PETROLEUM CEO ON AMERICAN AND KUWAITI REFINERIES,

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 003751

SIPDIS

NOFORN
SIPDIS

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

E.O. 12958: DECL: 09/16/2016
TAGS: ENRG EPET ECON KU OIL SECTOR
SUBJECT: PETROLEUM CEO ON AMERICAN AND KUWAITI REFINERIES,
PROJECT KUWAIT, POWER SHORTAGES, AND REGIONAL THREATS

REF: A. KUWAIT 3720

B. KUWAIT 3718

C. KUWAIT 3620

D. KUWAIT 3326

E. KUWAIT 0676

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


1. (C/NF) Summary and Comment: On 17 September, the
Ambassador met with Kuwait Petroleum Corporation (KPC) CEO
Hani Hussain to discuss energy issues and regional concerns.
Hussain was reluctant to share details regarding Kuwaiti
plans for North American refinery investment, saying that the
economic analysis had not yet been completed. When pressed,
he said that joint ventures in Eastern Canada or Aruba
appeared to be the most attractive options. He agreed to
accept an invitation from the Department of Energy to visit
the U.S. this fall for further discussions. Hussain
expressed pessimism about Project Kuwait (the $8.5 billion
project for foreign participation in northern oil field
development) claiming that the project was being held hostage
by domestic politics, specifically by populist resistance
from newly empowered Opposition MPs and the political
vulnerability of the new Energy Minister. He said power
shortages were likely to continue at least until the summer
of 2008 and suggested that mismanagement within the Energy
Ministry was largely to blame. Regarding development of the
newly discovered gas field announced in February, Hussain was
optimistic, saying preliminary reports indicated that
production could start at 1 million cu. ft/day in 2007 and
eventually reach 170 million cu.ft/day. A full assessment
will be completed in November. He expressed hope that
development of this gas field could allow Kuwait to switch to
gas-based power generation. On fuel for Iraq, Hussain
insisted that Kuwait was meeting all its contractual
obligations. On diesel shipments to Lebanon, he said that
deliveries had been halted during the Israeli blockade but
were expected to arrive by the end of September. Eager to
discuss regional security, he said Kuwait was most concerned
about Iran's intention to establish itself as a regional
power and Iraq's potential to fracture along sectarian lines.
End Summary and Comment.

KPC to Talk with DOE on American Refinery Investment
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2. (C/NF) In a 17 September meeting with KPC CEO Hani
Hussain, the Ambassador began by following up on a discussion
about North American refinery investment from the 5 September
meeting between POTUS and the Kuwaiti Amir. The Ambassador
asked which of the potential sites the GOK was leaning
toward. Hussain said he was reluctant to share specific
details of investment plans due to the confidentiality
concerns of his prospective U.S. partners, but he
acknowledged that of all the options under consideration,
prospective joint ventures with Irving Oil in New Brunswick,
Canada and Valero Energy in Aruba seem to be the leading
candidates. He emphasized that it was important for KPC to
select a partner with a well-established presence in the
place where the refinery would be built. Hussain said a
comparative economic analysis of the different refinery
options was due to be completed within coming weeks. When
the Ambassador pursued the possibility of building the
refinery within the U.S., Hussain said this option was still
on the table, but concerns over "developed country
regulations" and permitting made the U.S. option less
attractive. He also expressed worries about exposure to
hurricanes. The Ambassador explained that the USG could
offer some assistance to facilitate the permitting process.
When the Ambassador asked about the DOE's invitation for
Hussain to discuss the matter in Washington, Hussain said he
welcomed the opportunity but would prefer to wait until his
team completes the economic analysis. He said he would be on
vacation during the early part of October and left open the
possibility of conducting the meeting in late October or
early November.

Project Kuwait Stalled due to Domestic Politics
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3. (C/NF) Turning to Project Kuwait, the Energy Ministry's
proposed $8.5 billion project to partner with international
oil companies to develop four of Kuwait's northern oil fields
(ref B),Hussain said he was pessimistic about any progress
in the near term. He explained that the new Energy Minister,
Shaykh Ali Jarrah Sabah Al-Sabah, faced a difficult political
situation due to populist resistance to Project Kuwait by a
bloc of Opposition MPs as well as public outrage over

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unprecedented power outages and water shortages (ref A).
Some of these MPs, led by Ahmad Al-Saadoun, three-time former
Speaker of the Parliament, insist that any contracts
associated with the project should be individually ratified
by the full Parliament. Given the current political
vulnerability of Shaykh Ali, who is now facing calls for his
resignation over the electricity and water shortages, Hussain
thought it unlikely that the Government would renew its
efforts to approve Project Kuwait in the near future. When
asked if he thought the Minister would survive the political
crisis, Hussain avoided giving a direct answer, saying that
Shaykh Ali would be meeting with Opposition MPs to discuss
their concerns after Ramadan (which ends o/a 24 October).

