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Kuwait Petroleum Corporation Business Information, Profile, and History

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Salhia Complex Fahed Al Salem Street Post Office Box 26565
Safat
13126
Kuwait

History of Kuwait Petroleum Corporation

Kuwait Petroleum Corporation is the state-owned holding company for all state-owned companies active in the different sectors of the Kuwait oil industry, the largest of that is Kuwait National Petroleum Company. Before Iraq invaded Kuwait on August 2, 1990, KPC was the most dynamic of the Arab national oil companies. Its ambitious strategy of integration during the 1980s made it a mini oil major, and a serious competitor to the U.S. and U.K. oil companies which had once dominated the international oil industry.

Although KPC was established only in January 1980, it took over a number of companies that had been active in Kuwait for much longer. The most important of these was the Kuwait Oil Company, which was incorporated in London, on February 2, 1934, with an initial issued capital of £50,000 owned in equal shares by the Anglo-Persian Oil Company--later Anglo-Iranian Oil Company and then British Petroleum Company (BP)--and Gulf Oil Corporation of the United States. On December 23 of the same year, the ruler of Kuwait granted an exclusive concession to the Kuwait Oil Company (KOC), to explore for, produce, and market Kuwait's oil. The concession covered the whole country and was to last for 75 years. The formation of Kuwait Oil had been in part the result of a prolonged diplomatic dispute between Britain, the dominant power in the Middle East, and the United States, which supported U.S. oil companies' claims to participate in petroleum development in the region. The KOC formed part of a network of consortia of major U.K. and U.S. oil companies that controlled the middle eastern oil industry, and that had made its first appearance in the Iraq Petroleum Company formed in 1928.

KOC began drilling for oil in 1936. Oil had been discovered in Iraq in 1927 and in Bahrain in 1932, and it was widely believed that Kuwait held equally good prospects. In May 1936 the first drilling began at Bahra, in north Kuwait, but eventually reached 7,950 feet without producing oil. Meanwhile, drilling had also started in October 1937, at Burgan, in south Kuwait. On the night of February 23, 1938, the drillers struck high-pressure oil in large quantities. This was the start of the Kuwait oil industry. Eight more wells were drilled at Burgan before July 1942, when all operations had to be suspended and all completed wells plugged with cement, because of the wartime emergency. After World War II ended in 1945, operations resumed, and in June 1946 the first Kuwaiti oil exports began.

Between 1946 and 1950 Kuwaiti oil production grew from 5.93 million barrels to 125.72 million barrels, making Kuwait the third-biggest middle eastern oil producer after Iran and Saudi Arabia. However, the real breakthrough came with the cessation of oil exports from Iran between 1951 and 1954 because of the dispute between the Iranian government and the Anglo-Iranian Oil Company. KOC rapidly increased Kuwaiti output to replace the Iranian crude. By 1955 it had 185 producing wells in operation in Kuwait, and annual production had reached nearly 400 million barrels, the highest output in the Middle East. Throughout almost all of the next 15 years, Kuwaiti oil production retained this leading position, until it was gradually overtaken by Saudi Arabia and Iran toward the end of the 1960s.

Oil transformed Kuwait. In the 1930s the country was largely desert, with most of its population of 70,000 concentrated around the mud-walled trading and fishing port of Kuwait town. An average annual rainfall of four inches and a lack of irrigation permitted lit11e agriculture. Almost all food and all drinking water were imported, and the economy was based on pearl fishing, shipbuilding, and entrepôt trade oil revenues transformed the situation, especially after 1952 when it was agreed that the net profits of the industry would be shared evenly between Kuwait and the oil companies. By 1961 Kuwait, with a total population of 320,000, of whom only 50% were nationals, had one of the highest per capita incomes in the world. Nationals were given free medical treatment and free education, and the infrastructure of an advanced welfare state was created.

This wealth did nothing to reduce a growing irritation in Kuwait--and elsewhere--with Western control over its oil resources. The consortium system limited the bargaining power of host governments, for they faced only one producer. Iran's dispute in 1951 with the Anglo-Iranian Oil Company was just the first sign of general resentment at the system which spread throughout the Middle East in the 1950s and 1960s. In 1958 the Kuwaiti government granted a concession to the Arabian Oil Company, a Japanese venture in which the Kuwaiti government had a 10% shareholding. In 1960 Kuwait joined tne Organization of Petroleum Exporting Countries (OPEC) as a founder member. OPEC's objective was to unify and coordinate the petroleum policies of its members and protect their interests against the Western oil companies. In the same year, the government organized the Kuwait National Petroleum Company (KNPC) as a joint enterprise owned 60% and 40% by the government and private sectors, respectively. For the next two decades, this element of private ownership distinguished KNPC from most other national oil companies in the Middle East. In 1962 KOC was made to relinquish 60% of the areas included in its concession to KNPC.

