defense.

The constitution bars foreign ownership of the nation's oil, blocking the production-sharing deals that are normal in many countries. Under these contracts companies keep a percentage of what they extract. Project Kuwait would nimbly jump over this obstacle by paying firms a fee per barrel produced. It is not clear, however, how this would work with regards to wildly fluctuating oil prices.

Critics see it as a back-door auction of the nation's family silver.

Member of Parliament Nasser Al-Sane is an outspoken opponent who says the project is bad for the country, and the government “wants to do the project outside the supervision of Parliament."

Its powerful proponents, however, lead by oil heavyweight Kuwait Energy Minister Sheikh Ahmad Al-Sabah, who is Organisation of Petroleum Exporting Countries (OPEC) president, say the state-owned monopoly Kuwait Oil Company (KOC) lacks the know-how and technology to fully develop the country’s reserves.

Yet private companies with foreign consultants and operators on their payroll and which use state-of-the-art technology already operate in Kuwait’s oil fields.

KOC Chairman Farouk al-Zanki said: “In order to really achieve our aims, we really do need the full involvement of foreign oil firms. We need them to get involved in the decision-making process in order maximise benefits.”

Since the 1970s, overseas companies have been restricted to only do contract work for a set fee following KOC’s instructions.
Its supporters say the US $8.5 billion project aims to raise output at the major oilfields of Rawdhatain, Sabriyah, Ratqa, and Abdalli in the north and west from today's 530,000 barrels per day (bpd) to 900,000 bpd.

Three fields lie squarely on Kuwaiti turf, but the fourth, Abdali lies on both sides of the border and is at the centre of Iraqi accusations of Kuwait dipping in to reserves that lie on the wrong side of the fence.

With help from international companies a total of five billion barrels of oil can be produced from the fields over the plan’s 20-year span, and without it Kuwait will only produce 3.8 billion barrels, Sheikh Ahmad said.

He says the net extra oil profits produced by the majors for the country, after taking their fees, will be greater than that which KOC alone can produce, he says.

Not everyone agrees with his figures, however. In a recent report, Al-Shall Economic Consultants doubted that the targeted output of 900,000 bpd could be sustained for more than six years, making the average daily production at 680,000 bpd over the project's 20-year lifetime, or just 150,000 bpd above the current level.

Project Kuwait is an integral part of the plan to massively boost oil output, hitting 4 million bpd by 2020 from today’s total output of 2.65 million bpd. The government requires cash for its ambitious plans to lift crude output, refine more oil, produce more petrochemicals, and invest heavily in ports and plants to boost exports in the next 15 years.

It may be making the precedent–it is the first such deal since the emirate nationalised the oil industry in the 70s–the cornerstone of its economic liberalisation policies, which include opening up the oil industry. The move was put to parliament at the same time as the proposal to give women full political rights, which led many analysts to think the government was prepared to sacrifice women’s rights in the face of expected opposition, in return for getting Project Kuwait passed. Parliament, however, easily passed the voting bill in the summer and agreed to look at the oil bill this month.

The wider democracy and economic aperture are something that Kuwait’s protector, the US government, whose troops Kuwait billets and are busy next door, would like to see. Kuwait is keen for its friendship with Uncle Sam to continue and recently cemented it, donating US $ 500 million in humanitarian aid, including oil products, to the hurricane-hit Gulf of Mexico coast. Shiekh Ahmad said it was his country’s duty to help out following its rescue from Saddam Hussein in the first Gulf war. Furthermore, Project Kuwait could be key to the planned US $40 billion investment over the next 15 years, which it expects both public and private sectors from Kuwait and abroad to fund.

A new terminal is planned for Bubiyan Island, which will handle increased production from the project, and increased capacity will boost refinery and petrochemical production. Foreign firms are in the thick of it but can still only get fixed fees for doing specific jobs in the oil sector whose vital statistics are state secrets.

