Pamela Ann Smith reports on Kuwait's attempts to weather the effects of a depressed oil market and political unrest across its border.

Kuwait is awaiting the turn of the century for signs of an upswing that could end the current bout of uncertainty and financial austerity.

In addition to having to weather the international turmoil surrounding Saddam Hussein's latest threats, the country is facing a mounting budget deficit which many fear could lead to yet more cutbacks in government spending at home.

As elsewhere in the Gulf, the main problem is the exceedingly low level of current world oil prices-Kuwait's main export commodity. From an average of $19.10 a barrel in 1997, they fell to an estimated $13.20 a barrel last year. They are forecast to plummet still further this year to just $10.20 a barrel before recovering next year to $12.60 a barrel, according to figures produced by the London-based Economist Intelligence Unit (EIU).

Even if prices recover somewhat in the coming weeks due to a severe winter in the US or Europe or because of renewed conflict in Iraq, Kuwait is expected to earn only $7.61 billion from the sale of oil, gas and petroleum products this year. That is about $1.5 billion less than the estimated earnings last year, and almost 44 per cent less than the $13.47 billion recorded in 1997.

The adverse oil outlook is also affecting the country's trade and current account balances, which are expected to worsen this year. "Kuwait's trade surplus will experience a substantial reduction as both the volume and value of exports continues to be constrained in 1999," the EIU reports. In dollar terms, it estimates that the value of exports will fall 15 per cent this year, on top of a drop of 31 per cent in 1998.

However, "imports are projected to remain fairly steady," the EIU notes. "The result is a trade surplus that, at $462 million, will be less than 10 per cent of the surplus Kuwait enjoyed in 1997."

Similarly, despite an expected decline in the amount of money sent abroad as workers' remittances decline (due to the economic slowdown and measures to reduce Kuwait's dependence on foreign labour), the benefits to the current account could be offset by lower foreign investment in the country. This, together with the worsening trade balance, is expected to result in a sharp fall in the current account surplus, taking it down to just $1.52 billion this year. That is less than half the estimated $3.61 billion recorded in 1998 and only one-fifth the surplus of $7.82 billion reported in 1997.

Such projections may explain why the government is now dusting off major economic reform proposals aimed at increasing both private and foreign investment. Despite growing dissension in parliament about the way to proceed, there now seems little doubt that ministers recognise the need to encourage investment, reduce the substantial outlays paid to subsidise utilities and to increase non-oil revenues.

In October, the Crown Prince and Prime Minister, Sheikh Saad Abdullah al-Sabah, said that the government would accelerate its efforts to revive the economy, promote market forces and rationalise government spending.

In November, proposals to increase user fees for water, electricity, telephones, transport, health and education were submitted to parliament. Measures were also announced to cut subsidies for petrol and other fuels and to initiate taxes on certain consumer goods. All these moves would mark a significant step in reducing the "cradle-to-the-grave" welfare system that indigenous Kuwaitis enjoy and add to the costs paid by expatriates and foreign workers in the country.

While both foreign investors and many Kuwaitis would welcome the possible deficit reductions they would produce, many MPs are very concerned about the possible adverse political effects that rising utility prices and reduced subsidies could produce. They also fear that such steps could lead to a widescale programme of privatisations which would greatly increase unemployment among young Kuwaiti graduates, most of whom find jobs in the public sector.

As a result, the reform programme is expected to proceed slowly, despite the urgency of taking measures aimed at reassuring both local and foreign investors. Controversy over government efforts to revive the Kuwaiti Stock Exchange (KSE) is also holding back confidence. It fell more than 38 per cent last year as concern about low oil prices, the growing budget deficit and political uncertainties mounted.

One way out of the dilemma, local bankers say, would be for the government to borrow substantial sums either at home or through international capital markets. This could entail the sale of some of the additional investments held by the state-owned Kuwait Investment Authority (KIA), which has already raised more than $3.4 billion in the sale of government assets in the industrial, real estate and banking sectors.

While parliamentary approval would be needed for such a plan, the country has the advantage of enjoying a good credit rating. It successfully raised a sovereign loan of $5.5 billion on international capital markets in the early 1990s to help pay for the costs of the Iraqi invasion and occupation.

Additional foreign funds may also be forthcoming if the privatisation programme, particularly for telecommunications and aviation, goes ahead on schedule. In addition to injecting finance to upgrade and modernise facilities, the programme would demonstrate the government's commitment to market-oriented reforms, as urged by international organisations such as the World Bank. That in turn could help the government obtain yet more private and foreign investment for projects such as the construction of a new city at Subiya in northern Kuwait.

Plans call for the construction of 40,000 residential units, commercial facilities and infrastructure to accommodate up to 250,000 people. What does seem clear is that the days when Kuwaitis could expect ever more prosperous lifestyles are coming to a close.

The sober lessons of the early 1990s are now becoming even more apparent to a wider group of nationals and to a younger generation of graduates trained at home as well as abroad.

