KUWAIT ENERGY UPDATE: RECORD HIGH CRUDE PRICES,

UNCLAS SECTION 01 OF 02 KUWAIT 001417 SIPDIS SENSITIVE SIPDIS LONDON FOR TSOU DEPARTMENT OF ENERGY FOR IE EB/ESC/IEC FOR GALLOGLY, DOWDY E.O. 12958: N/A TAGS: ENRG EPET ECON BEXP KU OIL SECTOR SUBJECT: KUWAIT ENERGY UPDATE: RECORD HIGH CRUDE PRICES, NEW DISCOVERIES, OVERSEAS REALIGNMENT, MORE KUWAIT PROJECT DELAYS REF: KUWAIT 0676 This cable is sensitive but unclassified; please protect accordingly. Not for Internet distribution. ¶1. (U) Summary: Kuwait Export Crude continued to set record high prices, selling for almost $65/barrel, the highest in its history. Energy Minister Shaykh Ahmed announced that production of the recent gas discoveries will begin in "early 2007," while KOC announced an additional crude discovery in southeast Kuwait that a private industry source called "promising." The new refinery project in Kuwait picked up steam, and KPC is reportedly interested in downsizing its refinery operations in Europe while expanding it in Asia. While Kuwait's own plans for increased production through the "Kuwait Project" remain stalled in Parliament, Shaykh Ahmed joined the chorus of OPEC members calling for reactivation of the 2 million bpd of standby oil output to be made available to world markets to ease the record high oil prices. End Summary. KEC Continues Record Climb -------------- ¶2. (U) Kuwait Export Crude (KEC) continued its record climb to new heights, reaching almost $65/barrel on April 22. Spot prices for KEC have, for the most part, remained above $50/barrel since reaching that point in June 2005. By January 2005 KEC was averaging $55/barrel and in mid-April hit $60/barrel for the first time ever. In 2004, KEC was averaging between $28 and $36/barrel. Even if KEC drops back down to $50/barrel, the GOK will see a budget surplus of at least $22.5 billion for the 2005/2005 fiscal year. For the first ten months of fiscal year 05/06, Kuwait earned $36.1 billion in oil revenues, compared with $22.6 billion in the first ten months of the fiscal year 04/05. Gas Production Expected in 2007 -------------- ¶3. (U) Minister of Energy Shaykh Ahmed Al-Fahd Al-Ahmed Al-Sabah announced on April 18 that production of natural gas from the new discoveries in northern Kuwait (reftel) would begin "in early 2007." The Minister made these remarks to the press in Egypt after meeting with Egypt's Oil Minister. According to news reports, initial tests show non-associated gas flowing from the newly discovered wells at the Umm Niqa and Sabriya fields at a rate of 16,000 - 27,000 Mcf/d. The total tested production rate, between these fields and three others, is 112,000 Mcf/d, according to KOC engineers. And Another Crude Discovery, in the South -------------- ¶4. (SBU) Kuwait Oil Company (KOC) Chairman Farouk Al-Zanki announced to the press on April 20 that KOC has made a new discovery in the southeastern part of Kuwait, in the Arifjan area. Al-Zanki told the press that the well had been drilled down to the Jurassic Marrat formation, and that initial production tests showed an oil rate of a little over 5,300 bpd. An executive with an international oilfield services companies with intimate knowledge of the new discovery told Econ Officer on April 22 that "the quality is promising" in the new discovery, but the quantity is not yet fully known. He said that this was more of the "difficult oil" that Kuwait was beginning to find at deeper depths in the formations. ¶5. (SBU) Another IOC contact in Kuwait provided Econ Officer with rough coordinates of the new discovery, believed to be just to the southeast of the Burgan field area. The coordinates provided are roughly: MGRS: 39RTM1735197920, DD: 28.877967 Lat., 48.102122 Lon. 3 U.S. Firms Pre-Qualified For New Refinery Project -------------- -------------- ¶6. (U) Local news sources reported in mid-April that Kuwait has pre-qualified eleven companies for the construction portion of the new oil refinery. Projected to cost $6.3 billion, the refinery is expected to have a capacity of just over 600,000 bpd, and is planned for the Al-Zour area. There will be two separate tenders for the actual refinery production units, a third tender for utilities and services, and a fourth tender for storage tanks and a pier. Foster Wheeler has been pre-qualified for the estimated $2-2.4 billion contract for the installation of three 205,000 b/d crude distillation units, and it is competing against four non-U.S. companies. Washington Group and Shaw Group have been pre-qualified for the second production unit installation tender, estimated at $1 billion, and are competing against five non-U.S. companies. Foster Wheeler, along with the Shaw Group, are also competing for the estimated $900 million utilities and services package, against four non-U.S. companies. No U.S. companies were pre-qualified for the storage tank and pier construction contract. More Refining In Asia, Less In Europe -------------- ¶7. (U) KPC continues to realign its overseas marketing strategy towards Asia, with an April 22 announcement that a planned joint venture oil refinery with PetroChina could be located in Guangdong Province, in the Pearl River Delta area. The announcement comes on the heels of the December 2005 visit of Energy Minister Shaykh Ahmed to the province to meet with PetroChina officials. The refinery is planned with a capacity of 400,000 bpd. ¶8. (U) At the same time that Kuwait appears to be expanding its refinery operations and downstream marketing capacity in Asia, it appears to be cutting back on the same in Europe. April 23 online news sources reported that KPC has hired JP Morgan to look for potential buyers for the company's Europoort refinery in Rotterdam. KPC previously sold off other small European refinery assets because they were uneconomical, and is probably doing the same with this 40,000 bpd operation. The refinery is estimated to be worth $320 million. The sale of this asset would leave KPC's 50% stake in a 300,000 bpd refinery located in Milazzo, Italy as its only remaining European refining asset. Kuwait Project: Guess What? Still Delayed -------------- ¶9. (U) The National Assembly's Economic and Financial Affairs Committee approved the legal aspects of the enabling law for Kuwait Project in early April, but has yet to approve the financial and technical aspects. The IOCs remain hopeful to see some movement on the law in the current parliamentary session, but it appears that the Committee wants to take its time reviewing the law, and that the full Assembly is busy debating other political matters and may not have time to focus on the project this Spring. Many industry contacts have suggested to us that, if the project is delayed until the Fall of 2006, when many MPs will be gearing up for Parliamentary elections, it might be "dead in the water." Shaykh Ahmed Calls for Increased OPEC Production -------------- --- ¶10. (U) Echoing recent calls by other OPEC members, Shaykh Ahmed told reporters on his arrival at the International Energy Forum in Doha on 23 April that Kuwait supports reactivating the extra two million bpd in standby oil output that was made available in September 2005 after Hurricane Katrina. ********************************************* * For more reporting from Embassy Kuwait, visit: http://www.state.sgov.gov/p/nea/kuwait/?cable s Visit Kuwait's Classified Website: http://www.state.sgov.gov/p/nea/kuwait/ ********************************************* * LEBARON