Identifier
Created
Classification
Origin
04KUWAIT4557
2004-12-29 11:44:00
CONFIDENTIAL
Embassy Kuwait
Cable title:  

KUWAIT ENERGY UPDATE: PROJECTS, EXPANSION,

Tags:  PINR EPET ENRG BEXP KU IZ 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 KUWAIT 004557 

SIPDIS

STATE FOR NEA/ARP, INR
STATE PLEASE PASS DEPARTMENT OF ENERGY FOR IE
EB/CBA FOR J.F. MERMOUD, W. BEHRENS
EB/ESC/IEC FOR GALLOGLY, DOWDY
USDOC FOR 4520/ITA/MAC/AME, 3131/USFCS/OIO

E.O. 12958: DECL: 12/29/2014
TAGS: PINR EPET ENRG BEXP KU IZ
SUBJECT: KUWAIT ENERGY UPDATE: PROJECTS, EXPANSION,
COOPERATION, AND BIO NOTES

Classified By: Ambassador LeBaron for reason 1.4 (b)

C O N F I D E N T I A L SECTION 01 OF 04 KUWAIT 004557

SIPDIS

STATE FOR NEA/ARP, INR
STATE PLEASE PASS DEPARTMENT OF ENERGY FOR IE
EB/CBA FOR J.F. MERMOUD, W. BEHRENS
EB/ESC/IEC FOR GALLOGLY, DOWDY
USDOC FOR 4520/ITA/MAC/AME, 3131/USFCS/OIO

E.O. 12958: DECL: 12/29/2014
TAGS: PINR EPET ENRG BEXP KU IZ
SUBJECT: KUWAIT ENERGY UPDATE: PROJECTS, EXPANSION,
COOPERATION, AND BIO NOTES

Classified By: Ambassador LeBaron for reason 1.4 (b)


1. (U) Summary: Ambassador met December 2004 separately
with KPC board members, executives and chairmen of the
various KPC divisions, and also met with American oil company
executives. Most of the discussions concerned the Kuwait
Project (septel),but other topics discussed include:
Kuwait-Iraq energy cooperation; Kuwait's gas needs;
production levels and export capacity; training and workforce
issues; privatization; and refining sector expansion
projects. The meetings also produced considerable biographic
information on key Kuwaiti oil executives. End Summary.

Kuwait-Iraq Energy Cooperation
--------------


2. (SBU) On Iraq-Kuwait cooperation on energy projects, KPC
CEO Hani Hussain said that they have a joint committee to
look at various projects and keep the lines of communication
open. "We're gas-short," Hussain said of Kuwait, adding that
an agreement has been signed for the provision of gas by Iraq
but that it was "not much" and that a larger supply will
require a significant investment in facilities and pipeline
construction. He also said that KUFPEC (the state-owned
exploration firm) was looking at the potential for work in
Iraq, and that KNPC had hosted some Iraqis on visits to
Kuwait's refineries. At a December 27 "diwaniya" gathering
of Kuwaitis influential in the oil industry, KUFPEC Chairman
Bader Al-Khashti said that KUFPEC exploration in Iraq was
"only a matter of time" and that the Iraq Oil Ministry was
eager for KUFPEC's involvement. He said that when the
security situation stabilized further, KUFPEC would become
actively involved in the Iraqi exploration sector. When
asked about cooperation with Iraq on production at the
northern oilfields Kuwait Project Managing Director Ahmad
Al-Arbeed said that the two sides have "good cooperation"
right now and that Kuwait would like to sign a "unitization"

agreement, which would mean surveying the field, splitting
the reserves proportionally, developing the fields and
maximizing the recovery of oil for both sides.

