Issue 845, 16 January 2009

Kuwaiti government caves in to populist calls by cancelling KDow deal

The breakdown of the deal between The Dow Chemical Company and Petrochemical Industries Company – in which the Kuwaiti state-owned PIC would take a 50% stake in the United States’ largest chemicals group for around $9bn in return for the Americans developing the emirate’s downstream value-added via the KDow joint venture – is unsurprising. Not only does the harsh global financial climate make the deal unattractive (Dow’s share price has more than halved over the last 12 months), but the Popular Bloc in the National Assembly and other Kuwaiti opponents have long fought against the government’s plans to open up the upstream and downstream hydrocarbons sectors to foreign companies: the KDow deal would have marked a significant precedent, which the state does not appear ready for yet.

These events will not help executives in other major international companies (and especially of US firms) who are, at present, weighing up their strategic options for Kuwait (GSN 842/1). The best that can be said, as both sides line up expensive legal teams, is that the affair is a reminder of Kuwait’s genuinely democratic flavour, that makes it distinctive in the Gulf Co-operation Council region. In this political environment, disputes between government and members of parliament are an everyday factor, however frustrating to business partners. This will continue, with Prime Minister Sheikh Nasser Mohammed Al-Sabah still under intense pressure despite finally naming a ‘new government’, while pledging his determination to “double efforts… for positive co-operation with parliament in shouldering national responsibilities” (see Politics, above).

Over recent months, GSN had heard that Dow suspected problems, including possible contract revisions, but it is understood that the company had been reassured that all was basically well only weeks before Kuwait’s end-December announcement of the cancellation. The rush to cancel the KDow venture was determined by a clause stipulating that a penalty fee of $2.5bn would have been due if either party were in breach of the contract after 1 January. The Supreme Petroleum Council, chaired by Sheikh Nasser Mohammed, therefore took the decision to cancel the agreement on 28 December.

In a statement, Dow Chemical said it was “extremely disappointed”. However, it would appear that Kuwait has a strong legal case to avoid Dow’s attempts to sue it for the penalty fee, given that it had not yet signed any written agreement. Dow said it was awaiting written notification after it had only been “verbally informed” of PIC’s then plans to go ahead with the venture.

Opposition to KDow was led by Popular Bloc leader Ahmed Al-Saadoon, who voiced concerns at the size of Kuwait’s investment and the deal’s transparency. The government has refuted claims that individual members benefited from the deal, and at first resisted pressures to cancel it. On 22 December, then oil minister Mohammed Al-Olaim insisted the joint venture would go ahead, saying that “the deal has passed through proper channels after thorough studies.” But with the resignation of the cabinet and MPs threatening to grill the prime minister, as well as past experience of delays to schemes such as Project Kuwait and the planned fourth refinery at Al-Zour, the government clearly decided to cut its losses. Al-Olaim has been replaced, for the moment on an acting basis, by Foreign Minister Sheikh Mohammed Sabah Al-Salem Al-Sabah.

Outlining its objections to KDow, the Popular Bloc said in a statement that it was unhappy that the deal was signed after the government had resigned, and with parliament effectively suspended by the government’s absence from sessions. “Signing the contract at the time and the inexplicable rush in finalising the deal raised many questions… the worst aspect of the controversy is the overrated sums of money allocated for the project that seems beneficial to the other party and is a total waste of public money,” it said. The Bloc also criticised the size of the penalty clause. In response, Al-Olaim stressed that negotiators of Kuwait Petroleum Corporation and its PIC subsidiary had “made strenuous efforts to reach a fair deal with Dow Chemical.” Referring to the penalty clause, Olaim said that without it “the judicial claims could be open, thus leaving the door open for the judge to decide any sum of money.”

The Islamic Constitutional Movement (ICM) has led calls for an investigation of the joint venture amid accusations that ICM members may have benefited from the project; Al-Olaim is associated with the ICM. ICM MP Jamaan Al-Harbash supported the calls for an investigation, saying that “Kuwait has now become the laughing stock of the whole world due to this deal.” Influential ICM MP Nasser Al-Sane said he had been receiving text messages accusing him of benefiting from the deal, and so he was also eager for an investigation. However, as of 14 January, legislators had failed to reach an agreement on the formation of a committee, with public disagreements over what the focus of the investigation would be.

At a time when many Kuwaitis are feeling the pinch of the global financial crisis – with heavy losses at the Kuwait Stock Exchange, Kuwait Investment Authority and a liquidity shortage among financial companies, as well as the low price of oil – it is not unusual that talk of a joint venture with a foreign company would come under severe scrutiny and opposition. In Kuwait’s deeply conservative, nationalist society, it was near impossible to sign major deals with foreign companies in ‘strategic sectors’, even when liquidity was abundant. However, the KDow debacle – which is likely to play out in the courts and in the press as the US giant struggles to come to grips with its own financial issues – will undoubtedly leave a scar on Kuwait’s reputation as a place to do business.