KUWAIT OIL UPDATE - AUGUST 2004

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 002596

SIPDIS

STATE FOR NEA/ARP, E FOR CADE
EB/ESC/IEC FOR GALLOGLY, TUCKER, AND MCMANUS
STATE ALSO PASS TO DEPT OF ENERGY
USDOC FOR 4520/ITA/MAC/OME

E.O. 12958: DECL: 08/15/2009
TAGS: EPET ENRG EINV BEXP KU IZ IR
SUBJECT: KUWAIT OIL UPDATE - AUGUST 2004

REF: A. KUWAIT 2524

B. 2003KUWAIT 05756

Classified By: CDA TUELLER FOR REASON 1.4 (b) and (d).


1. (SBU) Summary: In this version of the Kuwait Oil Update:
the long-awaited Project Kuwait is given draft approval by
the Supreme Petroleum Council; Kuwait Petroleum Company CEO
Nader Al-Sultan tenders his resignation; the GOK moves
forward in its hunt for gas supplies; a fourth refinery is
planned; new oil tankers are contracted; and the Kuwait
energy sector looks for increased cooperation with, and
investment in, Asia following the Prime Minister's trip. End
Summary.

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Project Kuwait - Supreme Petroleum Council Approval
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2. (U) The Supreme Council for Petroleum (SPC) met on 10
August and gave formal approval to the economic model and
draft contract for the northern oilfields project (Project
Kuwait),according to local news reports. The project
documents will be referred to the Council of Ministers before
being presented to the National Assembly (NA) at the
beginning of the next parliamentary session. According to
local daily Al-Qabas, the members of the SPC "sensed
unprecedented seriousness in the need to see the project
through until its final stages in order to develop the oil
sector" by increasing production in the northern oilfields by
500,000 barrels. Investment in the northern oilfields
project is projected to be at least seven billion dollars.


3. (SBU) Many news articles noted that the SPC had changed
the description of the Project Kuwait bid package from an
"agreement" or "treaty" to a "contract." In an 11 August
telephone conversation with Hani Iskander, General Manager of
ChevronTexaco in Kuwait, Iskander told EconOff that this
opened up the possibility for the contract to be awarded by
Kuwait Oil Company (KOC) directly, without NA approval.
While not getting his hopes up for a quick approval by the
NA, Iskander said that this was "another step in the
process", and a "necessary formality." Iskander added that
his sources on the SPC told him that they had "sweetened the
fiscal terms" and that the "international oil companies
(IOC's) will be happy."


4. (SBU) Dirk Lenaerts, Business Service Manager for
ExxonMobil Kuwait, echoed Iskander's sentiment in a 11 August
conversation with EconOff, saying that the SPC approval was
"another important step forward," and that it was the "first
time that Project Kuwait would actually be formally submitted
to the NA." At the same time, Lenaerts expressed skepticism
about the GOK's stated desire to move forward rapidly, saying
that "with oil prices so high, why should (the GOK) bother
with (a $7 billion) investment?"

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KPC CEO Nader Al-Sultan Resigns
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5. (U) Local newspapers reported on 7 August that Deputy
Chairman and CEO of Kuwait Petroleum Company (KPC) Nader
Al-Sultan had tendered his resignation to the Energy Minister
and would finish his work when the current KPC board expired
in September, ending a 33-year career in the oil sector.
Sultan nominated current KPC Board Chairman Hani Abdel Aziz
Hussein to succeed him. Hussein has extensive experience in
the petrochemical, oil marketing and refinery sectors.


6. (SBU) According to Hani Iskander of ChevronTexaco, Nader
Sultan's resignation from KPC was the biggest news of the
week, more important than the SPC approval of Project Kuwait.
"Sultan was concerned with all of the details of Project
Kuwait", he said, and added that he hoped for increased
movement on Project Kuwait under Hani Hussein. Iskander said
that he thought KPC would be run well under Hussein.


