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Kuwait
Oil Industry
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 . 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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