Kuwait National Petroleum Company and the Best International Firms - Essay Example

"How does the oil play a big role in Kuwait economy" Introduction Today Kuwait is officially known as the of Kuwait. Before the 17th century Kuwait was known as "Qurain" which means 'hill' or "Kout" meaning 'fort.' In 17th Century maps it is called "Kuwait" meaning 'little fort.' Shaped roughly like a triangle, Kuwait shares borders with Iraq in the north and northwest and Saudi Arabia in the south and southwest; the Gulf bounds Kuwait on the east. Kuwait's border with Iraq has long been a source of tension between the two countries. Kuwait is mostly comprised of flat sandy desert. Although there are no rivers or mountains, the sandy soil gradually slopes to sea level where coastal marshes, mud flats and salt depressions around the northern part of Kuwait Bay are habitats for many species of birds. Kuwait has beautiful sandy beaches along the turquoise blue Gulf. In the southwest of the country, the landscape rises to a maximum elevation of 306 meters (1,004 feet). Islam is the predominant religion of Kuwait. Most of the Kuwaitis are Muslims are generally very conservative and governed by traditions and practices from very long ago. The Kuwaiti society is very family oriented. Kuwaiti families are usually quite large, and many different families are interconnected and related to one another through ancestry and marriage. For a country of such small size, Kuwait boasts a very broad and rich culture, containing a particular heritage and encompassing certain trends whose roots are embedded in the cultural traditions of antiquity. Kuwait holds a strong tie to its past, and the government takes pride in its assistance in the retaining of historical artifacts and antiques, as well as in the preservation of the arts and modern cultural endeavors. The official language of Kuwait is Arabic. All members of the government are required to have a working knowledge of Arabic in order to be eligible for the post. English is also widely spoken and is the country's official second language. Kuwait's government plays a dominant role in the country's economy. The government employs 92 percent of the population. Kuwait was the first Arab country in the Gulf to have an elected parliament. Moves to change the male-dominated political structure culminated in the granting of full political rights to women in 2005. Kuwait's most pressing environmental challenge is its limited water resources. In this regard, Kuwait has developed some of world's largest and most sophisticated desalination facilities, which now provide much of Kuwait's water. History of oil in Kuwait. Until the discovery of oil in the region in 1911 by a British concern, the Arab states in the gulf were weak and the faltering economies. The numerous rulers in small pockets kept up their autonomy with the help of the British. The Sultan of Omar was the largest of them all and but he couldn't further his rule because of the resistance. The Anglo Persian Oil Company or APOC was the first to start producing oil in Iran. In 1932 Standard Oil Company of California (Socal) discovered oil in commercial quantities in Bahrain. Socal then obtained a concession in Saudi Arabia in 1933 and discovered oil in commercial quantities in 1938. This triggered a flurry of oil exploration in the Gulf States in the 1930's. United States and Britain were the two main nations competing for the oil concessions. The new Iranian Government of Reza Shah Pahlavi revoked APOC's concession. Although the Shah and the British later agreed on new terms, the threat of losing Iranian oil convinced the British in particular that they must find other sources. The small states of the Persian Gulf were a natural place to look due to similar geological conditions to those in Iran. This did not mean immediate wealth for the Arab countries. Large deposits of oils were found in Bahrain. Oman was unable to export until 1967 and it was 1950 by the time oil rich states found it to be commercially beneficial. The oil fields in Kuwait were developed the fastest, and by 1953 that nation had become the largest oil producer in the gulf. Until 1970, the Gulf States did not benefit much since the foreign companies owned and managed the gulf oil industry. They paid a modest fee to the local rulers for the rights to explore and the right to export the oil. The United States and Britain were the primary nations that formed subsidiaries to work in particular areas. In the 1930's no one knew the extent of the oil reserves. Initially, local rulers had a weak bargaining position because they had few other sources of income and were eager to get revenues from the oil companies as fast as possible. As production increased and the extent of oil deposits became known, the local