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Economy


Despite diversification efforts, Kuwait’s economy is still heavily dependent on oil export revenues and GDP is determined as much by the oil price as anything else. With the oil boom of recent times, this has worked to the state’s advantage as nominal GDP growth has averaged more than 20 per cent in the last four years to see the economy grow to more than $95bn.

With the vast majority of government revenues coming from oil sales, this has also led to record budget surpluses. Fiscal surpluses are estimated to have reached more than 30 per cent of GDP in 2011.

Kuwait’s major challenge however has been translating these surpluses into expenditure. The issue is mainly budgetary. Budgets, and thus expenditure, are estimated on a conservative oil price of just $44 a barrel for the 2011 and 2012 financial years. The result of this fiscal conservatism is that ministries receive much less to spend than the state can afford. The result is a massive yearly underspend.

The other major issue is the heavy involvement of the state in economic activity. More than 90 per cent of the local working population work for the government. As a result, private sector growth has been stunted and remains heavily reliant on government spending. There is little innovation and entrepreneurialism in Kuwait. Government plans to open up and diversify the economy have been met with resistance, particularly since high oil prices have allowed the government to deliver economic expansion without the need for significant structural reform.

The economy remains largely closed and unreformed with an inefficient government bureaucracy and restrictive labour conditions. Foreign firms have to pay up to 55 per cent tax on their profits and there is limited  consequent international investment. In 2005, about $250m was invested in Kuwait, less than many sub-Saharan countries.

In 2010, Kuwait’s foreign direct investment (FDI) was approximately $1.1bn, an uncharacteristically high figure for the country which over the last decade has averaged only $313m a year in FDI. This is by far the lowest among the GCC states, which average $44bn a year.

The government has stated its intention to open up the economy, but legislation to reform the tax system and privatise state firms has been consistently blocked by parliament.

Oil & gas


Kuwait has been one of the world’s most important oil producers since oil was first found in the state in 1938. A member of Opec, the state has a production capacity of 2.7 million barrels a day (b/d), thanks mainly to the giant Burgan oil field, the world’s second largest oil field. The vast majority of Kuwait’s oil output is destined for export, mainly to the Far East and Europe. Control of the state’s hydrocarbons policy is in the hands of the Supreme Petroleum Council while the Oil Ministry is entrusted with overseeing the implementation of policy.

Kuwait Petroleum Corporation (KPC) is the state firm tasked with operating the sector. It has several subsidiaries to handle different areas, the most important of which are upstream operator Kuwait Oil Company (KOC) and refinery operator Kuwait National Petroleum Company (KNPC).

The state’s key oil and gas strategy is its 2020 plan to increase oil production capacity to 4 million b/d through the development of new reservoirs, the introduction of enhanced oil recovery techniques and the production of heavier oil grades.

The constitution prohibits the foreign ownership of the state’s natural resources and this has meant that the state is one of the few countries in the world without any international oil company presence. This has led to problems as the government says it urgently requires foreign assistance to help it maintain and boost output.

The state’s landmark upstream initiative, Project Kuwait, has been delayed by parliament for more than 10 years for this reason. KOC did however recently sign an initial agreement with the US’ ExxonMobil Corporation for the development of its heavy oil reserves, although it remains to be seen whether lawmakers will view this as constitutional.

Otherwise the focus upstream has been on improving the state’s woeful safety record and dealing with rapidly rising water cuts (the water content in the crude oil). Over the next 10 years, the state is expected to start producing more water than oil and has to find ways of disposing this effluent.

In terms of gas, Kuwait has not been so fortunate, with only limited amounts of associated gas. According to UK oil major BP, Kuwait has an estimated 63 trillion cubic feet of proven natural gas reserves, compared with 215.1 trillion cubic feet in the UAE and 884.5 trillion cubic feet in Qatar. In 2009, significant volumes of non-associated Jurassic gas were discovered in the north of Kuwait, attracting interest from international oil companies. UK/Dutch oil major Shell signed a five-year enhanced technical services agreement in 2010 to help KOC develop and manage the technically challenging resource. However, the $800m deal has been challenged in parliament over its transparency.

As a result, Kuwait has been forced to import gas. In 2011, with oil production at 2.8 million b/d, Kuwait produced some 1 billion cubic feet a day (cf/d) of associated gas, along with 150-200 million cf/d from non-associated fields. It consumed an average of 1.45 billion cf/d, with the shortfall covered by imports of around 270 million cf/d of liquefied natural gas (LNG), largely from regional neighbours, Yemen and Oman.

Downstream, the aim is to increase local refining capacity to more than 1.4 million b/d from more than 956,000 b/d today. The centerpiece of this is the long delayed new 615,000 b/d Al-Zour refinery, which aims to secure the supply of low sulphur fuel oil for electrical power plants. The initial tender in 2006 was cancelled after bids for the four packages came in well over budget at $16.5bn. The New Refinery scheme was relaunched in 2008, this time with five packages. About $10.3bn-worth of contracts were awarded to various firms in 2008, but were cancelled in 2009 before construction had begun.

The other main downstream scheme is the $16bn clean fuels project to upgrade and increase capacity at the state’s three existing refineries at Shuaiba, Mina al-Ahmadi and Mina Abdulla. Both schemes now have approval from the Supreme Petroleum Council, Kuwait’s highest oil sector decision-making body, but it is unclear when tenders will be launched.


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