SCENESETTER FOR ENERGY SECRETARY BODMAN VISIT TO

S E C R E T SECTION 01 OF 05 KUWAIT 002815

SIPDIS

NOFORN
SIPDIS

LONDON FOR TSOU
DEPARTMENT OF ENERGY FOR SECRETARY BODMAN
DEPARTMENT OF ENERGY FOR IE
EB/ESC/IEC FOR GALLOGLY, DOWDY; NEA/ARP FOR BERNS

E.O. 12958: DECL: 07/03/2016
TAGS: ENRG EPET OVIP PREL KU
SUBJECT: SCENESETTER FOR ENERGY SECRETARY BODMAN VISIT TO
KUWAIT

REF: A. KUWAIT 2602 -- (S) FREEDOM AGENDA: PRO-REFORM
CANDIDATES WIN LANDSLIDE VICTORY

B. KUWAIT 1417 -- (U) KUWAIT ENERGY UPDATE

C. KUWAIT 0676 -- (U) PROMISING OIL AND GAS
DISCOVERIES

D. KUWAIT 0206 -- (U) KOC DISPUTES REPORT ON
DIMINISHED OIL RESERVES

E. KUWAIT 848 -- (C) KPC CEO ON ENERGY SECTOR

F. KUWAIT 2527 -- (C) ELECTION COUNTDOWN: RUMORS OF
CABINET SHUFFLE

Classified By: CDA Matt Tueller for reason 1.4 (d)


1. This is an action request. See paragraph 20.


2. (SBU) Welcome to Kuwait Secretary Bodman. There has been
considerable change in the government since your November
2005 visit. In January, following the death of long-time
Amir Shaykh Jaber, former Prime Minister Shaykh Sabah became
Amir and identified political and economic reform as
priorities. Your visit comes nearly three weeks after
historic parliamentary elections in which women voted for the
first time and pro-reform candidates won a clear majority.
Ironically, the election of a reformist majority may further
delay the passage of Project Kuwait, the USD 8.5 billion
proposal to invite international oil companies to develop
fields in the north of the country. A new Cabinet was named
on July 10 led by PM Shaykh Nasser Al-Mohammed Al-Sabah. The
new Energy Minister, Shaykh Ali Al-Jarrah Al-Sabah, replaces
Shaykh Ahmad Al-Fahd Al-Sabah, whom you met in your previous
visit.

Reformists Victorious in Elections
--------------


3. (S/NF) Your visit comes at a watershed moment in Kuwait,s
democratic development. Pro-reform candidates won a
resounding victory in the June 29 parliamentary elections as
voters sent a clear message to the Government on the need for
political reform to combat corruption. Pro-reform MPs now
have a majority (34) in the 65-member Parliament. Overall
Islamist representation increased from 15 to 18 seats with
the bulk of these gains going to the Islamic Constitutional
Movement (ICM),the political arm of the Kuwaiti Muslim
Brotherhood. Although female turnout was low and none of the
27 female candidates were elected, women's participation in
these elections for the first time in Kuwait's history had a
tremendous impact, and directly contributed to the reformers'
victory. The outcome of the election demonstrates the
wellspring of popular support for reform and presents a
direct challenge to the Government and to the ruling Al-Sabah
family in particular. The challenge for reformers will be
holding together the fragile liberal-Islamist coalition at
the heart of the pro-reform alliance. If it holds together,
this pro-reform alliance could be a force for political
change. Ultimately, these elections are unlikely to
significantly impact the close U.S.-Kuwaiti bilateral
relationship. Kuwaiti Islamists are not monolithic and
largely support Kuwait's strategic relationship with the
United States.


4. (S/NF) The election of more reformers will put more
pressure on the GOK to implement political reforms, though it
may further delay passage of Project Kuwait. During the
electoral campaign, reformists accused the Government of
obfuscating important details of the project. Additionally,
the project,s champion within the Government, former Energy
Minister Shaykh Ahmad Al-Fahd Al-Ahmad Al-Sabah, faced
numerous allegations of corruption during the lead-up to the
election. Unfortunately, the innuendo surrounding Shaykh
Ahmad may have also tainted Project Kuwait. The degree to
which new Energy Minister Al-Jarrah will advocate for the
project remains to be seen. At present, the pressure to push
Project Kuwait through the Parliament is dampened by windfall
government revenues resulting from sustained high oil prices.