rulers woke up to the enormous revenue potential available and started bargaining for better terms and conditions. By the 1950's, an equal share of oil company profits in addition to a royalty fee became the norm. By the 1970s, most of the gulf countries, which by then were independent of British control, bought major shares in the subsidiary companies that worked within their borders. By the early 1990s,the subsidiaries were completely state-owned and although Western experts played a crucial part in the management at the highest decision-making levels, the local government enjoyed the profits as well as the responsibility. Oil Fields Most of Kuwait's oil is located in the Great Burgan area that comprises the Burgan, Maqwa, and Ahmadi fields located south of Kuwait City. It is the world's second largest oil field; it is still producing without the support of in-ground pumps and is supposed to have reserves of approximately 70 billion barrels. The most northerly field is Raudhatain with an estimated reserve of 6 billion barrels. Discovered in 1956, Sabriya and Bahra fields to the north have a reserve of 3.8 billion barrels. In the southwest the Minagish oil field has 2 billion barrels of reserve. The South Maqwa field is estimated to have at least 25 billion barrels of light crude oil was started in 1984. On October 20, 1995 a new field of easily recoverable very light crude oil with a very low sulfur impurity content was discovered at Kara'a al-Mara field .The initial discovery was made at a depth of 15,000 feet. The exploratory study at the Kara'as al-Mara oilfield continues, its reserves not yet known. The oil from this field will command a higher price on the international markets because it will require a less complicated refining process. Oil refineries When the oil sector was restructured, KNPC was entrusted with the responsibilities of oil refining and gas liquefaction as well as the distribution of petroleum products in the local market on behalf of KPC. Consequently, the company became in charge of the three oil refineries; Mina Al-Ahmadi, Mina Abdulla and Shuaiba, in addition to the LPG plant in Mina Al-Ahmadi. Shuaiba Refinery Shuaiba Refinery is located within the Shuaiba Industrial Area, some 50 km south of Kuwait City. The refinery installations occupy an area of 1,332,OOOm. Construction of the refinery started in 1966. It was the first refinery built by a national company in the region. In April 1968, the refinery was officially commissioned and the first shipments were exported to Japan and other consumer countries a month later. Shuaiba Refinery is the world's first all hydrogen refinery. Its capacity is 195,000 Barrels per day and was commissioned by the Kuwait National Petroleum Company (KNPC) in 1960 as a joint venture between the government and private sector. In 1975 the company became a fully owned state company. Since its construction, Shuaiba Refinery has been highly flexible and able to produce petroleum products with high technical specifications, for export to the world markets. This was mainly due to the fact that it was an all hydrogen refinery in order to convert heavy products to light products which enjoy a greater world demand. Shuaiba Refinery owes its importance to the advanced technological design of its processing units at the time of construction. At that time, the refining of relatively heavy crude, particularly those that had high sulfur content required specially designed and complicated technologies that were quite expensive. In addition to that advanced technology, Shuaiba Refinery was the first all hydrogen operated refinery in the world in removing sulfur and azote pollutants from petroleum products, thus raising the specifications of those products to the world's highest standards of quality. Shuaiba Refinery produces approximately thirty kinds of light, medium and heavy petroleum products, mainly gas, ordinary naphtha, various kinds of fuel such as high-octane gasoline, kerosene and ATK, automotive diesel, marine diesel, fuel oil and sulfur which is a byproduct of the industrial processes. Mina Al-Ahmadi Refinery Mina Al-Ahmadi Refinery was built in 1949 as a simple refinery with a refining capacity not exceeding 25,000 bpd to supply the local market with its needs of gasoline, kerosene and diesel. The refinery is located 45 km to the South of Kuwait City on the Arabian Gulf. It covers a total area of 10,534,000 m. The company implemented Mina Al-Ahmadi refinery Modernization and Further Upgrading Projects in 1984 and 1986 respectively to increase its capacity to 410,000 Barrels per day. Mina Abdulla Refinery Modernization Project was also completed in 1989 and the refinery capacity was raised to 231,000 Barrels per day. Within the framework of these two projects, 29 new units were built