Kuwait's Gas Needs
--------------


3. (SBU) KNPC Chairman Sami Al-Rushaid explained that Kuwait
has a tremendous need for gas to fuel its power plants, both
immediately and long-term. While Kuwait's plans for
expanding its refining capacity will meet some of those
long-term needs, in the short-term Kuwait has explored
importing gas for nearby countries. Qatar and Kuwait were in
negotiations to build a pipeline from Qatar through Saudi
Arabia's waters to Kuwait to bring gas. The deal was "signed
and agreed" according to Al-Rushaid, but then the deal was
held up by Saudi Arabia on the basis of territorial water
rights. (Note: Post's understanding is that the SAG is
holding up the deal because of what they consider to be
inflammatory reporting by the Qatar-based Al-Jazeera
satellite network.) Al-Rushaid said that once in a while he
hears indications of movement on the deal, but does not know
when it will go through, if ever. KUFPEC Chairman Al-Khashti
confirmed Post's understanding of the reason behind the
hold-up, and added that the gas supply from Qatar would still
not be enough to meet all of Kuwait's needs even if it did go
forward.


4. (SBU) Iran has gas to supply to Kuwait and the two sides
have had discussions on a supply deal many times, according
to Al-Rushaid. He said that whenever the two sides speak,
they almost reach agreement, and then other "religious"
authorities get involved and the deal gets changed or set
aside. (Note: Econ Officer has heard this opinion expressed
before, that the Kuwaitis "never know who they are really
dealing with" in Iran.) Al-Rushaid said that the GOK cannot
count on gas supplies from Iran.


5. (U) When asked about a just-announced deal for Iraq to
supply Kuwait with gas, Al-Rushaid said that this will meet a
very small part of Kuwait's short-term needs, but much more
will be needed. He explained that Iraq does not have the
infrastructure to actually use the gas but Kuwait does, so a
deal makes sense. The pipeline, transport and other
facilities need to be upgraded and maintained though,
Al-Rushaid said, so the deal will require some investment.
The short-term plan of importing 35 million cubic feet of gas
per day by the end of 2005 is possible with an investment of
$6-8 million, but the long-term plan of importing up to 200
million cubic feet per day will require an investment of
approximately $200 million, Al-Rushaid said. Kuwait will
still need much more gas than this to fuel its power plants,
so it will have to look at expanding its own refining
capacity.

Production Levels, Export Capacity, and New Directions
-------------- --------------


6. (U) KPC CEO Hussain described the overall vision of KPC
as operating as much like a private business as possible.
Hussain said that KPC planned on producing 4 million bpd by
2020, and looked to increase and diversify the refined
products coming from Kuwait. The petrochemical sector was
seeing a major expansion, he explained, with KPC,s
Petrochemicals Industry Company (PIC) partnering with Dow in
a number of ventures, both in Kuwait and abroad. He saw the
advantage of these joint ventures as being the influx of U.S.
best practices and the ability to avoid some of the
difficulties of the Kuwaiti labor market. Hussain said that
KPC was currently looking at $30-40 billion in planned new
investments and capital expenses, all part of what he
described as a "busy, ambitious program" of expansion.
Al-Rushaid also described a number of upcoming
"mega-projects" in the oil sector, and said that projects of
this size and scope have not been proposed in Kuwait since
the 1960,s. These included the Kuwait Project, construction
of a new refinery, upgrades at existing refineries, pipeline
construction, export facility expansion and more.


7. (U) KOC Chairman Farouk Al-Zanki said that KOC was
planning on expanding export capacity to three million bpd --
two million of crude and one million in refined products.
KOC plans to sign a contract for pipeline and export facility
construction by the end of 2005, and also plans to upgrade
existing pipelines and facilities. These contracts would be
of interest mostly to construction companies, Al-Zanki said.
Al-Zanki said that KOC has been exploring in other areas of
northern Kuwait and has found "good quality light crude,"
about 16,000 feet deep. He did not give any indication of
quantity of a timeframe for further development, other than
to say that KOC "hoped to produce light crude in a few years."

