Oil Investment Contract / Companies Commercial Law Essay

  • Length: 20 pages
  • Subject: Economics
  • Type: Essay
  • Paper: #41562057

Excerpt from Essay :

Commercial Contract Law to Increase Oil Investment in Kuwait

When it comes to the industries of natural resources and energy, the law of investment protection is particularly of great concern. According to the statistics of July 2013, it was revealed that 25% of the cases that have been registered with ICSID have addressed the issues concerning gas, oil and mining sectors. Moreover, another 12% of the cases are relevant to other energy sectors that include electric power.

Investments in the energy sector, including oil, are usually very capital-intensive as well as long-term in nature. Moreover these investments are regulated at the greatest levels, and are of concern for the public, since valuable resources are involved along with the essential services. These are the main reasons why such investments are extremely vulnerable to national and governmental interface. The aforementioned attributes of investment in the energy sector increase the possibility of conflicts arising out of changing laws and regulatory policies over the duration of a project.

Considering the nature of such investments, many activities in the sector of energy will normally succeed for protection as a part of applicable investment contracts. Disputes can surface in association with grey areas that include hedging arrangements and pure services and sales contracts. In the aforementioned circumstances, changes will be made with respect to the specific nature of activities as well as the specific definition of an eligible "investment" pertaining to the applicable investment agreement.

Oil has always been the most precious natural resource of the State of Kuwait. According to the Constitution of the country, the State is the owner of all the oil resources, and controls these resources as well. However, the State alone does not have the power to exploit, safeguard and utilize these oil resources, as it has been stated in the Kuwaiti Constitution, Article 21; Law No. 1 of 1962. Considering that, the right to monopolies, or concessions for the exploitation of the natural resources of Kuwait, which includes oil, can only be created by the presence of a law, and that too for a restricted period of time, as it has been stated in the Kuwaiti Constitution; Article 152 and 153.

In the year 2012, Kuwait intended to amend its foreign direct investment law, since the producer of Persian Gulf oil embarked up to a $111 billion plan so as to modernize the Kuwaiti economy, as it was reported by a government official. The head of the Kuwait Foreign Investment Bureau, Sheikh Meshaal Jaber Al-Ahmad Al-Sabah, stated that the foreign investors that come to Kuwait to look for the achievement of important licenses a very hard and prolonged procedure, as well as to get the required land for their projects. He further went on to say that the suggested amendment should cover up for the pitfalls in the law.

The State of Kuwait expects the private investors in oil to make a contribution almost half of the four-year development program, which started in the fiscal year 2010-2011, in order to make the oil-reliant company economy of Kuwait even more diversified. Kuwait passed the foreign direct investment law in the year 2001, so as to make the foreign ownership limits lenient, and the State is looking out for investments in projects that include an oil refinery worth of $14 billion. In the year 2007, the parliament of Kuwait also passed a law pertaining to the reduction of tax burden on the international companies, for the first time in a time period of more than 50 years. In the same year, a law was also passed to reduce the corporate tax or foreign companies to 15%. The tax rate previously was 55%. In the year 2010, Kuwait was considered to be the lowest receiver of foreign direct investment among the six Gulf Cooperation Council states, even though it was the fourth-biggest producer of oil in the Organization of Petroleum Exporting Countries. The direct foreign investment of Kuwait was noted to be $6.5 billion, as stated in the data on the United Nations Conference on Trade and Development website. The biggest economy in Arab was Saudi Arabia, with a direct foreign investment of $170.5 billion, United Arab Emirates named second with $76.2 billion.

When the Constitution was drafted to include the clauses, which includes the private sector as well as the foreign oil companies were in control of the interests. Moreover, the private sector also has rights in Kuwait oil resources that were subjected to pursuant to many different concessions. In the year 1975, by engaging a series of legislation and agreements, these were the rights that were reverted back to the government of Kuwait. These rights were represented by many different State organizations, and State completely owned organizations, which included the Kuwait Petroleum Corporation, Petrochemicals Industries Company, Kuwait National Petroleum Company, and Kuwait Oil Company.

There many laws and legislations that is associated with direct investment in countries, which includes oil investment. The background has been provided for the understanding of the readers about the situation of oil investment and its laws in the world in general, and Kuwait in particular. It is important to note here that when investment in any sector is being made, the contract or commercial laws have a role to play. Through this paper, we seek to explore the contract and commercial laws, and then consider these laws with respect to the situation of oil investment in Kuwait.

Part I

General Contract Law

The agreements of sale transactions made between different countries, which act like parties, are termed as international commercial contracts. There are many methods that can be used to enter the foreign market. These approaches are made after considering the risk, control and balancing costs of the transactions. The first method is direct export, the second is the engagement of a foreign agent to distribute and sell. The third is the use of a foreign distributor so that he can make transactions with the customers directly. In order to make international contracts, the countries (or the companies) can also manufacture their products in any foreign country. There are two ways of doing this. Firstly, they can set up a business in the foreign country, or they can acquire a foreign subsidiary. One of the other ways of entering into an agreement with another country is by licensing a local producer, or by becoming a part of a joint venture that has a foreign entity. Apart from that, countries can also deploy a franchise in the foreign country to enter the international market.

KPC was established in the year 1980, as an organization that came under the category of public corporation. It is important to note here that is the primary player in the Kuwaiti oil sector, and therefore is of great importance when it comes to the laws that have been defined in Kuwait with respect to oil investment in the country. In general, the objectives of this corporation include the engagement of the corporation in all activities that are associated with the petroleum industries, as well as the hydrocarbon materials during all their stages. Apart from that it also engages in the industries that are situated in Kuwait as well as in other countries, as permitted by the Article 3 of Law No.6 of 1980. Taking the support of Article 5 of Law No. 6 of 1980, KPC also has the right to engage in any activities that could assist it in achieving its objectives by making the right kind of partnerships. These partnerships can be made with companies or organizations that take part in similar activities as KPC, and that have the potential to help KPC to realize its objectives. As we observe in the past, KOC, KNPC, and PIC were owned partially by the State in association with private investors. In the year 1960, a Decree was given by the government as a result of which KNPC was established. A partnership was made between the private sector and the State, and the share between the two was 40/60% respectively. The main objectives were to become a part of the oil industry inside, as well as outside Kuwait, as well as to become involved in any stage during the process of oil production, which would include exploration of natural gas and petroleum, transportation and refining. In the year 1963, PIC was established between the local private investors and the State, as commercial company, the purpose behind the establishment of this company was to establish a petrochemical industry for Kuwait. Finally, in the year 1974, the State became a part of an agreement, which is known as the Participation Agreement, with Gulf Kuwait and BP Limited, which resulted in the creation of KOC. The latest objectives of this organization are to explore, exploit, refine, and produce oil for the local market, as well as for the purpose of oil investment and export purposes. A series of legislations were passed in the mid of 1970s, through which it has been aimed that the…

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