SECRETARY OF ENERGY THANKS GOK FOR KATRINA AID,

C O N F I D E N T I A L SECTION 01 OF 04 KUWAIT 004770

SIPDIS

SIPDIS

LONDON FOR TSOU
DEPARTMENT OF ENERGY FOR IE, MWILLIAMSON, AND OFFICE OF THE
SECRETARY

SIPDIS
EB/ESC/IEC FOR GALLOGLY, DOWDY

E.O. 12958: DECL: 11/15/2010
TAGS: ENRG EPET ECON BEXP KU
SUBJECT: SECRETARY OF ENERGY THANKS GOK FOR KATRINA AID,
BRIEFS ON ENERGY BILL AND REFINERY CAPACITY, AND URGES
INCREASED INVESTMENT IN KUWAIT'S UPSTREAM AND DOWNSTREAM
SECTORS

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

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


1. (U) Summary: During his November 13-14 visit to Kuwait,
Secretary of Energy Samuel Bodman thanked the Government and

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people of Kuwait for their generous support for Hurricane
Katrina victims, as well as their support of reconstruction
efforts in Iraq, Pakistan and elsewhere. The Secretary
briefed Energy Minister and current OPEC President Shaykh
Ahmad Fahd Al-Ahmad Al-Sabah on details of the new U.S.
energy bill as well as plans to reactivate refining and
production capacity lost in the recent hurricanes. Finally,
the Secretary urged Kuwait to increase its investment in both
upstream and downstream capacity, and specifically asked the
Minister and other oil sector leaders to work with other
countries in the GCC to publicize the investments that are
being made to increase capacity.


2. (U) While in Kuwait, the Secretary met with the Energy
Minister and Undersecretary Issa Al-Own, dined with the
Minister and top Ministry of Energy and Kuwait Petroleum
Corporation officials, met with representatives of six U.S.
companies active in the energy sector in Kuwait, and toured
the EQUATE petrochemical facility, a highly successful joint
venture between Dow Chemical and Kuwait's Petrochemical
Industries Company. The Secretary was interviewed by the
Editor-in-Chief of the Arabic daily newspaper Al-Qabas, and
also conducted a well-attended press conference prior to his
departure, where he emphasized the public themes of his trip
throughout the region. End Summary.

Secretary Thanks Kuwait For Katrina Support And More

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3. (SBU) During a November 13 meeting with Energy Minister
Shaykh Ahmad Fahd Al-Ahmad Al-Sabah, Secretary of Energy
Samuel Bodman told the Minister that his main objective in
coming to Kuwait was to thank the Government and people of
Kuwait for their generous support for the people and
communities affected by Hurricane Katrina. Shaykh Ahmad said
that the relations between the United States and Kuwait
"demand this kind of help." He added that the National
Assembly will take up the matter soon, in order to approve
the entire aid package.


4. (C) The Secretary also thanked Kuwait for all of its
support for reconstruction efforts in Iraq, as well as
support for the coalition efforts in Iraq and continuing
logistical and financial support for Operation Iraqi Freedom.
The Secretary also noted the generosity of Kuwait towards
Pakistan in its recent earthquake crisis, and thanked Kuwait
for being part of the aid and reconstruction efforts there.

Restoring U.S. Refinery and Production Capacity
-------------- --


5. (SBU) Secretary Bodman provided a briefing to Shaykh
Ahmad on efforts to restore refining and production capacity
lost in the recent hurricanes in the Gulf region of the U.S.,
and shared with the Minister specific details on shut-in oil
and gas production as well as damage to offshore platforms
and other facilities. Shaykh Ahmad was shown pictures of
some of the destruction throughout Louisiana and Mississippi.
Secretary Bodman said that he expected full refining and
production capacity to be back online by June or July of 2006.

The New Energy Bill: "Seeds of Recovery"
--------------


6. (SBU) The Secretary told Shaykh Ahmad that, with the
recently passed Energy Policy Act of 2005, the "seeds of
recovery" had been sown for the U.S. energy industry to
embark on a long-term effort to build capacity throughout the
system. He also explained that, in Dubai that morning, he
had just announced the publication of the first-ever Arabic
translation of the Energy Information Administration's
International Energy Outlook. Turning to the issue of power
generation, Shaykh Ahmad asked about the use of gas for power
plants in the U.S., to which the Secretary responded that the
gas has become very expensive in the U.S. and that an
increase in nuclear power generation is expected over the

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long-term.

More Dialogue Needed Between Producers and Consumers
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7. (SBU) The Minister said that he was very glad that the
Secretary had come for this visit and that it was "important

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to have dialogue between OPEC members and the major
consumers." During the November 13 meeting Shaykh Ahmad
called for increased cooperation between producers and
consumers, and he repeated this point during the dinner that
evening. He noted that the announcements and intentions by
producers to increase production combined with conservation
strategies announced by consuming nations was a good overall
strategy and worth continuing.