Energy Projects & Business Opportunities
--------------


5. (U) While the technical and managerial expertise of U.S.
companies has always been welcome in Kuwait, the current crop
of business opportunities and direct investment potential has
not been this promising since the nationalization of Kuwait's
petroleum sector in the 1970s. Kuwait currently produces

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about 2.5 million barrels per day (mbpd) of crude oil and
hopes to raise output to 4 mbpd by 2020. To do this, Kuwait
must bring in outside technical assistance and foreign
investment. This visit provides an excellent opportunity to
make the case that U.S. companies can offer the best of both.
Additional prospects include major opportunities such as the
construction of a new power plant and a new refinery and the
additional foreign direct investment in Kuwait's growing and
lucrative petrochemical sector. One example of such
investment is the EQUATE project, a joint petrochemical
venture between Dow Chemical and Kuwait,s Petrochemical
Industries Company (PIC) that you toured during your previous
visit in November 2005.

Project Kuwait - Development of the Northern Oilfields
-------------- --------------


6. (SBU) The GOK wants to bring in outside investment from
international oil companies (IOCs) in order to develop its
northern oilfields and increase production in four specific
fields from 450,000 bpd to 900,000 bpd. Pending
parliamentary approval, the Kuwait Petroleum Corporation
(KPC) will award the development project to one of three oil
company consortia. Chevron and ExxonMobil lead two of the
consortia, while Occidental Petroleum is a member of the
third. The GOK had hoped to pass the enabling law through
the Parliament by the end of 2006, but progress on the
initiative has already been delayed this year - first by the
Amiri succession, then by the dissolution of the Parliament.
Resistance from an opposition-dominated Parliament may lead
to further delays. This USD 8.5 billion undertaking, known
as "Project Kuwait," has been in the works for over ten years
and oil companies are growing increasingly impatient. The
IOCs are also concerned about conditions set out in the final
tender documents and whether the final package offered will
have high enough rate of internal return to merit their
participation. The arrangement will be akin to a very large
technical service agreement; companies will not be able to
book reserves from the fields they will exploit.

New Refinery
--------------


7. (U) Kuwait's planned fourth refinery, to be located in the
Al-Zour area in the south of the country, will reportedly be
the world's largest and will refine 615,000 barrels of crude
oil each day, according to Kuwait National Petroleum Company
(KNPC) officials. This refinery project is part of a larger
goal of expanding Kuwait's refining capacity from the current
930,000 bpd to 1.33 million bpd by 2010. The refinery will
take approximately 66 months to complete, and is expected to
begin production in 2010. The Al-Zour refinery will replace
the existing Shuaiba Refinery, which currently refines about
200,000 bpd but is scheduled to be decommissioned. The new
refinery will produce naphtha, kerosene and diesel.


8. (U) Fluor Corporation (an American company) is the Project
Management Services Contractor for the new refinery. KNPC
expects to list the qualified engineering, procurement, and
construction (EPC) contractors soon. Up from earlier
estimates of around $3 billion, the estimated cost for
construction of the new refinery is now being reported as
$6.3 billion. The Kuwaiti private sector will be invited to
participate through a 20% capital investment and through some
construction work being awarded to local contractors. Fluor
is also well-positioned to provide project management
services on upgrades for the three existing refineries.

New Electrical Plant
--------------


9. (SBU) Al-Zour North (AZN) is a proposed USD 2.4 billion,
2500-megawatt electricity plant, currently in the bidding
phase. In 1996, Amir Shaykh Jaber pledged the AZN contract
would go to an American firm following the cancellation of a
previous project that had been won by an American company.
Recently, the GOK has backed away from the late Amir's
promise, saying the contract will go to the best-qualified
firm. However, U.S. firms are leading most of the consortia
bidding, regardless of national origin. These U.S. companies
include Fluor Corporation, Black and Veatch, Shaw Group,
Washington Group, Bechtel, and General Electric. Parsons
Brinckerhoff is acting as technical advisor to the Ministry
of Energy and they will serve as the "client's engineer,"

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supervising the work of the EPC contract winner.

