Identifier
Created
Classification
Origin
07KUWAIT164
2007-02-04 11:28:00
CONFIDENTIAL//NOFORN
Embassy Kuwait
Cable title:  

AMBASSADOR DISCUSSES ENERGY ISSUES WITH KUWAIT OIL

Tags:  ENRG EPET ECON BEXP KU OIL SECTOR 
pdf how-to read a cable
VZCZCXRO7326
PP RUEHDE RUEHDIR
DE RUEHKU #0164/01 0351128
ZNY CCCCC ZZH
P 041128Z FEB 07
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 8206
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHLO/AMEMBASSY LONDON PRIORITY 1354
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 000164 

SIPDIS

NOFORN
SIPDIS

LONDON FOR TSOU
DEPARTMENT OF ENERGY FOR IE
EB/ESC/IEC FOR GALLOGLY, GRIFFIN

E.O. 12958: DECL: 02/02/2017
TAGS: ENRG EPET ECON BEXP KU OIL SECTOR
SUBJECT: AMBASSADOR DISCUSSES ENERGY ISSUES WITH KUWAIT OIL
COMPANY CEO

Classified By: Economic Counselor Tim Lenderking for Reasons 1.4 (b) an
d (d)

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 000164

SIPDIS

NOFORN
SIPDIS

LONDON FOR TSOU
DEPARTMENT OF ENERGY FOR IE
EB/ESC/IEC FOR GALLOGLY, GRIFFIN

E.O. 12958: DECL: 02/02/2017
TAGS: ENRG EPET ECON BEXP KU OIL SECTOR
SUBJECT: AMBASSADOR DISCUSSES ENERGY ISSUES WITH KUWAIT OIL
COMPANY CEO

Classified By: Economic Counselor Tim Lenderking for Reasons 1.4 (b) an
d (d)


1. (C/NF) Summary: On January 14, the Ambassador met with
Kuwait Oil Company (KOC) Chairman and Managing Director
Farouk Al-Zanki to discuss developments in the energy sector.
KOC manages all of Kuwait's upstream oil and gas production.
Al-Zanki highlighted the potential for "enhanced technical
service agreements (TSAs)" to encourage greater participation
by International Oil Companies (IOCs) in Kuwait's upstream
oil and gas production. He described the enhanced TSAs
(which incorporate substantial financial rewards for
achieving production targets) as a hybrid of standard TSAs
and traditional production sharing agreements (PSAs). The
introduction of PSAs in Kuwait would be politically
controversial and constitutionally problematic. Regarding
controversial plans to build a 615,000 bpd mega-refinery on
the doorstep of Saudi Arabian Texaco's (Chevron's) facilities
in the Partitioned Neutral Zone (PNZ) shared by Kuwait and
Saudi Arabia, Al-Zanki said that the project would need to be
re-tendered in order to attract more affordable bids. The
process of re-tendering could take four to five months. On
gas production, Al-Zanki said the 35 trillion cu. ft.
non-associated gas find announced in 2006 showed great
promise with Phase I production expected to begin this year.
However, some doubt exists about how easy it will be to
develop the field. Hani Hussain, Deputy Chairman and CEO of
Kuwait Petroleum Corporation, the parent company of KOC, will
resign in 2007. His successor has not been named, Al-Zanki
said, but offered it would not be him. End summary.


2. (U) Ambassador called on Kuwait Oil Company Chief
Executive Farouk Al-Zanki on January 14. KOC, established in
1934, has lead responsibility for exploration and production
of oil and gas within Kuwait and the country's territorial

waters. KOC's current production capacity is estimated at
approximately 2.5 million barrels per day.

--------------
Enhanced Technical Service Agreements
--------------


3. (C/NF) Al-Zanki told the Ambassador KOC was exploring
"enhanced" TSAs with IOCs in Kuwait. He acknowledged that
under existing TSAs - with Exxon, Chevron, BP, and others -
the IOCs do "everything for us" (i.e. provide assistance with
exploration, reservoir mapping, production planning, and
field operations),and "they don't get paid enough" for doing
it. (Note: In private conversations, IOC managers in Kuwait
confess that revenues from TSAs barely cover costs, and that
they enter into these contracts only to maintain a
relationship with KOC in the hope of eventually being awarded
a PSA.) "We admit that it's a consultation" relationship
with the IOCs, Al-Zanki said. The enhanced TSAs would give
the IOCs more supervisory authority and allow them to be
rewarded for helping KOC reach designated production targets.
The difficulty, he said, was that enhanced TSAs were likely
to be reviewed by the State Audit Bureau, with questions
asked about why the GOK was paying ten times more for
services and technical expertise than under a standard TSA.
How would we overcome this, even with the Kuwait Petroleum
Corporation (KPC),he wondered. (Note: Mid-level sources
within KPC have described frustration among some of the
company's engineers that they are being relegated to a
second-class status as consultants from IOCs assume greater
responsibility and higher compensation. Post's sources say
this perception that KPC management is undervaluing its
organic talent is leading to morale problems within the KPC
rank-and-file.) This is a new model and "bewildering" for
the IOCs which are more accustomed to traditional PSAs,
Al-Zanki said.


