KUWAIT ENERGY UPDATE: RECORD PRICES AND PROFITS,

UNCLAS SECTION 01 OF 03 KUWAIT 001496

SIPDIS

SENSITIVE

STATE PLEASE PASS DEPT OF ENERGY FOR IE
STATE FOR NEA/ARPI
EB/ESC/IEC FOR GALLOGLY, DOWDY, MCMANUS
USDOC FOR 4520/ITA/MAC/AME, 3131/USFCS/OIO

E.O. 12958: N/A
TAGS: ECON EPET ENRG KU OIL SECTOR
SUBJECT: KUWAIT ENERGY UPDATE: RECORD PRICES AND PROFITS,
GAS PLANS, AND PRODUCTION INCREASE

REF: KUWAIT 0943

This cable is sensitive but unclassified; please protect
accordingly. Not for Internet distribution.


1. (U) Summary: Kuwait Export Crude hits another record
high in March, while sustained high oil prices push Kuwait's
budget surplus to $9.2 billion for the current fiscal year
and as high as $12-$13 billion in the next. Kuwait Oil
Company expects to boost crude exports by an additional
150,000 barrels per day by the end of April when the
rehabilitation of the Gathering Center 15 facility is
complete. KOC's Gas Management Division chief describes how
Kuwait is moving ahead with its gas plans, including plans
for importation, drilling, and increased domestic consumption
of gas, and he asks for increased involvement in the sector
by U.S. companies. KPC continues expanding into foreign
markets, and the PR campaign for the Kuwait Project rolls on.
The Energy Minister adds to his already overburdened
schedule and temporarily takes on the Health Ministry
portfolio after the resignation of the Health Minister. End
Summary.

KEC Hits Record High
--------------


2. (U) Kuwait Export Crude (KEC) averaged $43.25 per barrel
for the month of March 2005, an all-time record high for a
monthly average. Fiscal year 2004-2005 and 2005-2006 budget
surpluses, based on 2004-2005 barrel prices, are projected to
be KD 2.7 billion ($9.2 billion) each year. The average
price per barrel in 2005 so far has been $39.40, however,
which would end up providing a 2005-2006 budget surplus of KD
3.8 billion ($12.9 billion),if this price scenario keeps up.

Additional Production Coming Online
--------------


3. (U) Kuwait is expecting to be able to boost its crude
exports by an additional 150,000 barrels per day by the end
of April 2005 when the rehabilitation of the Gathering Center
15 (GC-15) facility is complete. The GC-15 facility was
damaged in an accidental explosion in January 2002 and kept
approximately 300,000 bpd in exports off the market. An
initial 100,000 bpd was activated when the GC-15 was first
reopened in January 2005, and the remaining 150,000 is
expected to come online by the end of the month. The GC-15
facility is the largest in Kuwait and is able to handle
between 250,000 and 300,000 bpd, possible more in the event
of an emergency.

Gas Network Plans
--------------


4. (SBU) In a meeting with Econ Officer, Kuwait Oil Company
(KOC) Gas Management Group Manager Mohammad Al-Otaibi said
that we are now in the "gas century" and that the gas
business in Kuwait is "absolutely necessary" for Kuwait's
power stations, its consumers, its petrochemical plants, and
the business community as it turns to gas-powered factories.
He said that 60,000 barrels of oil were being used each day
just to refine gas to be used in Kuwait's power plants, and
added that KOC's three-year plan forecasts a demand of 1.7
billion cubic feet of gas per day. Al-Otaibi's team is
preparing feasibility studies now on creating a gas pipeline
network to service consumers and businesses throughout the
country, and is working with the Kuwait Chamber of Commerce
and Industry (KCCI) to survey businesses on their estimated
future gas usage.


5. (SBU) Echoing what post has heard from other sources
(reftel),Al-Otaibi said that Kuwait's options for gas
included importing it from Qatar, Iraq, and Iran, drilling
for gas in the offshore Al-Durra field, or refining it from
crude petroleum. Al-Otaibi said that drilling in the
offshore Al-Durra field would require time and a "political
decision," He added that, if the GOK gave the industry the
go-ahead to drill in Al-Durra, it would be handled by Kuwait
Gulf Oil Company (KGOC) and not KOC, whenever it did
commence. He said that KGOC would need to bring in outside
expertise, however, and that gas exploration, especially
offshore, would require the help of foreign companies.