The government wants to attract foreign direct investment and sell off state-owned businesses (outside the oil sector) to liberalise the economy for the wave of young Kuwaitis who will soon be on the job market. More than 90% of Kuwaitis work for the public sector, which will struggle to absorb the 65% of the population that is under 25.

Project proponents say that Kuwait has previously failed to prepare its oil-dependent economy for the next generation of job-hungry youngsters, by failing to cut this kind of deal with overseas oil Goliaths. According to official forecasts from 1995, when project Kuwait was first drawn up, had parliament gone ahead instead of blocking it, Kuwait would be pumping 900,000 bpd already from these fields.

Wells are becoming older and less productive, and some experts warn that further delays to the project would let the water levels that are rising in some crude reservoirs damage the reserves.

Some project critics, however, think its supporters’ true motives are less altruistic, and there is murky money to be made in agents' fees paid by multinationals, and that such fees often line what in their opinion are the wrong pockets.
Heading off these attacks parliament’s finance committee, which supported the bill this summer, added a clause to it banning the involvement of such middlemen.

And it is not just the bill’s detractors who suspect shady deals go on in Kuwait’s oil industry. Project Kuwait’s supporters say the current procurement system allows oil money to lubricate machines and palms, and cast aspersions on what drives its opponents. Foreign energy majors becoming more directly involved in the northern oil fields would lose some people a lucrative source of income, they say.

Whatever the motives are of both sides, many powerful MPs want to torpedo the plan and keep foreigners’ fingers off the nation’s patrimony.

In a bid to win over such troublesome lawmakers, Sheikh Ahmad denied that he was letting firms slip round the constitution via the side-door and said that the proposal categorically ruled out any foreign ownership of oil.
"It is not based on partnership but on service operation contracts, and foreign companies will be paid in money and not oil," he said.

Whether they scent cash or crude, three consortia led by BP, ExxonMobil, and Chevron who are jostling for a place to drink at Project Kuwait’s wells--a US $3.2 billion prize, which the energy minister says is the return the winning bidder can expect to get during the 20-year investment. This is less than 5% of the project's expected revenue to the state, which is a much lower figure than that which oil companies get in other countries, he said.

Peter Zeihan, an analyst of US-based Strategic Forecasting (Stratfor), a private geopolitical research institute, agreed with KOC that involving foreign oil giants at the decision making level would increase productivity. “The majors are run by geologists and scientists, whose interest is getting as much oil out of the ground as possible. Whereas state-owned firms are run by politicians,” he said. However, Zeihan gave another reason for Kuwait’s enthusiasm for getting US, UK, and French engineers digging on the Iraqi border. “It would give London, Paris, and Washington a vested interest in keeping Kuwait independent,” he said.

Tension between the two neighbours heated up this summer with Kuwait putting up a fence and Iraqi protestors ripping it down, as Kuwaiti border guards fired over their heads. It followed Baghdad’s accusing Kuwait of stealing land and oil–the same accusations that Saddam Hussein made as his tanks followed up his land claims.

Neither Zeihan’s reasons nor Sheikh Ahmad’s words, however, have won over a clear majority in parliament, which MP Nasser Al-Sane warned could still reject the proposal.

"I don’t think that any MP would agree to this.… This is a very serious development and such contracts are in breach of the constitution,” he said.

Parliament has previously supported the government to open up the economy. In 2001 it passed the Foreign Direct Investment Act, which lifted restrictions on foreign banks, protected foreign investors against nationalisation or confiscation, and abolished the requirement for overseas firms to have a Kuwaiti sponsor or partner.

The resulting opening in the economy helped expand Kuwait's infrastructure and oil-related industries. Much of the development involved foreign companies.

But parliament may draw the line at letting foreigners get too near its oil industry, which is at the heart of the debate over the nation’s future and the 99 billion barrels of oil in its reserves.

Kuwait pours some 10% of its oil and gas dollars, which account for 90% of government revenues, into the Future Generations Fund for the day when oil no longer flows. How much cash is in there for tomorrow’s children when that day arrives may come down to the success or failure of the precedent-setting Project Kuwait.


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