at this refinery that has now become one of the world's most modern refineries, with regard to both refining capacity, which exceeds 415,000 bpd, and the state-of- the art technology it employs. These steps towards modernization of the refineries also vastly improved the quality of the petroleum products in addition to the output and thus increased the prices for these products in the exports market. With regard to the local market, the company maintained the drive to expand marketing outlets so as to meet the growing demand on petroleum products and lube oils. Simultaneously an improvement to the oil export facilities had also been implemented. The South and North Piers in Mina Al-Ahmadi Refinery were upgraded to increase the loading efficiency along with Sea Island in Mina Abdulla Refinery and oil pier in Shuaiba Refinery. Mina Abdulla Refinery Mina Abdulla Refinery is located approximately 46 km to the South of Kuwait City, directly on the Arabian Gulf. The total area covered by its installations, after the completion of the modernization project, is 7,835,000 sq meters. The American Independent Oil Company built this refinery in 1958 during the rule of the late Sheik Abdulla Al-Salem Al-Sabah. It was, at that time, a simple refinery that contained one crude oil refining unit with a capacity of approximately 30,000 bpd. When the State of Kuwait acquired full control of its oil wealth in 1975, ownership of Mina Abdulla Refinery passed to the State. When the State of Kuwait acquired full control of its oil wealth in 1975, and, following a transition period during which the refinery belonged to a national company under the name of "Wafra Oil Company", ownership of the refinery transferred to KNPC in 1978. In line with the strategy adopted in the early 1980's to modernize Mina AlAhmadi and Mina Abdulla refineries, KNPC executed the Mina Abdulla Refinery Modernization Project. New Refinery Project Kuwait National Petroleum Company has begun the front-end design of its fourth refinery in Kuwait and is searching for the best international firms to design and construct this large, world-class facility with a producing capacity of 615000 bpd and will have a contract value of multibillion US dollars. Needless to say only the biggest and best will be among the competitors. Oil production Since April 1, 1999, Kuwait has trimmed its production to 1.836 million-barrels/day set by its OPEC (Organization of Petroleum Exporting Countries) quota. However, its present production capacity is 2.4 million barrels/day and is said to increase by capacity to 2.5 million barrels/day by the year 2000, and to 3 million barrels/day by the year 2005. Along with Saudi Arabia and the U.A.E., Kuwait is one of a select group of oil-producing nations having significant excess oil production capacity. Kuwait has plans to raise capacity to four million barrels per day by the middle of this decade. Under present market conditions and quotas as determined by the OPEC (Kuwait's is 1.71 million bbl/day), Kuwait is producing at only about 60 percent of capacity. Kuwait Oil Refineries and Production Capacity Port Production Capacity Mina al-Ahmadi 410,000 b/d Mina al-Abdulla 231,000 b/d Shuaiba 195,000 b/d Overseas 250,000 b/d *Source: Kuwait National Petroleum Company, 1999 Oil Production in Million Barrels per Day (m b/d) 1997 1998 1st qtr 2nd qtr 3rd qtr 4th qtr 1st qtr 2nd qtr Kuwaiti Production 1.84 1.81 1.83 1.88 1.94 1.81 Share of Neutral Zone 0.27 0.26 0.26 0.28 0.26 0.29 Total Production 2.11 2.07 2.09 2.16 2.2 2.1 *Source: U.S. Department of Energy, 1998 Production of Crude Oil and Natural Gas Natural Gas (million cubic feet) Crude Oil (thousand barrels) 1990 166,632 318,000 1991 34,481 65,803 1992 203,032 387,466 1993 359,724 686,497 1994 383,783 732,411 1995 383,789 732,422 1996 384,641 734,047 1997 383,869 732,574 *Source: Annual Statistics Abstract, Ministry of Planning, 1998 Kuwait's Oil Companies The Kuwait Oil Company and the Kuwait National Petroleum Company were merged in August 1998 consolidating the operations and streamlining costs in order to improve efficiencies. The Minister of Oil who is the Chairman, and is the head of the Kuwait Oil Industry heads the Kuwait Petroleum Corporation (KPC). This consists of eight Subsidiaries. The KOC is responsible for the crude oil and gas explorations KNPC deals with the crude refining and gas liquefaction and manages the three refineries. Kuwait Aviation Fueling Company (KAFCO) is a small concern and provides jet fuel for aircraft in Kuwait. . Kuwait Foreign Petroleum Exploration Company (KFPEC) explores drilling opportunities. Kuwait's Santa Fe for Engineering and Petroleum Projects Company specializes in onshore and offshore drilling on behalf of other companies worldwide. Oil and Kuwait's Economy Kuwait, a small