(SBU) KUWAIT AND IRAQ BEGIN ADDRESSING BILATERAL

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 000786

SIPDIS

STATE ALSO PASS TO DEPT OF ENERGY
PENTAGON FOR DESC

E.O. 12958: DECL: 03/07/2014
TAGS: ENRG ETRD EINV KU IZ SA QA IR
SUBJECT: (SBU) KUWAIT AND IRAQ BEGIN ADDRESSING BILATERAL
ENERGY CONCERNS

REF: KUWAIT 05756

Classified By: DCM FRANK C URBANCIC; REASON 1.4 (B)



1. (SBU) Summary. Energy Ministry Undersecretary Al-Own
told USG officials that Kuwait and Iraq have begun direct
discussion of bilateral energy issues through the creation of
a technical committee, but he remains concerned that Iraq is
lacking well-organized plans for the sector. (See septel on
Ambassador's March 8 meeting with Kuwaiti Energy and Iraqi
Electricity Ministers in Kuwait City.) Of primary immediate
concern for the bilateral technical committee is planning the
supply of fuels from Kuwait to Iraq to begin 1 April and most
likely to continue after the dissolution of the CPA in Iraq
on 30 June. Al-Own confirmed that any firm could bid on
humanitarian fuel contracts tendered by the USG and its
agents. Al-Own said the technical committee is considering
the longer term exportation of Iraqi oil via Kuwait and
tapping Iraq as a partial solution to Kuwait,s growing
demand for natural gas. The committee also is looking at
ways to encourage Kuwaiti investment in southern Iraq.
However, security and political sensitivities remain a large
concern for Kuwaiti companies. Al-Own said Kuwait is
committed to engaging the new Iraqi government on these
issues, but he stressed that American support for Iraq would
be necessary for years to come if these and other energy
issues are to be successfully resolved. End Summary.

(SBU) Bilateral Technical Committee Formed
--------------


2. (SBU) In a March 2 meeting with Econcouns, Econoff
(notetaker) and visiting officials from the U.S. Defense
Energy Support Center (DESC),Undersecretary for Oil Issa
Al-Own said Kuwait and Iraq have recently created a technical
committee to begin resolving bilateral energy concerns and to
find areas for future mutual cooperation. "Kuwait is talking
to the Iraqis directly and looking for the development of
strategic cooperation between the two countries," Al-Own
said. He reported that the technical committee, which "has
the blessing of the Prime Minister," has met three times in
Kuwait since December 2003 (December 11, January 17, February
29) and the next meeting is scheduled for May 4, 2004. The
Undersecretary heads the Kuwaiti delegation, which is
composed of chairmen from the production, marketing and
refining sectors representing the oil, gas, and related
commercial industries. Although Al-Own described the Iraqis
as committed to the work of the committee, he told us Iraqi
politics handicap Iraq's energy operations. He expressed
concern that he would be dealing with "new faces" after the
June 30 transfer of sovereignty to a transitional Iraqi
government.

(U) Kuwait Supplying Fuels to Iraq: How Much for How Long?
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3. (C) Al-Own said the Iraqis informed the technical
committee that Iraq would need 6.2 million liters of fuels a
day, beginning April 1st. He said he was uncertain how Iraq
arrived at this figure, but stressed he hoped it had been
decided in close coordination with the USG. Al-Own said
Kuwait is prepared and able to supply 3.6 million liters/day
to Iraq, but more than that would be logistically difficult
to accomplish due to loading and transport limitations. He
said he suspected Iraq,s oil production and refining would
be crippled for a long time, and thus more permanent
solutions, such as new pipelines, would be needed to meet
Iraq,s growing fuel needs. Al-Own estimated that it would
take Iraq seven to nine years to get back on its feet in
terms of production. Referring to the Iraqi State Oil
Marketing Organization (SOMO),he said he was "not confident
of SOMO,s capabilities to transport and pay" for any fuels
received, and that the only way to ensure continuity would be
to have the "Americans lay down the structure of operations,
which Iraq must accept as reasonable."


4. (C) DESC officials briefed the Undersecretary on the
state of commercial negotiations to find a replacement for
the current KBR administered humanitarian needs contract due
to expire March 31. Al-Own appeared satisfied with how these
contracts were being negotiated. He emphasized the need for
all contracts to be openly bid, and for the winners to comply
with all safety and trucking specifications. He said that
this contract represented "a new situation, an open
opportunity, and it is in the interests of all parties to
comply."