6. (SBU) Al-Otaibi seemed perplexed that more U.S. companies
were not actively trying to sell products and services into
the growing gas sector in Kuwait, and asked for Embassy
support in getting more U.S. companies interested in the
market. He said that KOC needed consultants for refinery and
network upgrades and a new booster station. He said that
many American companies have sent him brochures, but that few
have actively contacted KOC's gas division looking for
business. He said that most of the parts and supplies came
from Italian and Korean companies and that he would like to
do business with U.S. companies, if they are interested.

Foreign Expansion
--------------


7. (U) Following on a March 2005 deal between Kuwait
Petroleum Corporation (KPC) and BP to seek joint investment
opportunities in China, Royal Dutch/Shell Group signed its
own deal with KPC for a similar arrangement downstream
opportunities in China and India. The arrangements are seen
as a way to finance and develop new refineries in the region.
Press and rumor-mill speculation say that BP and Shell have
signed these deals not so much for the importance of KPC's
involvement in Asia but more for raising the profile of the
two foreign companies as they jockey for position in the
long-awaiting bidding for the development of the northern
oilfields.


8. (U) In other foreign expansion plans, KPC has
inaugurated its new Beijing office with a visit at the end of
March by KPC International Marketing Managing Director Jamal
Al-Nouri. Al-Nouri has said that KPC hopes to sign a
long-term contract with China for supplies of crude. KPC now
has offices in China and Japan. KPC's own subsidiary, the
Kuwait Foreign Petroleum Exploration Company (KUFPEC),has
just reported $103.8 million in profits for 2004, an 18.2%
increase from 2003. The companies operates in 11 foreign
countries and owns reported reserves of about 190 million
barrels of natural gas and 60 million barrels of oil.

Refinery Maintenance and Shutdowns
--------------


9. (U) March 28 online news sources reported that the
270,000 bpd Mina Abdallah refinery would undertake scheduled
maintenance in April, reducing output by about 42,500 bpd for
a short period of time. Additionally, it was reported that
the entire refinery would close down for maintenance in
September 2006. The refinery management also recently
reported record profits of $614 million in the first nine
months of the current fiscal year.

Kuwait Project: PR Campaign in Full Swing
--------------


10. (U) The public relations campaign for the development
of the northern oilfields (the "Kuwait Project") is in full
swing, with Minister of Energy Shaykh Ahmed Al-Fahd Al-Ahmed
Al-Sabah and top KPC officials making frequent public
appearances to defend the project. The National Assembly's
Financial and Economic Affairs Committee is wrapping up its
study of the enabling law for the project and should issue
its report to the full Assembly soon. Some Islamists and
others opposed to the project in the past have now come out
publicly for it, citing the PR campaign as the deciding
factor. Other MPs and economists, such as Jassem Al-Saadoun
of the Al-Shall Economic Report, remain opposed to the
project. The cost of the project is now being reported as
$8.5 billion, up from the $7 billion previously reported.

Miscellani
--------------

11. (U) The Kuwait Gulf Oil Company (KGOC) will soon take
over KOC's management of Kuwait's portion of the onshore
joint operation in the Saudi-Kuwait divided zone,
consolidating all of Kuwait's divided zone operations within
KGOC. EQUATE, the petrochemical joint venture between Dow
Chemical and Kuwait's Petrochemical Industries Company, has
posted record profits of $620.5 million for 2004, a 126%
increase over 2003. KPC is close to launching a new services
company, which will handle security, healthcare, and
logistics for all of KPC's subsidiaries. The Supreme
Petroleum Council is expected to approve the charter of the
new services company soon. Finally, after the Health
Minister submitted his resignation on April 10, the Energy
Minister was given the Health Ministry portfolio to watch
over temporarily. According to press reports, he does not
expect to serve in this capacity "for more than fifteen days"
and has already empowered the Health Ministry's
undersecretaries and assistant undersecretaries to run the
day-to-day affairs of the Ministry.

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