More Investments Needed in Upstream and Downstream
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8. (U) Secretary Bodman emphasized the importance of
increased investments in upstream and downstream capacity,
especially in the current climate of high prices for
consumers and high profits for producers. Within that
framework, he also urged the GOK to move forward on specific
new investments, such as development of the northern
oilfields and construction of a new refinery.


9. (SBU) Shaykh Ahmad said that the Kuwait National
Petroleum Company (KNPC) was currently looking for a joint
venture partner for the new refinery to be constructed in
Kuwait, and that the end-market for this refinery would be
the power sector in Kuwait. He added that most companies
"are reluctant to do the downstream side" because of the
smaller profit margins. He said that "the Chinese, Spanish,
and others get involved" in downstream operations, but not
the large IOCs. Secretary Bodman noted that oil producers
are increasingly needing to create their own product
distribution networks, which includes refineries, and that
includes both companies and countries involved in oil
production. Ministry of Energy Undersecretary Issa Al-Own
agreed, noting that Kuwait's "investments are tied to
strategy, not profits," and that Kuwait needed to find a way
to "announce that to the U.S. public."

Many Projects, Few Bidders, High Costs
--------------


10. (SBU) Shaykh Ahmad noted that the Ministry of Energy,
KPC, and its subsidiaries all have many tenders out for bid,
but that they were only finding two or three bidders for each
project, whereas in the past they have always had more. He
said that the resources of the engineering, construction, and
energy services companies are "stretched thin," especially
for Kuwait's large projects involving expansion of its export
facilities and oil infrastructure. The huge number of
projects throughout the region and the scarcity of bidders
translated into Kuwait paying "70% more than the real price"
for any oil infrastructure project, according to Shaykh
Ahmad, with further cost increases expected. He gave the
example of the new refinery, which has gone from an estimated
cost of $3.5 billion to $5.5 billion.


11. (SBU) "Everybody is busy," Shaykh Ahmad said, referring
to the companies needed for expansion of the upstream and
downstream sectors. In the past, he explained, companies
like Bechtel and Fluor "usually only took one project at a
time. Now they have numerous projects" each. He rattled off
a list of projects with involvement by U.S. companies in
Kuwait, including the refinery expansion projects (Fluor) and
a new olefins petrochemical facility (Foster Wheeler). He
said that Kuwait is "ready to accept a partner" in its new
refinery, with a steady supply of crude secured by KOC.
Shaykh Ahmad described the EQUATE petrochemical company as a
"successful model" for such a joint venture and that Kuwait
"could do this with refineries." According to the Minister,
Kuwait has committed to invest $52 billion in expansion of
the upstream and downstream sector over the next twenty years.


12. (SBU) The Minister offered a brief overview of projects
in the electricity and water sector, explaining that both
sectors were seeing critical shortages. Kuwait needs to
double its power and water capacity in eight years, he said,
and the increase in power capacity alone will cost Kuwait KD

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6 billion ($20.5 billion). (During the breakfast with the
Secretary on November 14, one U.S. engineering company

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executive said that he expected to see an increasing amount
of power shortages and blackouts in Kuwait without
significant investment in new capacity.)

A Need For Public Announcements Of Investments
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13. (SBU) Secretary Bodman explained to Shaykh Ahmad how he
had asked executives of U.S. oil companies to provide him
with information on how their companies are investing in
expanding capacity, and asked the Minister to consider
providing similar information through the GCC countries. He
told the Minister that it would be useful to have a GCC
statement on total investments in new capacity and plans for
future investments. Shaykh Ahmad responded by saying that he
could try to raise the investment issue at the final OPEC
meeting of the year, to be held in Kuwait in December, and he
said that he thought that "most sides will be happy to reveal
their downstream investments." He said that he would "look
at making public announcements" at the OPEC meeting, "and
expand from there." He asked for specific proposals for such
announcements, and the Secretary explained that most useful
would be an official statement of the facts of actual
upstream and downstream investment.

White House Statements On OPEC Appreciated
--------------


14. (C) Turning back to the issue of prices, Shaykh Ahmad
took exception to the common instinct to blame OPEC for high
oil prices. "OPEC, OPEC, OPEC," he declared, jabbing his
finger in the air for emphasis. "Everybody says it's OPEC,
but there are many other issues, including taxes." The
Minister then said that he wanted to thank the White House
and the U.S. Government for making "reasonable announcements"
regarding OPEC policy during his time as OPEC President.
"They supported OPEC, they didn't attack it," he said, and he
added that it was "helpful not to have the blame put on
OPEC." He repeated that he appreciated the "public support"
of the USG.