(SBU) Future Export of Iraqi Oil via Kuwait
--------------


5. (SBU) Al-Own said Kuwait is considering Iraq,s recent
request to export a portion of Iraqi crude oil through
Kuwait,s ports. He explained that Iraq originally had asked
that one million barrels per day be exported via Kuwait, but
now reduced its request to 250,000 barrels/day. He said
Kuwait was already intending to expand its export facility
from the current capacity of two million barrels/day to a
capacity of three million/day within seven years and to four
million/day within 15 years. Any new expansion plans will
factor in the additional Iraqi shipments, Al-Own said. He
expected a technical team to have preliminary cost estimates
for such a project within the next two months, although he
emphasized there are major hurdles to this effort,
particularly since there currently are no functioning oil
pipelines that can be used to accommodate the Iraqi
shipments.

(SBU) Kuwait,s Growing Demand for Natural Gas
--------------


6. (SBU) Al-Own described the challenge of securing
much-needed new supplies of natural gas for Kuwait as a
"headache" for him as Undersecretary. (Note: Although
Kuwait is blessed with extensive oil deposits, it has
insufficient natural gas supplies. End note.) Al-Own
explained that Kuwait needs additional natural gas for two
purposes: power generation and the growing petrochemical
industry. Kuwait wants to convert its oil burning energy
plants to more efficient and clean natural gas. Likewise,
Kuwait is expanding its petrochemical industry, with a $6
billion deal with Dow Chemical being the cornerstone of this
expansion.


7. (C) Al-Own said Kuwait is exploring four separate
options, or a combination thereof, for securing this needed
natural gas and said a final decision would be made sometime
this year. One option is a project with Qatar that could
potentially provide 1.2 billion cubic feet of gas per day.
Al-Own said ExxonMobil is exploring this project and would be
in Kuwait for renewed talks in May of this year. Kuwait was
also considering imports of natural gas from Iran (Reftel A).
Another possibility was to develop the offshore Al-Durra gas
fields in connection with Saudi Arabia and Iran, but he said
the dispute with Iran regarding their competing claims on the
field would need to be resolved first.


8. (C) The final option under consideration by the technical
committee is for Iraq to provide some natural gas to Kuwait.
Al-Own said from 1986-1990, prior to the first Gulf War, Iraq
provided Kuwait with 200-300 million cubic feet per day, but
much of the gas was "wet" and therefore of inferior quality.
Importing Iraqi gas would further enable consumers to
rationalize their use of Kuwaiti gas for maximum efficiency.
Under such an export plan, Iraq would no longer need to flare
its gas, resulting in reduced pollution and increased export
revenues. Al-Own said the infrastructure was in place for
these deliveries to begin again, noting that a connected gas
pipeline was in good condition, although metering instruments
would need to be installed. He, however, remained concerned
about the quality of the gas from Iraq. Econcouns asked
about possibly entering into a gas for debts swap with Iraq,
which Al-Own said was a possibility but that Kuwaitis still
harbor a lot of animosity towards Iraq for the damage caused
in 1990-91, for which they still demand compensation.


9. (C) Equate Petrochemical Company (a joint venture of Dow
Chemical and Kuwait Petroleum Investment Company) has
previously expressed to us strong interest in purchasing
Iraqi gas for its Kuwait facility. Additional supplies of gas
would allow Equate to fully utilize its plant's capacity and
boost its profitability. Equate also expressed its
willingness to make the necessary minor upgrades to the
pipeline system in return for a supply contract.

(C) Kuwaiti Investment in Iraq: Wait and See
--------------


10. (C) Iraq, through the technical committee, has asked
Kuwait to encourage investment in Iraq,s energy sector in an
effort to help revitalize that sector. When Econcouns
asked about the possibility of the two countries jointly
developing the Rumaila oil fields as a means of encouraging
Kuwaiti investment, Al-Own said the committee considered this
issue at its first meeting, but due to the political
sensitivity of the subject, Iraq had asked that this issue be
tabled. (Al-Own recalled that Saddam Hussein's regime's
demand for control of these fields was one of Iraq,s primary
reasons for launching the 1990 invasion.) Due to the
sensitivity surrounding the idea of joint exploitation of the
Rumaila fields, this part of the technical committee's
discussion was not even recorded into the meeting's minutes,
Al-Own said. Plans, however, are currently being considered
to open a Kuwaiti investment office in Basra, but the
security situation remains a concern. Such an office could
help facilitate various outsourcing contracts with Kuwaiti
firms, helping bring the energy sector back on line more
rapidly.

(U) Comment
--------------


11. (C) Al-Own frankly discussed the efforts Kuwait and Iraq
are currently undertaking to rebuild the energy sector and to
mutually improve bilateral relations. He stressed, however,
that any solutions would only be for the long term and that
Iraq would continue to rely upon US assistance for the
foreseeable future. He said Kuwait remains committed to
helping the US achieve success in Iraq, recognizing the dire
implications for Kuwait otherwise. Post views this working
level bilateral energy committee as a positive step for
Kuwait-Iraq economic and strategic partnership relations. We
will continue to monitor its progress and undertakings.
Baghdad minimize considered.
JONES