Persian Gulf nation possessing the world's fifth largest national oil resource base quite naturally has an oil-centered economy. Kuwait's economy is so overwhelmingly dependent on oil production and exports that the world price of oil is the most important international factor affecting the country. The Kuwait economy is dependent upon its oil resources, and fluctuations in the demand for oil typical of an oil rich economy. Needless to say, it definitely affects its plans for development. Unexpected changes in the price of oil often cause changes in revenues that affect the spending power of the government. To address the limitations of its oil dependencies Kuwait has tried hard to diversify itself into other areas like health and education. In the 1999 United Nations Human Development Report, Kuwait topped all Arab states by ranking 35th in the world in the area of human development. The report commended Kuwait on its efforts to limit its economic dependence on oil. The Gulf War affected Kuwait to a great extent followed by the Iraqi Invasion. Its bulk of the oil wells were sabotaged and about 600 of them were set on fire. The country lost its production of 1.1 billion barrels of oil. However, Kuwait got back on its feet swiftly and just three months later the oil production reached a new high of 2 million barrels a day. Due to the fact that a lot of the jobs in the oil industry are menial and not very well paid, the workers who hold the bulk of the jobs are from other Arab countries, South Asia and East Asia. These people are from poorer countries and do not mind the low wages. The Kuwaitis tend to prefer better paid jobs in the state owned enterprises and are employed in over 90 percent of them. Shortly after the war most of the foreign workforce was expelled and Kuwait decided to develop a better reliance of the jobs by the local nationals themselves, but it was easier said than done. This has complicated privatization and reforms in the state sector. The revenues from the oil are huge and this helps the Kuwait government provide an excellent network of social and health services to its citizens among the best in the world. This is expensive and suffers when the oil production or prices for the oil decline, like after the two devastating wars. The government had to draw on the reserve foreign exchanges during that time and also cover the debts incurred. Since then, modest economic restructuring has been used to tackle deficient budgets. The economy of Kuwait remains highly managed from the center and foreign corporations are only allowed to participate as a fee for service and this ensures that Kuwait enjoys all the profits from the production. The downside is that it also has to fund the entire investment for the production and development and export of the oil. Also almost 90 percent of the Kuwaitis are dependent on these ventures for their jobs and their salaries are a further drain on the budgets. The constitution prohibits the foreign entities form having any ownership interests in the ventures and there is a lot of opposition to consider any changes as well. All this work against any privatization and bringing in cost efficiency and streamlined operations. Kuwait has tried to address this issue by bringing in an "operating service agreement" which would award the corporate operator a fee per barrel, which is definitely not a joint venture, or offer any concessions. Even to this there is a lot of resistance and has been blocked by the opposition in the parliament. This type of liberalized access to oil-derived profits will aid the government to achieve its announced objective of adding 1.5 million barrels of daily production capacity within this decade. The government has tried to bring in diversification ventures in the near future in the form of oil-sector spin-offs. They include expansion of the petrochemical and fertilizer industries and utilization of natural gas produced in association with oil extraction. Much of the existing associated natural gas production is now flared; officials hope to redirect this valuable resource into electricity generation, which would free up the oil now burned at power plants for export. The increase in oil prices in the recent years above $20 per barrels has resulted in an increase in revenues and resulted in huge government surpluses. This has taken off some pressure on the government to regulate and privatize. Analysis The Kuwaiti economy has had a great growth phase, 17 percent in 1999 and 27 percent in 2000. However in 2001 it was 3.7 due to the flat oil production levels imposed by the OPEC. Higher oil prices often fuel the economy's growth while it is difficult when the production dips or oil prices fall to keep up the growth phase. The Kuwaiti dinar is a managed currency linked to