Kuwaiti Still Waits For A Partner For U.S. Refinery Investment
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15. (SBU) Shaykh Ahmad said that the GOK is ready to invest
in a joint venture for the construction of a new refinery in
the U.S., but that it needed to identify a U.S. partner that
could bring the technical expertise and construction
experience to the table. He added that he has already
received requests from Louisiana and Mississippi to build a
new refinery in those states. DoE Senior Advisor Molly
Williamson was told by KPC officials over dinner that the
interest by Kuwait in investing in refining capacity in the
U.S. is sincere. She provided an update to these officials
on current legal issues concerning refinery construction in
the U.S.

Gas Need Remains Critical
--------------


16. (C) Throughout the visit the Secretary heard about
Kuwait's shortage of gas and how this affects its ability to
generate power and meet the increasing demands of the growing
petrochemical sector. The Minister put it simply: "We don't
have a lot of gas, this is our problem". He described the
holdup over a proposed pipeline to bring gas from Qatar to
Kuwait as a "big problem" with Saudi Arabia, and noted that
Kuwait did not have enough refining capacity to meet its own
current and future needs. While suggesting that Kuwait has
some new gas reserves, he said that it still had a "problem
offshore with the Iranians," referring to the disputed
offshore Al-Dorrah gas field. He added that Kuwait would
like to have a choice to rely on a reliable source of gas or
to refine it from crude, but did not want to be forced into
one or the other.

U.S. Companies Offer Mixed Reviews
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17. (SBU) In the delegation's breakfast meeting with
Kuwait-based representatives of U.S. companies, the Secretary

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heard mixed reviews of the business and investment
opportunities in Kuwait's energy sector. Despite the
insistence by the Minister and others that the vote for the
enabling law allowing foreign companies to participate in the
development of the northern oilfields would pass through the
National Assembly, representatives of Chevron and ExxonMobil
remained skeptical. "They do have the National Assembly
votes if they push it," said one executive, "but they (the
GOK) won't." They also expressed concern about the
profitability of the project and the need for Kuwait to
compete with other, more promising, investment opportunities
throughout the region.


18. (SBU) The oil company executives were in agreement that
Kuwait would see a production drop in the future if it did
not bring in outside technical assistance, with one executive
saying that "that's what it will take to change things."
Those providing equipment for the new power plants and
petrochemical facilities noted that plans were being made for
these facilities without a secure supply of gas, and that
Kuwait could not produce the amount or type of gas it needed
for these projects.


19. (SBU) The executives were all in agreement with the
Minister's comments to the Secretary, that there were fewer
bidders on energy infrastructure projects because the
companies were all stretched thin. The lump-sum mentality
with small margins was keeping many companies away, according
to one executive, who added that he was beginning to see a
change in mentality by some elements of the Kuwait oil
industry away from lump-sum bids to smaller packages that
could be negotiated with numerous bidders. The provision of
energy infrastructure equipment and services has gone from a
buyer's to a seller's market, he noted.


20. (U) The breakfast meeting concluded with some of the
executives describing the ways in which they and their
companies are involved in community outreach, skills
development, and private sector development in Kuwait.
Chevron, for example, provides funding through AMIDEAST for
young Kuwaitis to go the U.S. and study English in summer
camps. Fluor has twenty young Kuwaiti engineers currently in
the U.S. for training, and is getting involved with the LOYAC
youth organization to provide summer jobs for Kuwaiti youth.
The ExxonMobil executive spoke of the rejuvenation and
expansion of the American Business Council. The Secretary
thanked the companies for this involvement and encouraged
them to do more.

EQUATE: A Kuwait-American Success Story
--------------


21. (U) The Secretary's last stop in Kuwait was a visit to
the EQUATE petrochemical facility, a joint venture between
Dow Chemical and the GOK's Petrochemical Industries Company
(PIC),with a minor stake held by two publicly-traded Kuwaiti
companies. EQUATE CEO Hamad Al-Terkait provided an overview
presentation on the company and its future expansion plans,
followed by a tour of the facilities. Established in 1995
with a $2 billion investment, the company is now the number
one producer of glycol in the world and PIC has become Dow's
largest co-investor in other projects around the globe.
Al-Terkait emphasized the reliability of the feedstock that
Kuwait can provide to such projects, but noted that the
increased amount needed for future projects might be harder
to secure. Dow and PIC now have a total of over $6 billion
in investments together worldwide.


22. (U) Secretary Bodman's visit to Kuwait received
widespread positive press coverage, to be summarized in a
separate mdeia reaction cable.

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LEBARON