7. (C) PolOff attended a dinner on 9 August with the Sultan
family, including Nader Sultan. The family congratulated
Nader on his "retirement" and, in one case, for deciding "not
to work under a crook," (referring to Energy Minister Ahmed
al-Fahad). Much of the family was in agreement that Nader had
been forced out of KPC because he was too clean. Regarding
his successor, Nader said that the company had held five
meetings to decide who the next Chairman of KPC would be. He
said they had looked outside the company, but had decided on
Hani Abdel Aziz Hussein because he is widely regarded as the
only man in the company with enough experience and
credibility to handle the job. Responding to a question from
PolOff, Nader said the Minister knows Hussein is the only
person up to the job, and would never consider sacking him.
"He would be scared to do this," he said. Nader said Hussein
had insisted to the Minister that he be allowed to bring in
his "own people" to lead the company, referring to a planned
reshuffling of top leadership posts in KPC. Nader said he
would spend the next two weeks going over the KPC
organizational chart with his successor to make sure the
appropriate people were shuffled into and out of the
appropriate jobs. Nader said he had requested that his name
not be placed into consideration for a renewal of the three
year contract over two years ago. (Note: In PolOff's 8 August
meeting with PM Advisor Fawaz Al-Sabah, Al-Sabah said the
decision had been made by the Minister himself (Ref A). End
Note.) Sultan professed happiness, but it was apparent the
move will be difficult for him, after 33 years with company.
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Gas - GOK Plans for Drilling in Al-Durra
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8. (C) At a 10 August dinner Nawaf Saud Al-Sabah, the head
of KPC's Washington office, shared with PolOff the latest on
KPC's efforts to buy and/or drill for gas. He said that
Kuwait had given up on the idea of buying Qatari gas, as the
Saudis will absolutely not allow Qatar to pipe gas through
its territory. Repeating what he told PolOff last year (Ref
B),he said Shaykh Sabah had approached Saudi Crown Prince
Abdullah on the issue, and had been told there were no issues
precluding the sale, but was subsequently told to "forget
about it" by Saud al-Faisal. Al-Sabah said Kuwait now has
plans to work with the Saudis to drill the offshore Al-Durra
field, irrespective of Iranian objections. He says Kuwait
needs all the gas, and has been talking with Saudis to "buy
them out," or at least buy their portion of the gas as it is
pumped. Al-Sabah added that Kuwait has given up on the idea
of buying from the Iranians, as they are "never sure who we
are dealing with." He said he expects a decision to drill
Al-Durra, which has not yet been approved, would prompt the
Iranians to get serious about the possibility of selling gas
to Kuwait. The time from decision until the first pumping of
gas is expected to take six years, according to Al-Sabah.


9. (U) Also on the gas issue, 10 August newspapers reported
that the Kuwait-Iraqi Joint Committee will discuss gas
projects during their 29 August meeting. The discussions
will include the importation by Kuwait of 200 million cubic
feet of gas from Iraq, and potential Kuwaiti investments in
the Iraqi Al-Saiba gas field.

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Fourth Refinery Planned
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10. (U) In another move to provide fuel for power stations,
a fourth refinery is planned for the Shuaiba area near the
old Shuaiba refinery, at an estimated cost of KD1 billion
($3.4 billion). According to 4 August news reports, planned
total capacity of the new refinery will be 430,000 barrels
per day, with an initial capacity of 215,000 barrels per day
expected to come online in 2008. Tenders for the front-end
engineering and design contract are expected to be opened by
the end of 2004.

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In Other Oil News...
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11. (U) As part of a plan to modernize its aging tanker
fleet and improve its exporting capacity, Kuwait Oil Tanker
Company (KOTC) has contracted with Korean Hyundai Heavy
Industries and Daewoo for the purchase of seven new oil
tankers, in deals worth about $552 million.


12. (U) KPC is following up on the Prime Minister's recent
trip to Asia by forming a committee to "follow up its oil
sector investments in China," according to local news
reports. KPC also announced that a delegation would visit
China to make arrangements for a new contract to supply
600,000 tons of aviation fuel to China each year, and to open
an office in China.


13. (C) After the PM's Asia trip, the PM's office released a
document to all of the Ministries highlighting desired
outcomes of the trip and specific objectives. A copy of the
document, in Arabic, was provided to EconOff. An informal
Embassy translation of this document provides the following
points on development of the oil sector's relationship with
Asian countries:

Overall Objective: Develop the oil sector, increase the
value-added in it, enhance its activities, increase demand
for its products, and secure markets for it in the long run.

Specific Goals:
- Work towards signing long-term contracts for selling crude
oil to those countries.
- Study joint-venture investment opportunities with strategic
partners in refineries and petrochemicals projects which
depend on Kuwaiti oil.
- Negotiate over joint investments in building strategic
stocks for those countries, whether in their own countries or
in other countries neighboring them.
TUELLER