Dow dispute dents Kuwait's image

The struggle for control over the country's energy sector has severely damaged its international standing.

Kuwait's energy sector is becoming increasingly isolated from foreign investment because of the deepening division between the government and parliament, experts warn, putting the country's goal of diversifying the economy in peril. A new low in the country's relationship with foreign partners was reached last week when Dow Chemical said it would take legal action to collect at least US$2.5 billion (Dh9.18bn) from Kuwait for the last-minute cancellation of a $17.4bn petrochemical deal.

Dow already operates two multibillion-dollar joint ventures with the Kuwait Petroleum Company (KPC), but it appears willing to close the door on future opportunities in retaliation for what it said was a violation of a final agreement. The Kuwaiti Supreme Petroleum Council, after signing a final agreement to develop a joint-venture petrochemical firm, backed out at the end of last month, days before the new company would have begun operations.

"We were shocked at what happened in Kuwait," Andrew Liveris, the chief executive at Dow, told Bloomberg. "The political process overtook the approval process. We are seeking multiple billions in remedy, and we will pursue all legal options to get that." The deal is not the first multibillion-dollar agreement to fall victim to political opposition in Kuwait. An $8.5bn proposal to develop the country's northern onshore fields in partnership with foreign firms, dubbed Project Kuwait, has been held up since the 1990s because politicians want greater concessions from foreign partners. A $14.5bn refinery remains tied up in a budget committee because the politicians say it circumvented the tendering procedure.

Government officials have long touted refining and petrochemicals as two areas in which the country could diversify away from crude oil exports. Kuwait has the fourth-largest reserves of crude in the world, according to the multinational oil company, BP. While members of parliament who opposed the Dow deal said it fell apart because of poor global economic conditions, not politics, the perception had solidified among foreign firms that Kuwait was not worth the risk, said Valerie Marcel, an associate fellow at the British think tank, Chatham House. Ms Marcel's 2006 book, Oil Titans, focused in part on politics in the Kuwaiti oil sector.

"Foreign investors will be quite put off by the poor investment climate in the oil and gas sector," she said. "No big player is going to invest a lot of time and money in the near term in KPC." Jamaan al Harbash, one of the politicians not convinced of the benefits of the deal as debate unfolded last month, was quoted on Thursday by the Arab Times newspaper as saying Kuwait had become "the laughing stock of the whole world due to this deal".

Kuwait's democracy has never functioned smoothly. The royal family picks the cabinet and tribal and sectarian groups dominate parliament's elections. Friction between the two groups was at the heart of the Dow deal's collapse. Parliament has long been at odds with KPC, which it accuses of offering excessively lenient terms to foreign firms. The collapse of the Dow deal rested squarely on KPC's shoulders, said Mohammed al Obaid, an independent member of parliament.

"Investment in the oil sector is very important, but it should be the right figure. If it's beneficial for Kuwait, the prime minister won't stop it, but he saw the process wasn't going well with KPC. It's KPC's fault," he said. "With the international economy, it's not the right time. I think we should be looking for successful projects, I don't think it will affect other business." But many Kuwaitis doubt parliament's intentions. One prominent academic, who asked that his name be withheld so he could speak freely on the issue, was critical of both the parliament and the government.

In the Dow deal, the oil ministry tried to cut out parliament's role by forging the contract directly between KPC and the US company, he said. "That made people angry." When some politicians realised they were being side-stepped, they exaggerated the deal's potential flaws and threatened to question the prime minister, he said. The government backed down. "Now Saudi or Qatar will enter," the academic said. "The Saudis are smarter than us, and they have one decision maker."

The collapse of the Dow deal exposed problems that had plagued Kuwait's oil industry for years, Ms Marcel said. The challenge facing the country's oil sector was two-fold, she said: parliamentary opposition and management difficulties at KPC. Parliament has fought for control of the oil and gas sector since the earliest days of Kuwait's democracy, when it persuaded the government to take full control of oil assets from foreign firms.

"I think it goes back to the 1970s, when the Kuwaiti parliamentarians were among the first to voice criticism of government handling of oil policy," she said. "The Kuwaiti democracy is very vibrant, but it's immature. There is resource nationalism and there is also political opportunism." Members of parliament were perpetually suspicious that technocrats in KPC were too willing to open up the country's resources to foreign firms, she said. In Kuwait's case, this so-called "resource nationalism" has extended to the downstream refining and chemicals businesses, which is uncommon among the world's major oil producers.

Tensions between KPC and parliament were evident in the debate over Project Kuwait, Ms Marcel said. "Again, they were pushing to get more concessions from the international oil companies. It just stretched the project to its commercial limits: there was no middle ground to be found anymore." The constant interference from parliament, including pressure from members to appoint political supporters to posts within the company, had left KPC demoralised and disorganised, she said. Key middle and top level managers had quit the company and KPC had faced difficulty in making the case for foreign participation to parliament.

A lack of transparency on the Dow deal proved decisive in stirring opposition, said Mr al Obaid. "The oil industry needs investment, but it must be clear from KPC. We need transparency." KPC would need to convince parliament in the longer term that it needed outside help to develop heavier crude oil reserves and to find new gasfields, Ms Marcel said, adding KPC had little experience in either area, and would need the technical expertise of the international oil firms.

"KPC can achieve a lot of expansion without international oil companies," she said. "[But] they'll hit a wall eventually." If the differences cannot be resolved, Kuwaiti society would be the ultimate loser, said Jeremy Cripps, an economist at the American University of Kuwait. "I am concerned because of the lost opportunities for my graduating students. We're educating high-quality students and their opportunities will not be in Kuwait. This could lead to a brain drain."

Mr Cripps said parliament's tendency to block deals was handicapping the public sector and local development. "There are some very big private companies that are recognised as being top-class, but they are all doing their work abroad," he said. "They don't come here because of the bureaucracy." [e-mail] [e-mail]