2024/09/22

In this Blog, we highlight the legal frameworks that govern the oil and gas projects in Kuwait and how to negotiate for concessions and business partnerships to protect the interests of companies and mitigate legal risks.

Introduction

Oil is the main source of the Kuwaiti wealth and one of the most important economic sectors. Therefore, Kuwait seeks to protect oil under a legislative framework. The legislature of Kuwait enacted Law 19 of 1973 on Conservation of Petroleum Resources implemented under Decree 72 of 1975 issued by the Minister of Oil. We explain here the concession contracts and partnerships between the Kuwaiti Government and oil companies as well as the relevant legal risks.

Oil Concession Contract

Oil concession is an exclusive right granted by the State to a foreign company for exploration and exploitation of oil within its geographical borers for a specific period. Oil concession contracts have an important influence on the economic growth.

Concession contracts are divided into two types:

• Oil and Gas Production Sharing Contracts

The Kuwaiti Government and concession holder agree that they will share the costs of production and exploration of oil. Under such contracts, a concession holder is subjected to strict environmental standards, perform oil operations including the exploration, establish the infrastructure, extract oil, and generate energy in return for a share in the produced oil. The Kuwaiti share is 51% of the production volume.

• Oil Service Contracts

Oil service contracts are concluded by the Government when it needs oil services in return for a fixed price. A contractor shall provide its services, expertise, and equipment while the Government will be liable for all risks. Unlike the long-term production sharing contracts, service contracts are short-term contracts.

Obligations of Companies Licensed to Perform Petroleum Operations in Kuwait:

• All measures and precautions shall be taken to prevent any damage or danger of petroleum operation pursuant to Article 3 of Law 19 of 1973 on Conservation of Petroleum Resources which reads as follows: “Any licensee shall take all measures and precautions to prevent any damage or danger that may arise from any petroleum operations and may impact on human lives, public health, property, natural resources, graveyards, or religious, archaeological, or touristic sites. A licensee shall also make necessary actions to conserve the air and superficial and underground water.”

 

• All devices, equipment, and tools used in petroleum operations shall conform to the international standards, satisfy safety requirements, and perform their functions according to the best practices and pursuant to Article 4 of the same Law.
• Pursuant to Article 5 of the above Law, programs, reports, and information on petroleum operations shall be submitted.
• Before performing any petroleum operation, an oil concession holder shall provide a description of the project to the Minister of Finance and Minister of Oil as required under Article 6 of Law 19 of 1973 which reads as follows: “A licensee shall before performing any petroleum operation provide the Minister of Finance and Minister of Oil with a description of the project including its plans, location, capacity, estimated costs, operational methods, engineering data, and any other information. The Minister has the right to accept or reject any project or request to provide further clarifications, studies, or modifications.”

 

Legal Risks of Petroleum Projects

The main legal risks faced by oil companies are as follows:

• Legislative Amendments

 Legislative amendments in Kuwait may lead to alterations to oil contracts and increase in the costs. For example, any amendment to tax laws results in an increase in the operating costs. In addition, where any licensing laws are amended, the documents and licenses may need to be renewed. Moreover, any amendments to labor laws bring more burdens on the petroleum company towards its manpower.

• Environmental Legislation

 Any oil company operating in Kuwait is subject to strict environmental standards and shall comply with the Environmental Protection Law 42 of 2014. Under this Law, an oil company is strictly required to take measures for preventing air and water pollution, manage wastes, and conserve natural resources. In addition, oil companies shall submit the environmental impact assessment and set plans for environmental emergencies such as oil spill.

• Oil companies shall pay big compensation for any environmental damage and shall assume the costs for repairing such damage.
• Oil companies are strictly monitored and periodically inspected. Penalties are imposed on them if they don’t comply with the applicable standards and laws.
• Kuwait is subject to international environment conventions which bring more burdens on oil companies.

 

Al Arbash Law Firm is an outstanding legal hub for consultation about oil concession contracts and how to comply with them in the light of constant legislative amendments in Kuwait.

 

References:

Law 19 of 1973 on Conservation of Petroleum Resources