Despite low oil prices, Kuwait is engaged in a substantial expansion of its oil, gas and petrochemical resources. The goal is to firmly establish the country's pre-eminent role in world energy in the 21st century. This new determination was demonstrated in October, when the state-owned Kuwait Oil Company (KOC) ordered a huge oil rig which will be capable of drilling to a depth of 30,000 feet and will be the largest of its kind in the Gulf.

Due to become operational in June, it is part of a programme aimed at boosting the country's oil production capacity from the current level of some 2.2 million barrels a day (b/d) to 3.5 million b/d by 2005. The Petrochemicals Industries Company (PIC), another state-owned concern, has also announced plans to expand its facilities over the next four years at a cost of just under $500 million. PIC already owns and operates eight fertiliser complexes producing ammonia, urea and ammonium sulphate, chlorine, caustic soda, hydrochloric acid, sodium hypochlorite, hydrogen, distilled water and salt. The latest investments will help to fund a new plant to produce methanol that will be built on the site of a disused ammonia factory in Shuaiba.

Another unit to produce polyolefins is also on the drawing board. However, plans to build a huge aromatics plant which was expected to cost more than $1 billion have been delayed due to the low price of petrochemicals worldwide.

In November, Kuwait inaugurated one of the world's largest petrochemical facilities, the state-of-the-art Equate complex, which is also located in Shuaiba. Owned jointly by PIC, Union Carbide of the US and the private Kuwaiti firm, Bubiyan Petrochemical Company, it uses ethane-enriched gas to produce up to 650,000 tons of ethane, 350,000 tonnes of ethylene glycol and 450,000 tons of polyethylene annually.

Elsewhere in the hydrocarbons sector, the Kuwait Oil Tanker Company (KOTC) is upgrading and modernising its fleet. Two double-hulled crude oil tankers costing some $160 million were received recently, and another five are due for delivery beginning later this year.

KOTC is the sole agent for the country's oil and gas terminals at Mina Al-Ahmadi, Shuaiba and Mina Abdullah and operates a fleet consisting of liquefied petroleum gas (LPG) vessels and product carriers, as well as crude oil tankers. The expansion plans in the sector are being made possible at a time of low oil revenues by a series of economic reforms aimed at bringing in private capital.

While more details are expected to be announced in the next few months, it is already clear that the government is seriously considering opening the door to independent oil companies (IOCs) from abroad for the first time in 40 years.

Up to now, the presence of foreign multinationals such as Chevron and Exxon of the US, Shell and BP of the UK and France's Total has been limited primarily to servicing state-owned operations. One exception is operations in the Neutral Zone which Kuwait shares with Saudi Arabia, where companies such as Texaco of the US have been active.

The latest proposals, which are still under discussion in the Kuwaiti parliament, would allow them to take part in upstream production throughout the country in return for providing the investments required to increase output and for employing and training Kuwaiti staff.

The companies would also be obliged to manage the production operations and meet output targets, including the supplies needed for export. They in turn would earn by receiving a service fee from the government for each barrel of oil they produce, an annual allowance and special payments for develop- ing certain oil fields.

Foreign involvement in Kuwait's hydrocarbons sector is also expected to be accompanied by the privatisation of some of the government's holdings in the sector. In August, the Supreme Petroleum Council (SPC) announced that it had decided to privatise both the PIC and KOTC. In October, the state-owned Kuwait Petroleum Corporation (KPC) ordered a study to determine the best policy and method of selling off the government shares in the two companies.

KPC is also considering structural changes to its own organisation that many industry experts say is a prelude to privatisation of at least some of its shares as well. The corporation's Chief Executive Officer, Nader Sultan, told local reporters in October: "On the broad front, we want to develop clear strategic decisions where KPC should focus.

We want to make KPC "more efficient." The SPC is also reported to have approved the merger of the Kuwait Oil Company (KOC) and the Kuwait National Petroleum Company (KNPC) - another move that is seen as a preparatory step toward the possible privatisation of at least some of the state shareholdings in the two huge concerns.

KOC controls the sheikhdom's entire oil and gas exploration and production activities. KNPC owns the country's three petroleum refineries and also handles the production of liquefied petroleum gas as well as the local marketing and distribution of petroleum products. Its total refining capacity amounts to around 900,000 barrels a day.

While its recent expansion plans have been limited primarily to upgrading instrumentation and control systems at its refineries in Mina Al-Ahmadi and in Shuaiba, industry sources say it is also considering larger scale projects to change the output mix and to expand the production of the kinds of cleaner fuels that are expected to be more in demand in the next century.

These schemes would require substantial investments both in new technology and in marketing and promotion. Although the process will take time, the plans to increase both private and foreign investment in Kuwait's oil and gas sector represent a commitment to modernisation and reform that should enhance Kuwait's position in the world's league of energy producers over the next few decades.