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WEEKLY NEWSLETTER
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Kuwait
Index
Figure 4. Kuwait: Oil Fields, Gas Fields, and 216 Refineries, 1993
For centuries, oil seepages in the desert had indicated
oil
below the surface. This oil came to the attention of
European and
United States developers. In 1911 the Anglo-Persian Oil
Company
(APOC), which was developing oil fields in Iran, requested
permission to negotiate a concession from Kuwait. The
British
government refused the request (as it was entitled to do
so under
an 1899 treaty that granted Britain substantial control of
Kuwait's foreign policy), but two years later the British
government commissioned a geological survey of the area.
In 1913
the British government signed an agreement with Kuwait's
Shaykh
Mubarak the Great in which he promised to grant
concessions only
to companies approved by the British government,
clarifying and
reaffirming the agreement of 1899. World War I interrupted
another effort to negotiate a concession. By this time,
the
British government had purchased 51 percent ownership in
APOC as
part of an effort to ensure oil supplies for the Royal
Navy.
After World War I, interest in oil grew. APOC continued
attempts to obtain a Kuwait concession. Meanwhile, in the
1920s,
Gulf Oil of the United States began to seek concessions in
the
gulf to overcome its lack of crude oil sources. British
treaties
with most rulers in the gulf, including Kuwait, made it
difficult
for non-British companies to gain access, although the
United
States government pressured the British to provide equal
treatment to United States oil firms. In 1932 Gulf Oil and
APOC
formed a joint company to negotiate a concession in
Kuwait, and
this effort received British government approval. In 1934
Kuwait's ruler, Shaykh Ahmad al Jabir Al Sabah, signed a
concession agreement with the Kuwait Oil Company (KOC),
the firm
jointly owned by APOC and Gulf Oil.
KOC began surveying in 1935. Drilling started in 1936
on the
north shore of Kuwait Bay, but no oil was found. The
second
attempt, in the desert, struck a gusher in 1938 in an area
that
subsequently was called the Al Burqan field, one of the
largest
and most productive fields in the world
(see
fig. 4).
World War
II slowed the development of the industry, but at the end
of the
war, pipelines and other facilities were completed that
could
handle 30,000 barrels per day
(bpd--see Glossary)
of crude oil.
Commercial export of crude oil began in June 1946.
Production
amounted to 5.9 million barrels in 1946 and 16.2 million
barrels
in 1947. KOC subsequently discovered seven additional oil
fields,
and production continued to increase until it peaked in
1972. (In
1954 KOC's parent company, APOC, was renamed British
Petroleum--
BP.)
In the years after World War II, other companies
received
smaller concessions, in particular for offshore oil, but
KOC,
which the government nationalized in 1976 (retroactively
to
1975), retained the lion's share. Subsequent concessions
contained progressively better terms for Kuwait, partly
because
of the entrance of small oil companies anxious to acquire
crude
oil sources and partly because of the activities and
exchanges of
information among oil-producing states. Payments were
substantially higher, the length of concessions was
shorter,
schedules for relinquishing underdeveloped areas were
established, and opportunities for Kuwaiti participation
in the
companies were increased.
The American Independent Oil Company (Aminoil) was the
successful bidder for Kuwait's rights in the Neutral Zone,
receiving in June 1948 a sixty-year concession for
exploration
and production. Aminoil, which was owned by a number of
small
United States oil companies, had a joint operation with
the Getty
Oil Company, which held the Saudi rights in the Neutral
Zone. The
Arabian American Oil Company (Aramco, the main developer
of Saudi
Arabia's oil fields) reportedly viewed the terms given
Kuwait by
Aminoil as unfavorable and relinquished its concession in
the
Neutral Zone, which Getty won. Aminoil started exploratory
drilling in 1949 but did not strike oil until 1953.
Production
began in 1954. Production from the Neutral Zone was shared
between the two countries, and Aminoil paid royalties and
taxes
to Kuwait, whereas Getty paid royalties and taxes to Saudi
Arabia. The zone was partitioned in 1969, but the
partitioning
did not affect the concession arrangements.