4. (C/NF) The Ambassador asked how the enhanced TSAs would
affect the development of the northern oil fields. (Note:
The $8.5 billion Project Kuwait is a proposal to invite IOCs
to participate as partners in the development of four
difficult oil fields in the North of the country through some
type of production sharing agreement. The Project is
controversial since foreign companies have been excluded from
directly participating in Kuwait's upstream operations since
nationalization in 1975. Kuwait's constitution bars foreign
ownership or control of the country's oil. We are concerned
that development of the northern oil fields under a TSA
rather than a PSA could create an incentive for IOCs to
"overdevelop" these fields in order to maximize short-term

KUWAIT 00000164 002 OF 003


earnings, thus damaging the reservoirs and reducing the
quantity of oil ultimately recovered. Under an extended PSA,
IOCs might be more likely to take a long-term view to
maximizing production.) Al-Zanki said part of the strategy
for the northern oil fields was linked to gas production, for
which Kuwait needed external help. He added that such help
would also be needed for the development of the northern oil
fields. Barring the possibility of a PSA, IOCs would prefer
"enhanced TSAs," which would include production incentives,
over existing TSAs, which only provided a fixed fee for
services rendered. According to Al-Zanki, "Even the Iraqis
are interested in the KOC approach (of enhanced TSAs)," which
he described as a hybrid model of PSAs and conventional TSAs.

--------------
Fourth Refinery
--------------


5. (C/NF) The Ambassador raised the controversial 615,000
bpd refinery, which Kuwait intends to build in the
Partitioned Neutral Zone (PNZ) adjacent to the compound of
Saudi Arabian Texaco (Chevron),and which Kuwait claims is an
economic and security priority as it seeks to phase out aging
refining facilities and replace them with a safer, more
modern, and more environmentally-friendly plant. Al-Zanki
said the refinery is going nowhere. (Note: In mid-January,
KNPC announced that it would be reconsidering the refinery
tender, since the bids received were too high. According to
Project Manager Ahmed Al-Jimaz, the project was budgeted at
$6.3 billion, but the bids came in at approximately $15
billion. Re-tendering the project with revised terms and
conditions could take four to five months.) Al-Zanki said
the refinery would need to be re-tendered using a different
model. He thought a "cost-plus" model would be the only way
to attract affordable bids. Al-Zanki acknowledged that the
proposed site of the refinery was controversial. (Note: Both
Chevron and the Government of Saudi Arabia have expressed
their objections to Kuwait's plans to build the refinery next
to Saudi Arabian Texaco's compound in the PNZ.) He said he
had spoken with Chevron about the issue.

--------------
Big Gas
--------------


6. (C/NF) The Ambassador asked about the new gas find.
(Note: In 2006, Kuwait announced the discovery of a 35
trillion cubic foot (est.) non-associated gas field in the
North of the country. In recent press statements, Al-Zanki
has announced gas production goals of 175 million cubic feet
per day (cfd) for 2007, 600 million cfd by 2011, and one
billion cfd by 2015.) Al-Zanki said some were doubting the
potential of the find although there was clearly a great deal
of gas and a great deal of condensate to exploit. He said
KOC was in contact with Shell for a preliminary evaluation.
So far everyone was happy, he said. There was no doubt it
was a big find - but how big was not clear. (Note: Post
contacts at Schlumberger, which has been working with KOC to
estimate the potential of the field, have said their
preliminary studies indicate that the quantity is indeed
close to 35 tcf but that that the field will be difficult to
develop due to its geographic complexity.) Kuwait expects to
use all of its Phase I production of 175 mcfd in domestic
power plants. Al-Zanki said Kuwait still needs to explore
deeper below the surface, where there is greater potential.


7. (SBU) As for the Dorra gas field which is shared by
Kuwait, Iran, and Saudi Arabia, Al-Zanki said the field could
provide 500 million cfd, but there is little discussion with
Iran on the issue. (Note: Kuwait and Saudi Arabia came to an
agreement in 2005 to begin exploration of the field, but
Kuwait and Iran still need to negotiate their offshore border
demarcations which will affect drilling rights.)

--------------
The Future of the Industry, Here and There
--------------


8. (SBU) Hani Hussain, Deputy Chairman and Chief Executive
of Kuwait Petroleum Corporation, has submitted his
resignation which will become effective in 2007, Al-Zanki
said. Al-Zanki denied he would succeed Hussain, as he wanted
to remain on the "technical side" of the industry" and
perhaps conclude "some things" with the IOCs. (Comment:
Hussein's successor has not yet been named, but Sami

KUWAIT 00000164 003 OF 003


Al-Reshaid, Chief Executive of Kuwait National Petroleum
Company is rumored to be the leading contender.)


9. (SBU) Commenting on staffing in the oil industry in
general, Al-Zanki complained there were not enough qualified
Kuwaiti graduates to fill the demand for jobs. The focus in
the industry is on "difficult" oil, Al-Zanki said, and
Kuwait's oil companies need technicians and experts. He said
the Saudis are snatching up technical experts with generous
offers and incentives the GOK cannot match. Al-Zanki noted
that Chevron representatives had similarly complained to him
that there was an "anti-big oil bias" in the West that was
discouraging young westerners from joining the industry.

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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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