Kuwait plan to sell 170m BP shares

Oil multinationals face unsettling times as investors show their mettle

The Kuwait Investment Office (KIO) announced yesterday that it would sell 170 million shares of British Petroleum.

In a statement it said: "The Kuwait Investment Office ... announces that it has entered into an agreement with Goldman Sachs to dispose of 170,000,000 shares of British Petroleum, amounting to 3.0 per cent of British Petroleum issued share capital."

The KIO, which had been advised by Schroders, said the shares represent a core investment for the Future Generation Fund of Kuwait and KIO. It will remain a significant investor in British Petroleum with its continuing holding of approximately 6.3 per cent of the company's issued share capital.

"The KIO's holding of British Petroleum shares has, however, come to represent a disproportionate part of the Future Generation Fund of Kuwait and this is why this portfolio rebalancing exercise is now being undertaken," it added.

The motive for the KIO's sudden decision was unclear. Its action, as opaque and unpredictable as markets have come to expect from the KIO, will send a frisson through the many other countries where Kuwait holds overseas assets.

It is possible that the motivation lies in a shift of analysis of the position of BP, or of Britain as a whole. Sir David Simon, BP's chairman, is leaving the company to become Minister for Trade and Competitiveness in Europe in Tony Blair's new government.

It is possible that the arrival of a Labour government has stimulated a change in thought. But given that this was signalled well in advance, and that Mr Blair will largely continue the pro-business policies of the outgoing Conservative government, it seems unlikely.

More likely is that the decision signals a shift in internal thinking about Kuwait's financial position. Kuwait's multi- billion dollar Reserve Fund for Future Generations was very hard hit by the 1990-91 Gulf War. As well as paying for the vast costs of reconstruction, Kuwait paid large sums to the countries which fought Saddam Hussein after he invaded the Gulf emirate.

Though hardly strapped for cash, Kuwait has had to pay closer attention to its investments in the aftermath. There have been intermittent concerns about the liquidity of its investments, which may explain the statement about the balance of the portfolio.

The KIO has traditionally been a very long-term investor with large assets spread wildly throughout the world. It has been an important, if highly controversial, investor in Britain. It bought into BP in 1988, just after the 1987 stock market crash, triggering fears about the ownership of one of the jewels in Britain's industrial crown.

Kuwait's economic problems were building even before the Gulf War, as the oil price weakened and the fiscal position deteriorated. The 1982 crash of the country's unregulated Souk al-Manakh stock market left huge outstanding debts, amounting to some $20bn which were bought out by the Kuwaiti government.

Even in the year preceding the Iraqi invasion, the budget deficit was financed from earnings on overseas assets.

The Reserve Funds for Future Generations, managed by the Kuwait Investment Office, then stood at around $100bn. By 1994, that was down to about $35bn - probably lower, once loan repayments were taken into account.

Kuwait's position was further undermined by a series of bad investment decisions, in particular in Spain where KIO's operations were wound up.