EQUATE and Other Petrochemical Opportunities
--------------


10. (U) Established in 1963, Kuwait's Petrochemical
Industries Company (PIC) built the first chemical fertilizer
complex in the region. Besides the company's own
petrochemical facilities, it is involved in numerous joint
ventures with international partners. The EQUATE joint
venture, which you visited in November 2005, brings together
PIC and Dow Chemical, with a 10% share held by a publicly
traded Kuwaiti company. The joint venture was established in
1995, with the first olefins plant commissioned in 1997. The
plant produces ethylene, ethylene glycol and polyethylene.
EQUATE has been very profitable for the partners in this
joint venture and, this success has led to plans to establish
new ventures for a second olefins plant and an aromatics
facility. EQUATE made a USD 588 million profit last year and
is on track to repeat the performance this year. Through its
work with Dow in EQUATE and through other projects, PIC has
now become Dow Chemical's largest co-investor worldwide. In
Kuwait alone, their joint investments total $3-4 billion.

Proven Reserves in Question
--------------


11. (S/NF) Kuwait publicly claims to possess 105 billion
barrels of crude reserves, or about 8 percent of the world's
total. However, Petroleum Intelligence Weekly's 30 January
2006 issue reported that an internal document, prepared in
December 2001 by and for the Kuwait Oil Company (KOC),
presented a major downward revision of oil reserves by
greater than 50%, from approximately 100 billion barrels of
proven reserves to 24 billion barrels of proven and 24
billion barrels of non-proven reserves. The GOK and KOC
publicly denied these lower reserve estimates. Due to the
impact on the world economy if reserves are much lower,
Washington analysts will begin to perform an independent
assessment in mid-September 2006 using technical data
gathered from open source and sensitive reporting. Post is
assisting this effort by using regional contacts to fill in
gaps in technical information.

Protecting Critical Energy Infrastructure
--------------


12. (S/NF) Kuwait,s oil industry remains vulnerable to
disruption by terrorist attack, accident, or natural
disaster, with the off-shore facilities being the most
vulnerable. A disruption to the refineries could stop
anywhere from 100,000 to one million barrels of crude from
being refined each day. An attack on the export facilities
at Mina Al-Ahmadi would take approximately 2 million bpd of
crude and refined product off the world market. The
proximity of oil infrastructure facilities to U.S. military
facilities in Kuwait remains a concern. The GOK coordinates
protection of its oil infrastructure through a Vital
Installations Security Group comprised of representatives
from various ministries and the oil sector. Additionally, in
2005, a new KPC subsidiary, the Oil Sector Services Company,
was formed to take the lead in security matters for KPC.
Post continues to engage GOK on improving the security of
critical energy infrastructure and is involved in discussions
to offer the services of a USG security assessment team.

Kuwait's Gas Needs
--------------


13. (C) Kuwait is oil-rich and gas-poor, and needs to secure
additional supplies of gas for its power plants and
petrochemical facilities. Its options are limited and
fraught with difficulties. The GOK is in talks with Iraq to
secure a limited amount of gas, but it won't be enough to
meet Kuwait's needs. A long-stalled plan to import gas from
Qatar via an undersea pipeline through Saudi Arabia's waters
is being blocked by the KSA, due to long-standing irritations
in the Saudi/Qatari relationship. Kuwait has limited options
to drill for its own gas, with exploration of the most
promising option, the offshore Al-Durra field, held up over a
boundary dispute with Iran. Kuwait has also been in
negotiations with Iran to import gas via pipeline. We have
encouraged Kuwait to explore other options and have informed
them of the potential for ILSA repercussions. In February

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2006, the Ministry of Energy announced a large gas discovery
in northern Kuwait. Sources in IOCs report that the quantity
and quality of the gas are significant, but a comprehensive
survey of the find will not be completed until 2007.