No, Seriously, How Much Oil Do You Have?
--------------


8. (SBU) ChevronTexaco GM Hani Iskander (please protect)
said that he thinks Kuwait has about 30 billion barrels of
oil left, not the 96 billion that KPC and the GOK report.
The production costs are increasing as the fields mature, he
explained, with the last third of every field being the most
expensive to produce. KOC shuts wells down when they start
producing 5-10% water, Hani said, while ChevronTexaco can
keep operating at 90% water. The water-handling costs and
the volume of water will continue to increase as Kuwait's
fields mature and as KOC goes after more difficult
reservoirs. The Burgan field has a water table beneath it
providing pressure, but it too will run out and will require
water injection someday, according to Iskander.

Training and Workforce Issues
--------------


9. (U) The KPC executives all said that they consider
training and development important and that the company tries
to start people off with training right out of high school.
Some KPC divisions had offered scholarships to the U.S. in
the past, he said, but had problems with the students not
being disciplined enough with their studies, and falling
behind their colleagues during their time in the U.S.
Al-Rushaid said that the company was looking at reintroducing
some scholarship programs with more controls. Hussain said
that training and career development are also being given a
priority, with the creation of a new position overseeing
training and budgetary authority.

Privatization: Three Competing Gas Station Companies
-------------- --------------


10. (U) Al-Rushaid said that a directive had been issued to
all public sector companies to identify areas ripe for
privatization, and KNPC had identified its petrol stations
sector as a viable candidate. The reasons given for
privatizing gas stations: fewer restrictions on hiring and
firing, fewer restrictions on services offered, and more
competition. After the first round of 40 of the
approximately 120 petrol stations are privatized, the
government will offer a second round in February or March of
2005, according to Al-Rushaid. The third round of the
remaining stations will be privatized at a later date. The
three separate rounds of privatization will result in three
separate gas station companies competing against one another.
The gas prices will still be regulated, but the three
companies will have different brands and will have an
operating margin within which they can adjust the prices.
They will also be able to operate convenience stores and
repair garages, something KNPC cannot do without generating
justifiable complaints from the private sector. According to
Al-Rushaid, the GOK wants to allow the private sector to
flourish, so this was the best way for KPC to participate.
Previously, the lubrication oils plant was privatized, as was
the coke smelter operations.


11. (SBU) When asked about KNPC,s privatization of petrol
stations, Hussain said that it was a necessary step and that
Kuwait "should let capitalism work a bit." He said that
Sheikh Hamad, the Prime Minister's son, wanted to get control
of the first privatized gas station company (Al-Owla),but
that KPC fought against it and he was not given control.
Hussain said that the petrochemicals sector was a candidate
for more privatization, and that the tanker and transport
division was also a potential candidate. He said
privatization was being pushed by the GOK and by the Supreme
Petroleum Council (SPC.)

Refining Sector Expansion
--------------


12. (SBU) Fluor-Daniels was recently awarded the contract to
be the Project Management Consultant for a fourth refinery,
planned for the Shuaiba area. Fluor-Daniels will also
prepare the tendering documents for the Engineering,
Procurement and Construction (EPC) portions of the new
refinery project, and supervise the EPC contractors.
Al-Rushaid said that the main purpose of the construction of
a fourth refinery was to provide fuel for Kuwait's power
plants. Kuwait has been waiting a long time for gas from
Iran or Qatar, he said, and would prefer to be self-reliant
and produce its own environmentally-friendly fuels. At the
same time, KNPC will begin upgrading the three remaining
refineries to be in line with the environmental standards of
the consumers of its refined products. The refinery upgrades
will cost about $2 billion, and the construction of the new
refinery will cost $3 billion. In the Project Management
Consultant contract with Fluor-Daniels for the new refinery,
KNPC has the option to retain the company for work on the
refinery upgrades. Al-Rushaid said that it was "most likely
that KNPC will use them," because the work would be very
similar, and it was already in the contract.


