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KPC’s
origins are rooted in epic drama worthy of any Hollywood classic. It
is a child of the turbulent 1970s , when conflict scared the Middle
East and world oil markets followed a roller coaster ride. These
were the twilight years of the colonialism and the coming of age of
nationalism when the people of the developing world were demanding
their own sovereignty, especially over their national assets.
To understand the context of KPC’s birth one must understand the
forces of those times. Kuwait had been fully independent since 1961
and a UN member since 1963. Kuwait enjoyed a fully functioning
democratic Parliament with ambitions for ensuring that Kuwait had
full control over its own destiny and that her reserves were
conserved for future generations. Several other Arab countries had
completely nationalized their oil industries. Iran had done so as
early as 1951. The 1973 Arab Israel war had just been fought and
OPEC had become a force to be reckoned with. Great Britain had
withdrawn from the Gulf, yet Kuwait’s greatest physical hydrocarbon
resources were still the property of the original foreign KOC
concessionaires, the UK’s BP and America’s Gulf Oil and had been
since 1934. The situation couldn’t continue; it was a question of
national sovereignty.
In fact an agreement had been reached between the KOC partners and
Kuwait’s former Minister of Finance and Oil Mr. Abdulrahman Al
Ateeqi, in October 1972 for the government to acquire 25% of KOC
rising to 51% in 1983 but that was not satisfactory to Kuwait’s
parliament who rejected it. The popular demand for sovereignty over
the country’s resources was too great for that. The parliament
concerned that the oil was being extracted too quickly and being
converted into devaluing dollar also instructed KOC to limit
production. At the time, BP and Gulf concerned to get as much as out
of Kuwait before KOC was nationalized were pumping and annual
average of about 3.3 million bpd even reaching 3.7 million bpd. This
only increased pressure for nationalization. The first concrete move
towards this came in early 1974, when the Kuwaiti State acquired 60%
of KOC.
At the time, Kuwait’s return on the oil industry, apart from jobs
for its citizens and agency opportunities was through royalties on
the volume of oil pumped and a share of the profits through taxation
from KOC and Aminoil, the American consortium which had held the
Neutral Zone concession since 1948 and had built the Mina Abdullah
Refinery in 1958.
The acquisition was under what was known as the ‘Participation
Agreement’, dated January 29th 1974 and ratified by Law 9 of that
year. The question has often been raised as to why Kuwait did not
then take over all of KOC. The concept of ‘participation’ being
partial ownership achieved by negotiation rather than complete
nationalization was devised consciously because outright
nationalization would disrupt relations between with the oil
companies who controlled access to the markets, and would put the
exporting countries in the business of selling oil. Besides being a
matter of sovereignty, oil is also very much a business. Kuwait
would have to compete with other exporters for markets. Fears were
that this would lead to a dramatic collapse in the price structure
as each producing country tried to meet its national budget in the
face of declining prices by moving larger volumes of oil to the
market. Although several other major OPEC producers had gone the
path of outright nationalization, it was not something which Kuwait
was ready for at the time. The original 1974 Participation Agreement
called for a review if the relationship between the Government and
BP and Gulf prior to the end of 1979. However, events moved quickly.
In august 1974 the government formed the supreme petroleum council,
Kuwait’s paramount oil body to consider how best to build the new
indigenous oil industry. At the time, the Ministry of Finance and
Oil were one organization, but on February 9th 1975 they were split
into separate Ministries with Mr. Abdulrahamn Al Ateeqi assuming the
Finance portfolio and Mr. Abdul Mutallab Al Kazemi being appointed
the Minister of Oil. The following month, Kuwait announced that it
would take over all of the oil industry and entered into discussions
with the KOC partners, BP and Gulf. By December 1975, an agreement
had been reached whereby the Government acquired the remaining 40%
of KOC. The final agreement was signed for Kuwait by Oil Minister
Abdul Muttaleb Al Kazemi, for BP by Mr. P.I Walters who later became
BP’s Chairman and for Gulf by Mr. M.LRalston. Parliament approved
the deal with Law 10 of 1976.
But Kuwait was still a long way from having a fully integrated oil
industry. It was not in the same position as the oil majors, who had
established markets for the oil from oil fields who could refine it
and transport it to markets.
Now that the Government had at least the most important part of the
industry-the oil fields- in its hands, it had to figure out how to
make the best use of that resource.
Perhaps the most important factor then was the establishment of the
Supreme Petroleum Council which brought together some of the best
minds in the country to consider how to plan for the future, but
without the problems of bureaucracy. They were able to get to the
point quickly and to make recommendations to the Government. The
role of the Ministry of Oil also changed temporarily. Prior to
nationalization its main function had been overseeing the operations
of the foreign oil companies which produced Kuwait’s oil and
managing relationships with other oil producing and consuming
countries. 1975 saw the takeover of KNPC and PIC followed in the on
March 16th 1976. Aminoil with its Neutral Zone operations and Mina
Abdullah Refinery was nationalized on September 19th 1977. The
Kuwait Wafra Oil Company was formed to take over its operations.
The development of Kuwait’s oil industry was given a great boost in
early 1978, when Sheikh Jaber Al Ahmad Al Sabah became the Amir.
Sheikh Ali Al Khalifa Al Sabah was appointed Minister of Oil and
immediately went to work on how to consolidate Kuwait’s oil industry
into a world class player. The Government acquired KOTC on June 17th
1979.
Performance through Integration
With all the major pieces of the industry now in its hands, the
Government put the final touches on how to make them work together
in the most effective manner possible. The answer was KPC. It was
formed in January 1980. The shares of KOC, KNPC, PIC and KOTC were
transferred to the new Corporation. KPC successfully welded all the
oil companies into one integrated oil industry and the new structure
allowed central planning of the industry with more effective and
efficient distribution of the work, close coordination between
various elements, and the better use of engineering economies of
scale which are so important in a thriving oil industry. Each
company was to focus on their own activity which provided the
commercial flexibility necessary to run a successful oil business.
KPC took over the function of marketing Kuwait’s oil outside Kuwait
from the Ministry of Oil.
KPC began expanding its operations worldwide. KUFPEC was established
in was formed in 1981 with the responsibility of exploration and
production outside Kuwait and in 1983 Kuwait Petroleum International
was set up in London and proceeded to build a European wholesale and
retail network by acquisition and development.
KPC’s growth over the years in now a legend. Kuwait is now truly the
mistress of her own oil industry and KPC is now an oil major by all
standards.
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