Kuwaiti Investments in the U.S.
--------------


14. (SBU) The GOK has expressed an interest in partnering
with a U.S. company to invest in additional refinery capacity
in the United States. This topic has seen a renewed interest
by the GOK in light of new energy legislation in the U.S. and
the pressing need for additional refining capacity
highlighted by recent hurricane damage. While the Kuwaitis
do not appear to have made formal overtures to any specific
U.S. company, we should continue to encourage them to explore
potential investments in U.S. refinery expansion and brief
them on plans to streamline the regulatory system. The State
of Louisiana, through its State Secretary for Economic
Development, has been in contact with KPC's Washington
office, and directly with the GOK, to showcase the economic
and regulatory advantages of investing in new refining
capacity in that state. The Governor of Louisiana has
indicated her intention to visit Kuwait in the near future to
discuss the possibility of Kuwaiti investment in a new
refinery.

Expanding the Energy Dialogue
--------------


15. (C) The excellent dialogue that we have had with Kuwait
on global and bilateral energy issues continues. Ministry of
Energy Undersecretary Issa Al-Own and others in the Kuwait
energy sector frequently attend U.S. conferences and
seminars, and we encourage these visits as often as possible.
The GOK has also expressed interest in having U.S. private
sector participation in a planned "GCC Strategic Studies
Center" to be located in Kuwait and to focus on the
intersection of energy and economic research. Undersecretary
Al-Own has met with the U.S. Center for Strategic and
International Studies to discuss the idea.

Assistance for Iraq
--------------


16. (C) Kuwaiti support for USG goals in Iraq remains strong.
Since early 2002, the GOK has provided billions of dollars
in free and discounted jet fuel for use by Coalition Forces
in Operation Iraqi Freedom, and continues to do so.
Additionally, Kuwait hosted a visit by Iraqi Prime Minister
Maliki from 4 to 5 July and continues to support humanitarian
projects in Iraq in the fields of education and health
through the Kuwait Fund. The Ministry of Foreign Affairs
reacted positively to the USG,s recent request that the GOK
assume a role on the Steering Committee of the UN,s proposed
Iraq Compact.


17. (S/NF) From December 2002 to December 2004, Kuwait
provided nearly USD 2 billion in free fuel for U.S. and
Coalition Force use in Operation Iraqi Freedom (OIF) and as
Assistance in Kind (AIK) for Kuwait-specific activities under
the Defense Cooperation Agreement (DCA). Kuwait continues to
provide jet fuel at a discounted rate, saving the military
and U.S. taxpayers millions of dollars a year. It also
provides in-kind support, estimated at $1-2 billion annually,
for the U.S. military presence in Kuwait. Kuwait's support
facilitates the U.S. military's mission in Iraq and
Afghanistan, both of which are supported by U.S. forces in
Kuwait. Kuwait currently hosts approximately 22,000 U.S.
military and civilian contractors at bases around the country.


18. (U) Kuwait is also a generous financial supporter of
countries and organizations where we have a strategic U.S.
interest. It has provided financial assistance in the form
of grants and concessionary loans to Iraq, Afghanistan, and
the Palestinian Authority.

Assistance for Hurricane Katrina
--------------


19. (U) The GOK pledged USD 500 million for humanitarian
assistance after Hurricane Katrina. To date, the Prime
Minister has presented $25 million to the Bush-Clinton
Katrina Fund and another $25 million was donated to the

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American Red Cross. A further $50 million has been approved
to be donated in the form of petroleum derivatives. The GOK
has proposed providing the remaining $400 million as $50
million for humanitarian relief and $350 million in petroleum
products pending approval by the Parliament.

Action Request:
--------------


20. (U) To assist with planning, Post would appreciate a
complete delegation list, arrival/departure information, and
fiscal data for motor pool and other support services. As
Kuwait has been a consistently reliable bilateral partner,
the visit offers an opportunity to express gratitude to the
Kuwaiti Government for their ongoing support in the War on
Terrorism and the building of democracy in Iraq. We also
recommend congratulating the Kuwaitis on their recent success
in conducting democratic parliamentary elections which
incorporated women as both voters and candidates for the
first time. We would also like to recognize the GOK's
generosity, whether it has been in support of security
efforts in the region or through humanitarian assistance to
the states affected by Hurricane Katrina.


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For more Embassy Kuwait reporting, see:
http://www.state.sgov.gov/p/nea/kuwait/index. cfm

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