Identifier
Created
Classification
Origin
06KUWAIT3718
2006-09-16 11:42:00
CONFIDENTIAL//NOFORN
Embassy Kuwait
Cable title:  

GRIM PROSPECTS FOR PROJECT KUWAIT

Tags:  EPET ENRG ECON KU OIL 
pdf how-to read a cable
VZCZCXRO5162
RR RUEHDE
DE RUEHKU #3718/01 2591142
ZNY CCCCC ZZH
R 161142Z SEP 06
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC 6729
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 003718 

SIPDIS

NOFORN
SIPDIS

STATE FOR NEA/ARP, EB/ESC/IEC; ENERGY FOR WILLIAMSON

E.O. 12958: DECL: 09/15/2016
TAGS: EPET ENRG ECON KU OIL
SUBJECT: GRIM PROSPECTS FOR PROJECT KUWAIT

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 003718

SIPDIS

NOFORN
SIPDIS

STATE FOR NEA/ARP, EB/ESC/IEC; ENERGY FOR WILLIAMSON

E.O. 12958: DECL: 09/15/2016
TAGS: EPET ENRG ECON KU OIL
SUBJECT: GRIM PROSPECTS FOR PROJECT KUWAIT

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


1. (C/NF) Summary: The Head of Kuwait's Oil Development
Company (ODC) said it was unlikely that the Kuwait Project,
the $8.5 billion project for international companies to
develop Kuwait's northern oil fields, would be brought before
the Parliament this year. He said that support had
significantly eroded in recent months after the Parliamentary
elections and the replacement of the embattled former Energy
Minister. The ODC chairman explained the structure of the
contract and said that, once determined, the new fees would
be more favorable to the bidders. Moreover, he said it would
likely be possible for international partners to book the
reserves. In separate meetings, representatives from
International Oil Companies (IOCs) expressed pessimism and
thought it unlikely that, if approved, the contracts would
offer appealing terms and conditions. End Summary.

Lost Opportunities
--------------


2. (C/NF) On 13 September, Econoff met with Hashim
El-Rifaai, Chairman and Managing Director of Oil Development
Company. (Note: ODC was established in 2005 as the
subsidiary of Kuwait Petroleum Corporation (KPC) responsible
for overseeing any future operations involving international
oil companies in Kuwait, especially the $8.5 billion Project
Kuwait which would invite IOCs to participate in the
development of four of Kuwait's northern oil fields. End
Note.) El-Rifaai explained that the best opportunities for
Parliamentary approval of the Project had been lost. He said
that at the end of 2005, all of the votes were in place but
then the Amir died in January before the legislation could be
brought before the Parliament. During the spring, momentum
was building again towards approval when the new Amir decided
to dissolve the Parliament in May over a political
redistricting issue.

"Back to Square One"
--------------


3. (C/NF) El-Rifaai says that now, after the June elections
gave a parliamentary majority to the pro-reform Opposition,

"Everything is back to square one." He said, "The Opposition
is stronger, the Government is weaker, and the new Energy
Minister is weaker than his predecessor." (Note: The Energy
Ministry is currently under heavy fire from both the
Parliament and the press over electrical blackouts and water
shortages, septel. End Note.) El-Rifaai doubts the Project
will have enough votes to pass in the near term. He added
that on 12 September, the Petroleum Workers Union had
announced its opposition to any Government plans that would
diminish sovereign control of the northern fields. El-Rifaai
says there is also significant opposition within KPC on the
part of engineers who are unwilling to concede that they lack
the in-house capacity to manage the development of the
difficult northern fields and need the capital and expertise
of the IOCs. He says these engineers are feeding information
to Opposition MPs in order to undermine the Project. He
thinks it unlikely that the issue will be brought before the
Parliament before January 2007.

An Uphill Battle Ahead, but Strategically Important
-------------- --------------


4. (C/NF) During the election campaign and now again in
recent weeks, some opposition MPs have expressed their
resistance to the Project, suggesting that it is economically
unnecessary and politically dangerous to allow foreign
companies to take a stake in Kuwait's most precious resource.
(Note: Kuwait's Constitution forbids foreign ownership of
Kuwaiti oil. End note.) Furthermore, during the campaign,
former Energy Minister and champion of the Project Ahmed
Al-Fahd was accused of corruption and a lack of transparency
in preparing the contracts. El-Rifaai showed Econoff a
binder he had prepared for the Energy Minister to rebut each
of the challenges made by MPs, clarify the economic and
strategic basis for the Project, and spell out all the terms
and conditions of the proposed contracts. He expressed
frustration at the allegations of corruption and
dissimulation saying, "This is the most transparent project
that I've ever worked on!" As for the strategic value of the
project, El-Rifaai said it was necessary to significantly
increase production in the northern fields in order to be
able to "rest" the massive and aging Burgan field so that it
would be able to serve as a source of surge capacity in the
future. A twenty-year veteran of KPC, El-Rifaai confessed
that the company did not have the ability to develop the
difficult northern field on its own.

KUWAIT 00003718 002 OF 002



Questions over Terms and Conditions
--------------


5. (C/NF) Under the 20-year contract, IOCs' compensation
would consist of five different fees: a fixed price per unit
of gas produced, a low fixed price per unit of oil produced
up to the current KPC production levels, a higher fixed price
per unit of oil produced in excess of the current KPC
production levels, 50% of operating costs, and 50% of capital
costs repaid over 10 years. El-Rifaai suggested that the
contracts had been structured and worded in such a way as to
allow IOCs to book proven reserves per the SEC definition
without actually owning the oil in the ground. (Note:
Econoff had recently heard the same from IOC reps from two of
the Project Kuwait consortia. End note.) When Econoff asked
whether he thought these terms would be attractive to IOCs,
El-Rifaai responded that the actual fixed prices in the
contract had not been revised since 2002. He said that
although the new numbers had not yet been determined, there
would be a significant upward revision from the 2002 fees to
make the terms much more appealing to IOCs. He cautioned,
however, that the new fees would have to be approved by the
Council of Ministers before going to the Parliament.

IOCs Pessimistic
--------------


6. (C/NF) In recent meetings with local heads of ExxonMobil
and Chevron, Econoff was told that compared to other
international opportunities currently available, the 2002
terms of conditions of the Kuwait Project made it an
unattractive investment. Exxon went so far as to say it
would offer a negative rate of return. Both contacts
indicated the ability to book reserves would be an essential
starting point, and that beyond that the value of the
contract would depend on how much the Kuwaitis were willing
to adjust the fees. Both contacts said that IOCs were losing
patience with the GOK and had little confidence that, if
approved, the contracts would offer favorable terms and
conditions. That said, all the IOCs in Kuwait are exploring
different business arrangements with the Kuwaitis to work on
their particular technical specialties, and some are engaged
in profitable technical service agreements.

********************************************* *
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