In a crippling blow to its plans, the Kuwait Petroleum Corporation and Petrochemicals Industries Company has verbally informed The Dow Chemical Company, its partner in a $17.4-billion petrochemical deal that the Kuwait Supreme Petroleum Council (SPC), had asked it pull out of the previously approved deal.

The project was to have been executed through a 50:50 joint venture company, K-Dow Petrochemicals, for which approvals had already been granted.

Dow expects an official written notification of the decision within the next few days.

In a statement released by Dow Chemicals, it said, "Dow is extremely disappointed with the decision, and is in the process of evaluating its options pursuant to the joint venture formation agreement. While disappointed in this outcome, Dow remains committed to its Middle East strategy."

Kuwait and Dow lowered the value of the joint-venture by more than 8 per cent to $17.4 billion earlier this month after the government asked the Kuwaiti company to cut its contribution, in view of a sharp slowdown in global demand.

This deal was conceived over a year ago in December 2007 and was then considered a positive move with shares of Dow Chemical jumping more than 6 per cent.

Kuwait Petroleum and Dow had agreed to jointly manufacture marketed polyethylene (PE), ethyleneamines, ethanolamines, polypropylene (PP), and polycarbonate and related licensing and catalyst technologies. PE and PP comprise more than half of world polymer demand. PE is the most widely used of all plastics and can be found in everyday products from food packaging, milk jugs and plastic containers to pipes and liners. PP is a versatile plastic used in fibers, packaging films, non-wovens, durable goods, automotive parts, and consumer applications.

Polycarbonate is an engineering thermoplastic used in applications such as optical media, electrical and lighting. Amines are a family of chemicals with a broad range of properties, used in various applications from wood treating and pharmaceutical processing, to coatings and consumer products.

The withdrawal of the deal has clearly come as a surprise to Dow Chemicals. Just four days earlier, on 24 December the companies CEO had made a statement reinforcing the strength of the deal.

Andrew Liveris, chairman and CEO of The Dow Chemical Company, issued the following statement today on the current discussion and debate over the Company's joint venture agreement with Kuwait's Petrochemical Industries Company (PIC).

''Among the accomplishments I am most proud of since becoming Dow's chairman and chief executive officer in 2005, has been the strong and growing economic relationship between our company and our business partners in Kuwait,'' Liveris said. ''Since the early 1990s we have worked together to establish four joint ventures, each of which has created economic development and prosperity and established the State of Kuwait as one of the leading petrochemical producers in the world.''

''In recent weeks there has been much discussion and debate about whether a fifth partnership to establish a new joint Kuwaiti-American company - K-Dow Petrochemicals - is in the long-term interest of the people of Kuwait,'' Liveris continued.

Political pressures
The deal had not gone down too well with some Kuwaiti parliamentarians who said the project was not economically viable in light of the global financial crisis and slumping petrochemical sales.

Criticism of the deal increased greatly in the last few days, especially after officials disclosed that commissions worth $850 million were assigned to certain groups that supported the deal.

Officials said they expected senior officials at the ministry of oil to be referred to oublic prosecution if the deal was approved.

MP Musallam Al-Barrak attacked the Dow Dow Companychief during a symposium last Friday organised by London union students and said the chief was not someone who should lecture Kuwait on how to administrate the different affairs of the country.

The chemical industry has been facing one of the worst slumps ever in chemical demand, due to recessions in most developed countries and a sharp slowdown in emerging economies.

Earlier this month, Dow said it would close 20 facilities, divest several businesses and cut 5,000 jobs, or 11 per cent, of its workforce. It also plans to temporarily idle about 180 plants.

The cancellation of the agreement after the start of the New Year would have made Kuwait liable to pay a penalty of up to $2.5 billion.

A huge blow to Dow
The cancellation of the deal is a blow to Dow, which had planned to use the proceeds to repay a large part of $13 billion in debt it will have to shoulder once its acquisition of rival Rohm & Haas closes in early 2009.

In July 2008, Dow had agreed to buy Rohm & Haas, a maker of materials used in paints and electronics, for $15.4 billion and assume $3.4 billion of debt.

Dow would be able to complete the Rohm & Haas transaction even without the Kuwaiti money, the company had then said.

Dow had planed to fund the Rohm & Haas purchase with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett's Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow would need only about $5 billion of the bridge loan with the Kuwait proceeds. But with the falling valuations, Dow may seek to back out from its deal to buy Rohm & Haas.

In April 2008, Dow had fired two executives, accusing them of holding secret buyout talks with outside interests.

The shakeout occurred after a British tabloid reported that a group of Middle Eastern investors and US buyout firms had secured financial backing for a $50-billion bid to acquire the the US chemicals giant.

Dow first said it wasn't involved in any talks, then said the two executives had engaged in secret talks without company permission.