SAUDIS REJECT KUWAITI PLAN TO BUILD NEUTRAL ZONE

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 001396 SIPDIS NOFORN SIPDIS DEPT FOR EB/ESC/IEC, NEA/ARP; ENERGY FOR MWILLIAMSON E.O. 12958: DECL: 09/12/2017 TAGS: EPET PGOV ECON KU SA SUBJECT: SAUDIS REJECT KUWAITI PLAN TO BUILD NEUTRAL ZONE REFINERY NEXT TO CHEVRON COMPOUND REF: KUWAIT 1059 AND PREVIOUS Classified By: CDA Alan Misenheimer for reasons 1.4 (b) and (d) ¶1. (C/NF) Summary and Comment: In a 12 September meeting with CDA and Econoff, Khaled Al-Fulaij, advisor to the Amir on energy affairs, said that a KSA envoy had recently visited Kuwait to deliver a message to the Amir stating the Saudi position that it would be unacceptable for Kuwait to build a new refinery next to Saudi Arabian Chevron's (SAC) compound in the Partitioned Neutral Zone (PNZ) shared by Kuwait and Saudi Arabia. The Kuwait National Petroleum Corporation (KNPC) has been planning to build a new 615,000 bpd mega-refinery in the Kuwaiti portion of the PNZ to produce low-sulfur fuel for power generation and allow the decommissioning of Kuwait's aging and accident-prone Shuaiba refinery. Both Saudi Arabia and Chevron have previously voiced their objections to the proposed refinery location since, they contend, it would impinge on the operations of SAC, a wholly-owned subsidiary of Chevron which holds the Saudi concession for exploration and production in the PNZ. The Kuwaitis argue that they have considered other locations, but the proposed site next to SAC is the only feasible option. The Kuwaitis had planned on tendering the contracts for the new refinery before October; but it now seems likely that they will hold off until some kind of political accommodation can be reached. Given the position taken by the KSA, it seems there is little role for USG advocacy for Chevron at this time. End Summary and Comment. ¶2. (C/NF) In a 12 September meeting with CDA and Econoff, Khaled Al-Fulaij, advisor to the Amir on energy affairs, said that a KSA envoy had recently visited Kuwait to deliver a message to the Amir stating the Saudi position that it would be unacceptable for Kuwait to build a new refinery next to Saudi Arabian Chevron's compound in the Partitioned Neutral Zone shared by Kuwait and Saudi Arabia. Al-Fulaij said that Kuwait had originally hoped that the issue of the refinery location could be worked out directly between the two companies, Saudi Arabian Chevron and Kuwait National Petroleum Company, but now, he said, it is unlikely that the issue will be resolved anytime soon. ¶3. (C/NF) Kuwait News Agency (KUNA) had reported, somewhat mysteriously, on 17 July that Saudi Oil Minister Al-Naimi had come to Kuwait to deliver a letter from the Saudi Crown Prince to the Amir. According to KUNA, Minister Al-Naimi was received at the airport by Amiri advisor and former Oil Minister Abdulrahman Al-Atiqi. In previous meetings with the Ambassador and Econoff, Al-Fulaij and Kuwait Petroleum Corporation General Counsel Nawaf Saud Nasir Al Sabah said that Al-Atiqi had been assigned as the Kuwaiti envoy to negotiate this issue with the Saudis. ¶4. (C/NF) Background: The Kuwait National Petroleum Corporation (KNPC) plans to build a new 615,000 bpd mega-refinery in the Kuwaiti portion of the Partitioned Neutral Zone shared by Kuwait and Saudi Arabia. The refinery, which is needed to produce low-sulfur fuel for power generation and allow the decommissioning of Kuwait's aging and accident-prone Shuaiba refinery, would be located immediately adjacent to the Saudia Arabian Chevron compound in the PNZ. Both the Government of Saudi Arabia and Chevron have voiced their objections to the proposed refinery location since, they contend, it would impinge on the operations of SAC, a wholly-owned subsidiary of Chevron which holds the Saudi concession for exploration and production in the PNZ. SAC's concession is due to expire in February 2009. The new refinery project has long been delayed, most recently due to higher than expected costs and the controversial location. After an initial single-contract tender for the project issued in late 2006 returned bids of $15 billion and more, KNPC sought and received approval from the Government to increase the budget for the project from $6 billion to $15 billion. On 17 June, KNPC announced it was inviting international EPC (Engineering-Procurement-Construction) companies to apply for pre-qualification. U.S.-based Fluor has already been named project manager, and other major U.S. EPC contractors including Bechtel and Foster Wheeler are likely to bid. Chemical reactors will be provided by General Electric. Energy Secretary Bodman sent a letter to the Kuwaiti Oil Minister on 11 January in which he expressed his hope the Kuwaitis could select site for the refinery that would not impinge on SACs current or future operations. The Kuwaitis argue that they have considered other locations, but the proposed site next to SAC is the only feasible option. KUWAIT 00001396 002 OF 002 ¶5. (C/NF) Comment: The Kuwaitis had planned on tendering the contracts for the new refinery before October; but given what appears to be a strong objection from Saudi Arabia, it now seems likely that the Kuwaitis will hold off until some kind of political accommodation can be reached. This project has already been delayed for a number of years and we see few signs that the Kuwaiti leadership suddenly considers it to be urgent. Absent any agreement, the Kuwaitis may eventually have to move the refinery to an alternate location. The most likely site is next to the Al-Zour South power station, which lies south of the SAC compound; but so far the Kuwaitis have rejected this site due to its proximity to a planned beach resort community. Given the position taken by the KSA, it seems there is little role for USG advocacy for Chevron at this time. We may now, however, see the Kuwaitis putting more direct pressure on Chevron to acquiesce in the proposed site. Chevron's Kuwait office, which is separate from SAC, is engaged in ongoing talks with the Kuwaitis regarding "enhanced" technical service agreements in the Burgan oil field complex. ********************************************* * 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/ ********************************************* * MISENHEIMER