During the 1960s the Kuwaiti government sought to increase the share of oil income staying in Kuwait, especially by promoting downstream development. The government attempted to persuade KOC to begin refining operations, but the company resisted. Economically, there was an overwhelming case for locating refineries near centers of consumption rather than of production, and the vast majority of new refining capacity installed in the decades after World War II was in Western Europe and the United States. However KOC, like the other Western oil companies in this period, underestimated the extent to which nationalist feelings were growing, even in conservative and pro-western states such as Kuwait and Saudi Arabia. Kuwait also had a special interest in building refining capacity. It would not only provide for technology transfer into Kuwait and create jobs, but by using advanced refinery technology it could counterbalance Kuwait's relatively weak export position, the result of its rather poor-quality crude oil. Eventually KNPC decided to enter refining itself, and it started operating a refinery at Shuaibia--near the oil pipeline terminal--in 1968.

The Western oil consortia in the Middle East collapsed in the early 1970s during a dramatic restructuring of the industry. The most obvious manifestation of the restructuring was the huge rise in world oil prices in 1973. During the opening years of the 1970s, there was a rush of agreements designed to give producer-governments a stake in oil companies. In 1974 one such participation agreement transferred 60% of KOC's ownership to the state of Kuwait, the remaining 40% being divided equally between BP and Gulf Oil. In 1975 the Kuwaiti government took over this remaining 40%. In 1976 the Kuwait Oil Tanker Co. (KOTC), established in 1957 by private Kuwaiti interests, was converted to 49% state ownership, and it was fully nationalized in 1979. Also in 1976, a minority private sector shareholding in Petrochemical Industries Co. (PIC), established in 1963, was similarly bought out.

In January 1980 Kuwait Petroleum Company (KPC) was established as a holding company responsible for the overall management of this group of companies, together with the government's share of the capital of the Arabian Oil Company of Japan. Operations were rationalized, with KOC restricting its activities to exploration and production, and KNPC to refining and distribution. In 1981 KPC established two new companies, the Kuwait Foreign Petroleum Exploration Company (KUFPEC)--a subsidiary empowered to undertake crude oil and natural gas exploration, development, and production operations outside Kuwait--and the Kuwait International Petroleum Investment Co., owned 70% by KPC and 30% by private Kuwaiti investors and empowered to engage in refining and petrochemical operations outside Kuwait.

KPC developed an ambitious strategy to integrate its oil industry from the well-head to the petrol pump in consumer countries. Considerable attention was given to expanding and upgrading Kuwait's refinery capacity, in order to enhance Kuwait's ability to respond rapidly to changes in the pattern of export demand. By 1983 the share of product exports in total oil exports was more than 40% by volume, and more than 50% by value. By 1989 KPC had three modern refineries--the Mina Abdullah, Mina al-Ahmadi, and Shuaibi plants--and plans were being made to integrate their operations to attain the greatest possible economic efficiency. When the expanded Mina Abdullah refinery came on stream in February 1989, Kuwait had a refined-products capacity of over 700,000 barrels per day.

KPC's most dramatic move, however, was to expand overseas. In 1981 it acquired Santa Fe International, a California-based exploration-services company, for US$2.5 billion. Santa Fe owned or operated, among other things, rig joint ventures in various regions, including the North Sea and Australia. It also had an engineering subsidiary, S.F. Braun. A more important step came in February 1983, when KPC purchased Gulf Oil's refining and marketing networks in the Benelux countries, adding those in Sweden and Denmark a month later. Under a further agreement with Gulf Oil in January 1984, KPC acquired 1,500 service stations and a 75% interest in a refinery at Bertonico, Italy, which had closed two years previously. In the following year, KPC purchased 53 of Elf Aquitaine's Belgian service stations, and in 1986 and 1987 KPC obtained access to 821 petrol stations in the United Kingdom by buying Hays Petroleum Services, an independent distributor, to which it added the 466-station network of Ultramar, a U.K. oil company. It also bought British Petroleum's oil-marketing subsidiary in Denmark. During 1988 KPC made several acquisitions in Italy, including a 25% equity interest in a petroleum-product pipeline in northern Italy and the purchase of Rol Oil, an independent company specializing in oil blending and distribution. During 1989, KPC acquired the U.K. oil-lubricants business Carless Lubricants. By 1989, through its London-based subsidiary Kuwait Petroleum International, KPC owned more than 4,500 petrol stations in 7 countries, plus refineries in Rotterdam, and in Gulfhaven, Denmark. In 1988 KPC launched its own brand--Q8--in Europe. Kuwaiti oil was transported to Europe by KOTC, which used large tankers to transport refined products as well as crude oil. By 1990 KOTC's fleet had 22 vessels, including 3 crude carriers, 14 product tankers, and 5 liquefied-gas tankers. Following a visit to Kuwait by the Thai energy minister in March 1989, it was agreed that KPC companies would explore for oil in Thailand and introduce Q8 petrol stations there. In the same year, another KPC subsidiary, Petrochemical Industries Company, moved into overseas petrochemicals, buying a 25% stake in Hoechst of West Germany.

