The reopening of the Kuwaiti upstream to international oil companies has been a hot topic in the industry since the end of the Gulf war more than nine years ago. Reema Ali looks at the complex issues raised by the proposals and the legal hurdles that still need to be cleared if the programme is to go ahead as planned

OIL has been and continues to be the State of Kuwait's most precious natural resource. By virtue of the Kuwaiti constitution, the state owns and controls all oil resources in Kuwait. The state alone has the power to exploit, utilise and safeguard those resources (Article 21, Kuwaiti Constitution, Law No. 1 of 1962). As such, the right to concessions and/or monopolies for the exploitation of Kuwait's natural resources, including oil, may be created only by virtue of a law and only for a limited time (Article 152 and 153, Kuwaiti Constitution).

At the time the constitution was drafted to include these provisions, the private sector and foreign oil companies owned interests and had rights in Kuwait oil resources pursuant to various concessions. In 1975, through a series of agreements and legislation, these rights reverted back to the State of Kuwait, represented by various state agencies and/or state wholly-owned commercial companies, including Kuwait Petroleum Corporation (KPC), Kuwait National Petroleum Company (KNPC), Petrochemicals Industries Company (PIC) and Kuwait Oil Company (KOC).

KPC was established in 1980 as a public corporation and is the major player in the Kuwaiti oil sector. In general, its objects are to engage in all activities relating to the petroleum industries and hydrocarbonic materials in all their stages, as well as all related industries, both within and outside Kuwait (Article 3, Law No. 6 of 1980). Included in the many activities in which KPC may engage in achieving its objects is the right to form partnerships with other companies or entities that engage in similar activities and that may assist KPC in realising its objects (Article 5, Law No. 6 of 1980). Historically, KNPC, KOC and PIC were partially owned by the state in conjunction with private investors. KNPC was established by decree in 1960, as a 60:40 per cent partnership between the state and the private sector, respectively. Its objectives were to engage in the oil industry inside and outside Kuwait and to engage in any stage of oil production, including exploration of petroleum and natural gas, refining and transportation. PIC was established in 1963 between the state and local private investors as a commercial company for the purpose of establishing a petrochemicals industry for Kuwait. Finally, in 1974, the state entered into a participation agreement BP Limited and Gulf Kuwait, creating KOC. The current objects of this entity are the exploration, exploitation, refining and production of oil for the local market and for exporting purposes. Through a series of legislation in the mid-1970s aimed at nationalising the oil sector,1 KNPC, KOC and PIC became fully owned by the state. Ultimately, by virtue of the 1980 law establishing KPC, all of these companies were transferred to KPC.

As part of the nationalisation effort, Kuwait created several public entities/bodies whose purpose is to set policies for and monitor the activities of this crucial sector, including the Supreme Petroleum Council.2 This council, established by emiri decree in 1974, is tasked with setting the general policies of the oil sector, within the framework of the national economic and social development plan. The nationalisation process culminated in 1986 with the formation of the Oil Ministry as a separate ministry from the Commerce & Industry Ministry. The ministry exercises policy-making powers in conjunction with the SPC and performs a supervisory role over all public institutions that are related to the oil sector in Kuwait. As such, the oil minister is the chairman of KPC and a member of the SPC. To date, this remains the corporate and governmental structure of the oil sector in Kuwait.

There are differing viewpoints among the members of parliament in Kuwait on the need for and the feasibility of involvement by IOCs in the project. One view is that Kuwait does not need the assistance of IOCs in meeting its targets for the development of the northern fields and, if it does, then the government shoulders the blame for not developing local skills to undertake the task to be given to the IOCs. Another commonly held viewpoint is that, while IOC assistance is needed for the project, the government must present all aspects of the relationship to parliament for approval. Those who advocate this position believe that the government should present parliament with full information on the technical, economic and other relevant details of the relationship and that parliament should vote on the prequalification and award procedures and the actual agreements, all of which should be adopted by a law. A third viewpoint is that parliament need only ratify the agreements by law.

An exemption from taxes and tariffs throughout the life of the OSA;

An exemption from customs duties;

An appropriation of real estate and lands for the purposes of the project;

An exemption from restrictions on imports and exports; and

Benefits of double taxation treaties and treaties protecting foreign investment.

Finally, the penalties for violating the terms of a licence or OSA under the draft bill include warning, withdrawal of privileges or withdrawal of the licence and liquidation of the investment.

The next step in the life of this bill and, more importantly, the project, is the presentation of the bill to the cabinet and, ultimately, to the parliament for final approval. Once approved, the law must be published in the Official Gazette of Kuwait, at which point it will become effective. KPC had originally set August as the deadline for the conclusion of this process. Whether or not it would succeed depends largely on the government's approach to parliament and parliament's preparedness to approve the recommended measure.

Reema Ali is managing partner at Washington-based Ali & Partners, attorneys and counsellors at law practising all aspects of Middle East law

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