Identifier
Created
Classification
Origin
05KUWAIT1884
2005-05-08 10:18:00
CONFIDENTIAL
Embassy Kuwait
Cable title:  

IRANIAN GAS AND PROJECT KUWAIT: THE VIEW FROM KPC

Tags:  EPET PREL PTER KU IZ IR OIL SECTOR 
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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 02 KUWAIT 001884 

SIPDIS

STATE FOR NEA/ARPI, EB

E.O. 12958: DECL: 04/26/2015
TAGS: EPET PREL PTER KU IZ IR OIL SECTOR
SUBJECT: IRANIAN GAS AND PROJECT KUWAIT: THE VIEW FROM KPC

REF: A. STATE 83661


B. KUWAIT 943

Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 001884

SIPDIS

STATE FOR NEA/ARPI, EB

E.O. 12958: DECL: 04/26/2015
TAGS: EPET PREL PTER KU IZ IR OIL SECTOR
SUBJECT: IRANIAN GAS AND PROJECT KUWAIT: THE VIEW FROM KPC

REF: A. STATE 83661


B. KUWAIT 943

Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d)


1. (C) Summary: During a May 2 meeting, Kuwait Petroleum
Corporation (KPC) General Counsel, Shaykh Nawaf Saud Nasser
Al-Sabah (strictly protect) gave Poloff a readout on the
status of Kuwait's efforts to import natural gas, including
details on the highly publicized March 15 MOU with Iran.
Nawaf said Kuwait viewed Iran as a secondary source for
natural gas, and asserted that Kuwait would ideally like to
import gas from Qatar. In an effort to ensure Iranian
cooperation, he noted that Kuwait had structured the MOU so
as to require Iran to sink substantial costs into the
construction of a pipeline (estimated at $100 million) before
recouping any costs. In the event the agreement with Iran
falls through and the Saudi-Qatari row remains unresolved,
Nawaf said Kuwait would consider accepting a Qatari offer to
supply LNG, although this would require the construction of a
very costly LNG terminal. He did not see the importation of
Iraqi gas as a viable alternative. On Project Kuwait, Nawaf
said the recent favorable report on the project by the
National Assembly's Finance Committee would virtually ensure
the body's support for the measure once brought to the floor.
He said the GOK hopes to conclude a vote on the issue before
the National Assembly's June 28 recess date. End Summary.

Iranians Duplicitous in MOU Negotiations
--------------


2. (C) KPC General Counsel Shaykh Nawaf Saud Nasser Al-Sabah
told Poloff May 2 that he had accompanied Energy Minister
Shaykh Ahmed Al-Fahad Al-Sabah to Iran to negotiate the March
15 gas MOU on behalf of Kuwait. During the trip, Nawaf said,
the CEO of Iran's state gas company had engaged in
duplicitous behavior, changing "half the agreement" in the
few hours between the end of negotiations and the signing
ceremony and leading Nawaf to threaten to withhold his
Minister's signature. Although the CEO denied making
anything more than minor changes to the document, Nawaf said
it was clear he had authored all of them.


Sunken Pipeline Equals Sunk Costs
--------------


3. (C) Wary of dealing with Iran, Nawaf said Kuwait had
purposefully structured the MOU so as to force Iran to assume
substantial sunk costs before realizing any profits.
Accordingly, the MOU calls for Iran to build or contract out
for the building of the necessary pipeline, which KPC
estimates will cost $100 million, before any further
agreements are made. Previous drafts of the MOU had called
for a jointly owned pipeline, operated by an International
Oil Company (IOC) on a Build, Operate, Transfer (BOT) basis.
When Iran approached IOCs about the project, however, none
would agree to undertake it without receiving a portion of
the upstream business, terms Iran was unwilling to accept.

Iranian Gas Substandard and Secondary Source Only
-------------- --------------


4. (C) Nawaf said KPC had queried Turkish officials about
their gas deal with Iran, and had been informed that Turkey
had pulled out of it after more than five years, in part
because of the poor quality of Iranian gas. Even if this
turns out to be true, Nawaf said, KPC envisions an Iranian
source as secondary to others it is pursuing.

Qatar Offers LNG Until Political Settlement with SAG
-------------- --------------


5. (C) Chief among Kuwait's planned sources is Qatar, which
Nawaf said KPC is still hoping will settle its differences
with Saudi Arabia, thereby allowing for a pipeline across
Saudi territorial waters. In the meantime, he said, Qatar
has approached Kuwait with an offer to supply Liquified
Natural Gas (LNG) via ships. Nawaf said KPC estimates for
the construction of an LNG terminal were in the range of $500
million, an extremely high cost, and one that KPC is
unwilling to bear for transport from such a close distance.
On sourcing from Iraq, Nawaf said that this would also
require significant investment in a pipeline for a very small
amount of flare gas, and would not be worth the expense.
(Note: He did not address Iraqi gas exports to Kuwait that
could be used to power electricity generation for sale back
to Iraq. End Note.)

Project Kuwait To Pass National Assembly
--------------


6. (C) The recent favorable report from the National
Assembly's Finance Committee on the Northern Oilfields
Project (Project Kuwait) makes it almost certain that the
project will be approved by the entire National Assembly,
said Nawaf. He said KPC and the GOK hope to have the
assembly vote on the project before the June 28 recess date
which will mark the end of the legislative year. Although he
admitted the GOK may not meet this deadline, Nawaf said the
Minister is committed to the project and is willing to make
every effort to ensure its passage by year's end.

Debate Over Bookable Reserves
--------------


7. (C) Responding to Poloffs comment that IOC's were losing
interest in Project Kuwait, Nawaf said there is ongoing
debate inside KPC over whether the project would allow IOCs
to book Kuwaiti reserves. So far, he said, the Minister and
other key actors have not been convinced that the potential
benefit of sweetening the deal this way for IOCs would be
worth the possible political ramifications. (Note: Some MPs
have opposed Project Kuwait on the grounds that it would
somehow transfer or imply IOC ownership of Kuwaiti reserves.
They would presumably be similarly suspicious of allowing
IOCs to book Kuwaiti reserves. End Note.)

New KPC CEO Management Style
--------------


8. (C) Nawaf said new KPC CEO Hani Hussein is less outwardly
focused than predecessor Nader Sultan, and shuns attendance
at international conferences in favor of an increased focus
on corporate governance issues. Accordingly, he has ordered
the formulation of a corporate ethics policy which include
anti-sexual harrassment and religious freedom provisions.

Assembly Dissolution Unlikely
--------------


9. (C) Discussing the passage of Project Kuwait, Nawaf noted
that many important issues were being crowded out by the
current debate over women's rights. Although the situation
had proved frustrating for the government, Nawaf said
dissolution of the assembly would be highly unlikely given
that the GOK had "paid a lot for this National Assembly" and
the Prime Minister would not want to have to start from
scratch or risk losing his key ally, Speaker Jassem
Al-Khorafi.


10. (C) Comment: Despite the MOU between Iran and Kuwait, the
behavior of Iranian negotiators and the Kuwaiti desire to
structure the gas deal in their favor in order to guarantee
forward movement are both strong indicators that the project
may never come to fruition. The difficulty of Kuwait and
Iran to deal with each other in good faith does not bode well
for this project. Kuwait has not lost hope that Qatar will
be able to supply gas in the near future and continues to
seek a diplomatic solution to the Saudi-Qatari row. As a
last option, Kuwait may eventually build an LNG terminal,
albeit at great cost. Either way, it is post's estimation
that Kuwait would prefer not to rely on Iran as its primary
source.

*********************************************
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LEBARON