13. (U) When asked about the future directions of KNPC,
Al-Rushaid said that his focus now was on improving the
financial performance of the company and on upgrading the
refineries to be able to produce better products. He
specifically wanted to bring the fuel oil portion of their
refined products down to 10% and increase the production of
higher-value products. With the new refinery completed in
2010, Al-Rushaid said that the planned production of 225,000
bpd of low-sulphur fuel oil would meet all of Kuwait's power
requirements through 2020. He also said that he wanted to
work on safety, health and environmental issues.

Bio Notes
--------------


14. (C) None of the oil executives currently leading KPC
appear to have political ambitions. They have all just
assumed new positions on the board and will likely lead KPC
through this next major phase of expansion, and will be the
key interlocutors for the USG on a range of petroleum issues
for the foreseeable future. Biographical information on four
of the top executives is included below.

Hani Hussain, Deputy Chairman and CEO, Kuwait Petroleum
Company (KPC)
Born 1949. Chemical Engineering degree, University of Tulsa,

1971. Worked in KPC and divisions from 1972 to the present.
Hussain says that he considers himself a "religious person"
and can easily shift from discussions of the most intimate
details of the oil sector to far-reaching philosophical
discussions of religion, history and politics. In a recent
lengthy, meandering conversation about religion, politics and
reform, Hussain said that Kuwait was "still trying to find
itself" and still trying to figure out what the "final
system" would be, in terms of leadership and governing
structure. He saw the need for more economic reform, noting
the problems in counting on oil revenues for an infinite
stream of wealth. "People need to get it through their
heads," he said, "you can't just live by digging this stuff
up out of the ground forever."

Farouk Al-Zanki, Chairman, Kuwait Oil Company (KOC)
Born 1953. BS and Master's degrees in Petroleum Engineering,
Oklahoma University, 1976, 1980. Worked in KOC from 1980 to
the present. Al-Zanki spent 12 years in the United States
completing his undergraduate and advanced studies in
petroleum reservoir engineering and enjoys reservoir
management, rather than the more popular and lucrative
production side. He studied in New Mexico, Oklahoma, and
Texas. He met and married an American woman and they had one
child together. This child died in a car accident in Kuwait.
The woman did not want to live in Kuwait and they are either
separated or divorced. Al-Zanki has another son now who is
in high school and considering studying in the U.S. Al-Zanki
has a great fondness for the United States and travels there
often. He says that he "must go the U.S. every year." He is
a clever, humorous conversationalist and clearly enjoys
talking with Americans.

Sami Al-Rushaid, Chairman, Kuwait National Petroleum Company
(KNPC)
Born 1956. BS in Industrial Engineering, Miami University,

1978. Worked in KNPC from 1978 to the present. Al-Rushaid
has 4 children. One daughter is finishing her pharmacy
degree in Kuwait, and another is in dentistry school in
Dublin, Ireland. His son is finishing high school in Kuwait
and plans to study in the U.S.

Ahmad Al-Arbeed, Managing Director, Kuwait Project
Born 1955. BS in Petroleum and Natural Gas Engineering,
University of Pennsylvania, 1977. Worked in KOC, KUFPEC ,
and KPC from 1977 till his appointment in the newly created
Kuwait Project position in August 2004. While Al-Arbeed has
been described as an "Islamist" in the Kuwaiti press and by
other post contacts, he is clearly familiar with the West,
was educated in Pennsylvania, and speaks fondly of his many
visits to the United States since attending college in the
1970,s. He spent time in New York after September 11, 2001
when many other Arabs were staying away, and said that he
enjoys himself whenever he travels to the U.S. He explained
how, on his last visit, the immigration and security
personnel at the airport treated him the same as Americans
were treated, and that he appreciated that. He has eight
children, seven girls and one boy (the youngest). He is
planning a family holiday to the U.S. for the summer of 2005,
and explained that he has put out a request for proposals to
his daughters to determine the summer vacation. The best
package will earn the winning daughter a spending money
bonus.

********************************************
Visit Embassy Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************
LEBARON