Energy & Mining

Time to Privatize?

Kuwaiti Energy Assets Could Change Hands

So far, discussions around oil privatization have produced no concrete changes, yet serious efforts to privatize the energy sector could give Kuwait the push it needs.

Traditional Arabic coffee is offered as Kuwait Oil and Petrochemical Industries Union workers sit in a shaded area on the first day of an official strike over public sector pay reforms, in Ahmadi, Kuwait April 17, 2016. REUTERS/Stephanie McGehee

Low oil prices and structural changes have weakened Kuwait’s economy, but energy privatization, if done right, may jump-start its sluggish economy.

Though privatization is not a guaranteed economy booster, several factors make Kuwait’s oil sector, or at least parts of it, ripe for privatization.

By reducing monopolies and introducing profit as a central objective to affected companies, it encourages competition and cost reduction, improving the general business environment.

These are central tenets of the 2035 Development plan, and Kuwait’s oversized and underperforming public sector desperately needs trimming, which could be spurred on by competition.

It also tends to increase transparency and limit corruption, two reforms that every rentier economy country struggles with, particularly when fabulous oil reserves are involved. When well done, privatization tends to reduce public spending, which in these times of low oil prices is the break Kuwait’s public finances need.

Finally, privatization would attract much-needed foreign investment, something Kuwait is welcoming with open arms.

But certain forces inside Kuwait are opposed to such changes.

For starters, the rentier economy, much more than just a system, is a philosophy; it tends to view the status quo as a good thing that should not be tampered with, and is opposed to the private sector, which by definition in today’s competitive international economy thrives on change and constant adaptation.

Many political forces are also opposed to it, starting with parliament. Kuwaiti citizens are afraid of a future that does not provide them with the same standards of living to which they are accustomed, and politicians thrive on these fears.

Populistic demands are formulated every day to reduce the number of expatriates and promote stagnant economic policies. Last year and this year, Kuwait Union Company (KOC) unions held sit-ins and protests against news that privatization was possible, showing a diverse opposition to the idea.

Many people, including leading politicians, argue that oil being the only resource in Kuwait means it should remain in the hands of the state.

It is, of course, the backbone of the economy, thus privatization should be done carefully and with explicit goals to reassure all parties, including the public.

Constitutionally, it would be very difficult to sell any downstream and upstream activity, because they are considered as strategic; thus, relevant laws would need to be enacted.

But the low oil prices make change urgent.

Of course, a challenge will be for the effort to remain long-term; one risk being the government backtracking if oil prices start going up again.

Kuwait has been filled with rumors and announcement of privatization of the oil sector for the last twenty years, and has been part of KPC’s playbook since 2002, but nothing has come of it.

Last year, the government was looking into potentially partially privatizing four oil companies: Kuwait Oil Tanker Company, Q8, Kuwait Petroleum Industries Company, and Kuwait Foreign Petroleum Exploration Company.

They talked about public offerings, but no news has been delivered since.

More dynamic shifts in neighboring economies may spark forward movement regarding Kuwait’s privatization, starting with Saudi Arabia.

The IPO of Aramco, the most valuable company in the world, is set to take place in 2018. The move originally sparked the same opposition as it did in Kuwait, but the IPO may be proof of changing tides in the region.

Exploration and production will, realistically, not be privatized, and the state will remain in control of the big companies. But a privatization of oil-related services can be contemplated, and part of the public companies can be sold as a starting point.

It is up to the new government to decide what laws it will enact, but make no mistake: this choice will define Kuwait’s future.