Electricity and Water Shortages Will Persist
--------------


4. (C/NF) Regarding electricity and water shortages,
Hussain blamed the problems on "tremendous overusage,"
inefficiencies in the distribution system, and poor
management at the Energy Ministry's Electricity and Water
Division. He said power and water problems would continue at
least through 2007 due to the lead time required to bring
additional generating capacity online. Hussain said the
Minister was "very upset" with some of the managers at
Electricity and Water, some of whom have recently been
suspended pending the outcome of the Ministry's internal
investigation into the shortages. He did not know if any of
these individuals would be fired since there might not be any
qualified candidates to replace them.

Gas Discovery Looks Promising
--------------


5. (C/NF) In speaking about power generation, Hussain added
that new capacity could be brought online more quickly and
more economically if Kuwait switched from fuel oil/steam
turbine generation to natural gas/gas turbine generation. He
said that in November, the Kuwait Oil Company (KOC) would
report its assessment of the 35-trillion cu.ft (est.)
non-associated gas field discovery announced in February (ref
E). Hussain said that preliminary reports indicated that
production of 1 million cu.ft/day could start as early as
2007, eventually ramping up to 170 million cu.ft/day. He
said KOC was very optimistic about this field which could
allow Kuwait to convert all of its power plants to gas, thus
freeing up more oil for export.

Neutral Zone Refinery Controversial but Necessary
-------------- --------------


6. (C/NF) When the Ambassador asked about KPC's plans to
build its fourth and largest refinery at a controversial site
in the partitioned neutral zone between Kuwait and Saudi
Arabia (ref C),Hussain said he could not understand Saudi
Arabian Texaco's (SAT) objection to the proposed site. He
explained that he had visited the site three weeks earlier
and did not believe the refinery construction would have any
impact on SAT's operations, although he understood that this
had become a "big political issue" since the GOK received a
letter from Prince Saud Al-Faisal stating the KSA's objection
to the plans. Nevertheless, he said that the project was
moving forward since Kuwait could "not afford to delay."
Bidding for the project's contracts will close within the
next month. He added that KPC had good relations with
Chevron (the parent company of SAT) in other areas,
especially Chevron's technical assistance to KOC in
processing heavy crude. The Ambassador offered to talk with
SAT to ensure that they clearly communicate their specific
objections to the project.

Diesel Deliveries to Lebanon
--------------


7. (C/NF) On fuel deliveries to Lebanon, Hussain said that
diesel shipments which had been en route to Lebanon in July
had to be diverted once the conflict between Israel and
Hizballah erupted and the blockade was imposed. He said
these shipments were now due to arrive in Lebanon by the end
of September. Contradicting previous reports (ref D),
Hussain said that Kuwaiti fuel was not sold to Lebanon at a
discount but that under the contract, Lebanon was granted an
unusually long term for payment. He said Kuwait offered
similar terms to a number of developing countries. He added
that even though there was no discount, the Kuwaiti fuel was
still significantly cheaper than anything Lebanon would have
been able to obtain from the Mediterranean.


KUWAIT 00003751 003 OF 003


Providing Fuel to Iraq
--------------


8. (C/NF) Hussain said Kuwait was fulfilling all of its
contractual obligations in providing fuel to Iraq. He added
that he was surprised that the GOI had not requested an
increase in the volume of Kuwaiti fuel delivered. He
admitted that some of this fuel was "lost" en route due to
problems with transportation but said that per their existing
contract, the Kuwaitis left it up to the Iraqis to contract
and manage the fuel carriers.

Brain Drain in Kuwaiti Oil Sector
--------------


9. (C/NF) Hussain said that he and several senior managers
within the Kuwaiti oil sector would be retiring within the
next one to two years. He said that he would have retired
this year, but given the appointment of the new Energy
Minister in July and the Minister's current political
difficulties, he feels it is an inopportune time to retire.
In addition to the departure of retirees, Hussain said KPC is
suffering from an exodus of many of its most qualified
managers and engineers who, given the current profitability
and growth of the petroleum industry, are leaving to pursue
better salaries with private companies or in some cases to
start companies of their own.

Regional Threats from Iran and Iraq
--------------


10. (C/NF) Hussain was eager to talk with the Ambassador
about regional threats and said that Iran and Iraq were the
biggest areas of concern for Kuwait and the other Gulf
countries. Hussain said a number of friends and colleagues
who traveled to Iran remarked on the difficulty of the
domestic economy and the increasing reluctance of the Iranian
public to make sacrifices domestically in order to fund the
"exporting of the revolution." Conversely, Hussain thought
the Iranian government's position on nuclear technology was
the one issue that all Iranians supported and rallied around.
He said that Iran clearly aspired to regional superiority,
as this ambition was inherent in the "Persian character." On
Iraq, he said Kuwait's biggest fear was the spread of
political instability and sectarian violence. Iraq's
division into three quasi-independent entities was an
increasingly likely outcome, a development Hussain said would
significantly undermine regional stability.

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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/
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LeBaron