Can Kuwait diversify its economy enough whilst political impasse continues?

Published March 19th, 2013 - 08:26 GMT
Kuwait has stepped up its investments in foreign energy markets and in foreign energy infrastructure
Kuwait has stepped up its investments in foreign energy markets and in foreign energy infrastructure

The political stalemate in Kuwait is, no doubt, hurting the country economically. As long as reforms are put on hold because of corruption charges and changes in government, Kuwait will fail to adapt to the global economy and will struggle to diversify its economy.

The World Bank currently ranks Kuwait 82 out of 185 countries for ease of doing business, sixty places below its ultra-conservative counterpart, Saudi Arabia (ranked 22), and far below the other GCC states.

The political impasse has also halted many development projects in the country. Two of them directly affect Kuwait’s most lucrative export and the source that it relies on for revenue: Project Kuwait and the al-Zour oil refinery.

Project Kuwait was originally intended to increase Kuwait’s oil production capacity with the help of international oil companies, but the project was deemed unconstitutional at its inception in 1998, because the constitution forbids foreign ownership of Kuwait’s natural resources. A revised agreement allowed foreign companies to earn a “per barrel” fee while Kuwait maintains full control over production, but implementation of the project halted again when Kuwait’s royal family made parliament responsible for decision-making in 2007. Parliament, yet again, barred foreign involvement, costing foreign investors huge sums of money invested in bidding for the project and alienating industry majors.

Another important project is the proposed al-Zour refinery, a refinery capable of processing 615,000 barrels per day. It was originally conceptualized in 2008, but immobilized by parliament who cancelled the project in 2010. The project has since been reinstated and has managed to survive the bidding rounds for consultancy contracts, awarding UK’s AMEC the honor of managing the project. 

Decision-making on the al-Zour project has been taken away from parliament in order to prevent further delays. However, many specialists still doubt that the projected completion date in 2018 will be met.

Kuwait has relied on international experts to bolster exploration and refining capacity and to contribute new technology and unique expertise since oil was first struck on its soil in 1938 with the help of the Gulf Oil Cooperation (now Chevron) and the Anglo-Persian Oil company (now BP). Now Kuwait’s outdated laws are hindering the foreign investments and the flow of new technology and expertise from international firms that are required to update the country’s upstream wells and refineries.

Meanwhile, Kuwait has stepped up its investments in foreign energy markets and in foreign energy infrastructure.

Kuwait Energy signed a contract with Baghdad in January to explore for oil along Iraq’s southern border with Iran and has invested in exploration and developments in Yemen, Egypt, Russia, Pakistan, and Oman. Kuwait Petroleum International joined with Vietnamese and Japanese companies to construct a refinery with a capacity of 200,000 barrels per day in Nhi Son, Vietnam that is expected to be completed next year.

It is a highly opportune time to invest in energy industries abroad, build relationships with foreign countries, and invest in downstream markets, where there is high growth potential. The likely, or at least intended, result of these large investments abroad is diversified income and exchange of technology.

But for a country that relies on its own oil exports for 95 percent of its public revenue, Kuwait should be wary of neglecting needed domestic investments. Investments abroad cannot make up for outdated infrastructure and technology at home.

Kuwait has lofty goals, including raising production capacity to 4 million bpd by 2030 and investing over $100 billion on both domestic and foreign oil projects over the next five years, however, that will be unmet if political bickering continues to impede both economic reform and energy infrastructure developments.

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