a basket of International currencies and is fairly stable. Although inflation increased due to the aftermath of the war to above 9 percent, it has remained fairly low since 1992. As the recent increase in oil revenues triggered additional demand, consumer prices have risen at very low rates in the two percent per year range in recent years, although inflation as measured by the GDP deflator was much higher in 1999 and 2000 due to the very steep increase in the price of oil and the large component it represents in total GDP. The financial consequences of the 1990-1991 wars on Kuwait were enormous. The government's monetary surplus reserves were drawn upon and depleted significantly. The public budget deficit already present now increased due to the necessity to cover the social and health welfare programs already mandated. The weakening international oil prices added problems to the mix. The country has benefited due to the increase in the oil prices that has been great to the general economy. A positive entry in the balance of payments was made in September 2000, when the United Nations made a final disbursement for damage claims resulting from the Gulf War; of a total payout of US$825 million, Kuwait received US$509.2 million. Total 2001 goods exports by value actually fell to US$16.1 billion from US$19.5 billion in 2000, but still were substantially larger than exports of US$12.3 billion in 1999 and just US$9.6 billion in 1998 when oil prices hit their lows. Goods imports have averaged about US$6.7 billion over the past three years so the country's trade surplus has grown significantly from less than US$2 billion in 1998 to more than US$9 billion in 2001. Kuwait's reliance on Foreign Service firms to run its petroleum sector implies that it runs a substantial deficit in the international services account of the balance of payments; over the past three years, Kuwait's net services payment deficit has averaged more than US$3 billion annually. The country has a long standing history of running current account surpluses based on oil-driven trade surpluses has given it a strong international net credit position so that it earns substantially more on foreign assets its government and citizens own than it pays out to foreign owners of assets in Kuwait. In recent years, the country's surplus on net factor income payments has averaged more than US$5 billion per year. Due to the nature of its workforce comprising of a lot of foreign workers, the government incurs a deficit due to the remittances of expatriate workers who send a portion of their earnings back to their home countries. The excess net outflow of the capital earnings in the form of foreign exchange is solely that of the government rather than of the private sector. The government seems to be inclined towards investments in the foreign bonds rather than investing in foreign entities. In 2000, Kuwait bought foreign bonds worth almost US$13 billion; in 2001, the smaller current account surplus meant the government had fewer excess funds to invest abroad, but it still purchased US$7.3 billion of foreign bonds. This fund is intended to build a large reserve of assets to provide a substantial reserve on income for the future generation citizens of Kuwait when its oil reserves are ultimately depleted. Reportedly, 10 percent of oil revenues are to be invested in this fund and its assets now approach US$60 billion. Overall Kuwait has been steadily building its gross official reserves and by the year 2001, the foreign reserves had reached well over US$9.8 billion, equivalent to well more than one year's imports. The government's creation of the Reserve Fund for Future Generations (RFFG) in 1976 ensures that future generations will enjoy the prosperity that oil has brought the country. Another concern is the regional situation. As long as the peace and physical situation of the region is not threatened or violated all bodes well for the oil economy in particular. The Gulf war of 1990-1991 was a setback and took some time to get back on track. The Israeli Palestinian conflict and the United States War on terror inflaming Islamic passions are of concern to Kuwait whose citizens are predominantly Muslims. In short any unrest in the neighboring countries will be case of grave concern on the economy of Kuwait. Conclusion Oil is the backbone of today's industrialized nations. Oil is the largest traded entity in both volume and value in what some experts call the "Hydrocarbon economy". The prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share. Finally, the price of oil is linked to some extent to the price of other fuels even though oil is not fully substitutable for natural gas, coal, and electricity. For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing and consuming countries. The