A group of Japanese companies formed the Arabian Oil
Company
(AOC), which obtained concessions from both Saudi Arabia
(1957)
and Kuwait (1958) for exploration and production in the
offshore
area of the zone. AOC started drilling in 1959, and
production of
crude oil began in 1961. Production was shared between
Kuwait and
Saudi Arabia. Some AOC production was from the northern
tip of
Saudi Arabia's As Saffaniyah field, the world's largest
offshore
field. Saudi Arabia and Kuwait each purchased 10 percent
ownership of AOC soon after its formation.
From the beginning of the development of the oil
industry,
Kuwait's leaders had wanted to participate actively in oil
policy
and company management. BP and Gulf Oil rejected the
demands of
the
amir (see Glossary)
for a Kuwaiti on the KOC board of
directors, but the Kuwaiti government obtained some
participation
in the AOC concession agreement, although it was more
symbolic
than real.
Frozen out of oil operations by the major oil
companies,
Kuwait started to develop its own proficiency in the oil
industry. The Kuwait National Petroleum Company (KNPC) was
formed
in 1960 with the expressed intention of becoming an
integrated
oil company. Its founding charter allowed it to engage in
almost
any activity concerning oil at home or abroad. It began
with 60
percent government ownership; the remaining shares were
held by
private Kuwaiti investors. The government bought out
private
investors in 1975.
KNPC started operations on a small scale, in part
because of
Kuwait's acute shortage of skilled workers. It bought out
KOC's
local oil distribution facilities and became the sole
supplier of
oil in Kuwait. It participated in foreign refinery
operations and
established subsidiaries and facilities abroad for
marketing oil
products. Departments for exploration and other aspects of
field
operations were established within KNPC to work with
foreign
companies in the concession area that KNPC had received
from the
government.
Using foreign expertise and equipment, KNPC built a
modern
refinery to use gas in the Al Burqan field, which would
otherwise
have been flared, in a hydrogenation process to convert
crude oil
into products and to produce sulfur as a useful
by-product.
Kuwait's crude is heavy and contains considerable sulfur,
so the
design of the refinery was excellently fitted to the local
circumstances to turn out a product superior to that of a
regular
refinery. The refinery at Ash Shuaybah was completed in
1968, but
technical problems initially caused an unprofitable mix of
products. Between cost overruns during construction and a
poor
range of products, KNPC lost money until the problems were
corrected. Nonetheless, KNPC provided useful training for
Kuwaitis in upper levels of oil company management.
As oil revenues began to mount, officials increasingly
favored investing a larger part of the funds in
downstream (see Glossary)
and
upstream (see Glossary)
oil operations. The
petrochemical industry offered fewer obstacles to
industrial
development than most other industries. It needed
relatively few
workers, large capital investments, and substantial oil
and gas
sources--requirements that fit the country's circumstances
well.
Yet despite the apparent advantages, the government moved
slowly,
perhaps for good reason. In 1963 the Petrochemicals
Industries
Company (PIC) was formed, with 80 percent state ownership.
It
began with modest facilities but acquired additional
plants over
the years through purchase of other companies and
construction of
new facilities. In 1976 the government bought out private
investors, and PIC became wholly government owned. PIC's
chemical
complexes were the country's largest manufacturing plants.
A key
ingredient was a gas-gathering system to use the gases
produced
in association with crude oil. Until the late 1970s, a
considerable part of the gases had been flared. In
addition to
the gas-gathering system, the government expanded its
investment
in oil-refining capacity and petrochemical facilities.
Kuwait's goal of real participation in and control over
its
oil industry was achieved in 1976 when the government
bought KOC,
including the refinery and other installations. BP and
Gulf Oil
continued to provide technical services and personnel in
return
for access to oil supplies and service fees. In 1976
Kuwait
concluded negotiations to purchase 60 percent of its
one-half
share of AOC's offshore operations. Negotiations for 60
percent
of Aminoil foundered over the value of assets. In 1977
Kuwait
nationalized the firm, paying compensation on the basis of
an
official estimate of the value of assets. Aminoil became
the
Kuwait Wafrah Oil Company. In 1978 operations of the Al
Wafrah
field passed to KOC, and KNPC took over the former Aminoil
refinery and shipping terminal at Mina Abd Allah.