In 1990, KPC had a downstream capacity in Western Europe of 450,000 barrels per day, or 25% of its crude-oil production in Kuwait. KPC's market shares in Europe included 24% in Denmark, 12% in Sweden, 7% in Belgium, 4.5% in the Netherlands, and 2.5% in the United Kingdom.

Although the construction of a retail network in Europe was at the heart of KPC's strategy in the 1980s, the company also was active in exploration activities in foreign countries through its KUFPEC and Santa Fe subsidiaries. In 1984 KUFPEC acquired two petroleum concessions, in Bahrain and Tunisia. Offshore discoveries in Egypt and Indonesia were developed in 1985 and 1986, and in 1986 an agreement was signed to participate in the development of the Yacheng gas field in China.

KPC is a remarkably successful national oil company. During the 1980s, it achieved a far greater degree of integration than any other OPEC producer, with the possible exception of Petroleos de Venezuela. KPC was tne first--and by 1990 the only--state-owned oil company from the Third World to sell its oil under its own brand name and through its own service stations. However, there were problems. Some analysts considered that KPC had paid excessive amounts for some of its acquisitions, especially the purchase of Santa Fe in 1981. KPC's consolidated net profits were impressive--rising from US$488.6 million in 1986-1987 to US$606.9 million in 1987-1988--but it was likely that this disguised poor performance from certain downstream operations. KPC also faced resistance to its growth from established international oil companies, which partly explained its failure to penetrate the U.S. market in the 1980s. When, in 1984, KPC tried to purchase a refinery and around 4,000 petrol stations in the southeastern part of the United States from Chevron Corporation, it was outbid by Standard Oil Company of Ohio, which did not welcome its presence. Standard of Ohio was controlled by and later acquired by British Petroleum. More fundamentally, there was some conflict between the strategies of expanding refinery capacity within Kuwait and seeking to become an integrated oil major, which might dictate more refining operations nearer markets.

KPC's state ownership created political problems. KPC's attempts to buy downstream assets in Japan, for example, were blocked in part because it was owned by a foreign government. The Kuwait Investment Office's purchase of over 20% of British Petroleum's shares in 1988 as a consequence of Margaret Thatcher's privatization program was attacked on these grounds, and the Kuwaitis were forced to reduce their stake to 10%. At the time there was speculation that this purchase was aimed at further advancing KPC's downstream integration strategy, because relations between the Kuwait Investment Office (KIO) and KPC were known to be close. KPC's greatest liability, however, was the geographical location of its home country. KPC relied entirely on sea transport through the Persian Gulf to export its oil, and during the Iran-Iraq War in the mid-1980s the resulting vulnerability of KPC was evident. A number of KOTC tankers were hit by Iranian raids, prompting the Kuwaitis to re-register some of their fleet in the United States and United Kingdom. However, this was a minor irritant and inconvenience compared to the Iraqi invasion and occupation of Kuwait in August 1990, which took place after a period of tension over Kuwait's reluctance to see an increase in oil prices.

The Iraqi invasion devastated Kuwait, but it did not devastate KPC which, because of its international diversification strategy, survived. Senior staff of KPC escaped with the bulk of crucial management information intact, and within days had set up an alternative head office in the London premises of Kuwait Petroleum International. Saudi Arabia guaranteed KPI's European downstream commitment. In exile, KPC was granted immunity from the asset freeze which was imposed on Kuwait's overseas interests by the European Economic Community, the United States, and Japan, allowing it to continue normal commercial operations. Eight of KPC's ten directors were outside the country at the time of the Iraq invasion, enabling the company to continue functioning with a legal quorum. Shortly after the invasion, KPC's U.K. Lubricants business was relaunched as Kuwaiti Petroleum Lubricants. In October 1990 the diversification strategy was furthered when KIO acquired over 10% of the shares of the Singapore Petroleum Company, an oil-refining group. The continued vigor of KPC in the midst of the greatest crisis ever faced by Kuwait was a tribute to the strength of the business organization that had been created in a single decade.

Principal Subsidiaries: Kuwait Oil Co. KSC; Kuwait National Petroleum Co. KSC; Kuwait Oil Tanker Co. KSC; Kuwait Foreign Petroleum Exploration Co. KSC; Kuwait Sante Fe Braun for Engineering and Petroleum Enterprises KSC; Kuwait Aviation Fuelling Co. KSC; KPC (US Holdings); KPC International NV (Netherlands); Petrochemical Industries Holding NV (Netherlands).

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