ramifications of the fluctuating oil prices cannot be underestimated. Sharp decreases in oil prices help oil importing nations and hurt oil exporters. For net oil importers, lower oil prices act allow more consumer disposable income. This often leads to a looser monetary policy, and hence lowers interest rates with lower inflation and usually after a few months, stronger economic growth. Conversely, sharply higher oil prices have been identified as a major cause in many of the post-World War II recessions in the United States. Oil revenues earned by producers is to a large extent "recycled" back to consumers in imports of all types of goods and services. For example, Kuwait may use its oil revenues to import and buy construction goods and services, military hardware, food, or any other goods or services from companies located in its consumer, like the United States. This benefits the United States as well since they earn back a percentage of the dollars spent. When oil prices fall, the revenues of the oil exporters go down and so does their buying power. They tend to buy less from their consumer countries and bring about a fall in their export percentage. The magnitude of any economic impact of an oil price change depends on several mediating factors, including the level and duration of the change, the prevailing demand and supply for oil, and the overall share of oil in the country's economy. The impacts are more when the price changes are abrupt and sudden and last for a very short time. This really sends the global economy into a spin and impacts the stock markets as well puts a spin on the economy. Short lived oil price changes often do not allow time to adapt or may mislead people regarding its duration and so can distort consumer expectations and make them behave differently than expected. Countries with larger populations like Saudi Arabia are more pressured to meet internal needs and often tend to focus on programs that offer short-term revenue realizations. Countries with small populations and large oil reserves and financial reserves as well like Kuwait often favor a strategy of long-term revenue maximization, and generally have been in stronger positions to weather price declines. Also their production price per barrel is lower allowing them to ride out the oil price fluctuations better. Whereas high cost oil production nations like the United States or Canada often cannot sustain production during low price phases since it becomes economically unviable. During high price phases quest for alternate sources as well as locations are often given a boost due to their crunch situations. When oil prices go down, the oil producing nations react by devaluing its currency, cutting subsidies, raising taxes, privatizing energy industries, increasing efforts aimed at attracting foreign investment, etc. The oil consuming nations try to mitigate their risk of high oil prices by identifying strategic oil reserves, coordinate with other oil importing nations, and try to attempt to reduce dependence on oil imports, among other policies. In short the oil industry is an inherent part of the today's global industrialized hydrocarbon global economy. Kuwait being at the heart of the oil industry has been a great contributor to the world economy. Internally the government has made good use of the revenues from oil to the development of the infrastructure, education and comprehensive health care systems, and affordable housing. Today, Kuwaiti citizens enjoy comprehensive welfare systems, medical benefits, and free education from kindergarten through the university level. This was a remarkable achievement in view of the fact that Kuwait was a comparatively recent entrant to the oil industry. Sources World fact book "Kuwait" Retrieved 12th October 2005 http://www.cia.gov/cia/publications/factbook/geos/ku.html Kuwait Information Office "Economy" Retrieved 12th October 2005 http://www.kuwait-info.org/Country_Profile/economy.html Kuwait Information Office- USA " Oil and industry" Retrieved 12th October 2005 http://www.kuwait-info.org/Statistics/oil_and_industry.html Federal Research Division Data as per July1993 "Library of congress country studies" Retrieved 12th October 2005 http://lcweb2.loc.gov/cgi-bin/query/rfrd/cstdy:@field(DOCID+kw0016) Energy Information Administration June 2005 "Oil Prices and Revenues: an Economic Analysis" Retrieved 12th October 2005 http://www.eia.doe.gov/emeu/cabs/oprevecn.html Wikipedia " Kuwait" Retrieved 12th October 2005 http://en.wikipedia.org/wiki/1973_energy_crisis KNPC "About us" Retrieved 12th October 2005 http://www.knpc.com/knpc/about_history.html BBC News UK edition 18th August 2005 "Country profile: Kuwait" Retrieved 12th October 2005 http://news.bbc.co.uk/1/hi/world/middle_east/country_profiles/791053.stm Read More