As oil revenues rose in the 1970s, the Kuwaiti
government
continued its upstream and downstream expansion,
establishing the
Kuwait Petroleum Corporation (KPC) as a semiautonomous
state
organization in January 1980 to rationalize the
organizational
structure of its oil industry. KPC became the country's
national
integrated oil company, with KOC, KNPC, PIC, the Kuwait
Oil
Tanker Company, and the Kuwait Foreign Petroleum
Exploration
Company among its more important wholly owned
subsidiaries. KOC
remained primarily responsible for domestic exploration
and
production of oil and gas, and KNPC was mainly the
refining
subsidiary. KPC also entered into joint ventures with and
purchased shares in foreign companies involved in various
aspects
of the oil business. In 1981 KPC bought the Santa Fe
International Corporation, a United States drilling and
energy
engineering firm. Other KPC activities abroad included
part
ownership in refineries and petrochemical plants,
exploration and
drilling in foreign concession areas, and purchase of
retail
outlets for petroleum products. By the late 1980s, Kuwait
was
producing 20,000 bpd in overseas holdings, primarily in
the
United States and in the North Sea. It was exporting
614,000 bpd
as refined products. Initially, Kuwait sold this oil
primarily to
Japan and Pakistan, but beginning in the late 1980s, it
also sold
through a large West European retail network it purchased,
selling oil under the logo Q8.
Oil production levels fluctuated in the period after
World
War II (see
table 6, Appendix). At first, production of
crude oil
rose rapidly, peaking at nearly 1.1 billion barrels in
1970
before falling to more modest levels. Until 1972 much of
the
expansion resulted from increasing crude oil production.
For the
rest of the 1970s, oil production was substantially lower,
but
higher revenues per barrel financed continued economic
growth.
With regard to prices, Kuwaiti officials followed
moderate
policies between conflicting objectives. Initially, Kuwait
actively supported the Organization of the Petroleum
Exporting
Countries (OPEC), which at times required oil production
levels
below that necessary to cover government expenditures.
Kuwait,
for example, reduced oil production and exports during the
Arab
oil embargo associated with the October 1973 War. The
Kuwaiti
government believed that oil in the ground was worth more
to
future generations than holding such paper claims as
securities
and corporate shares that were subject to price inflation,
exchange-rate risks, and sequestration. In 1973 the
Kuwaiti
government set an oil production limit of 3 million bpd
under
pressure from the National Assembly. In 1976 the
production
ceiling was reduced to 2 million bpd. In the 1980s, a
surplus of
oil relative to demand began to emerge on the world
market, and
oil prices fell dramatically. As surplus oil supplies
grew,
Kuwait's production ceiling was further reduced to 1.5
million
bpd, although actual production was appreciably lower. But
as oil
prices fell, and with it revenues, Kuwait increasingly
resisted
OPEC's efforts to limit its production. In 1986 Kuwait
reluctantly agreed to an OPEC limit of 1.25 million bpd
(not
counting, however, output of the Divided Zone that, during
this
period, was earmarked as aid for Iraq). In 1989 it refused
an
OPEC level of just under 1.1 million bpd. In early 1990,
Kuwait
produced nearly 2 million bpd, a factor that the Iraqi
government
cited in its decision to invade Kuwait in August.
In the 1950s and 1960s, Kuwait economically had been
little
more than an oil well: oil was the source of most of its
revenues, and the bulk of its exports were oil, mostly
crude oil.
But in the 1970s, officials increased refining capacity,
and by
the 1980s, refined products gained in value relative to
crude oil
exports. By the 1980s, Kuwait controlled its hydrocarbon
resources and had created an international oil company,
KPC, that
was among the world's largest corporations. Through its
subsidiaries, KPC was involved in all aspects of the oil
industry
and in many countries of the world. This was a remarkable
achievement in view of the fact that only twenty-five
years had
passed since Kuwait entered the oil industry.
Data as of January 1993
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