AMBASSADOR DISCUSSES CEIP VISIT, KUWAIT'S FOURTH

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 000383 SIPDIS SIPDIS LONDON FOR TSOU DEPARTMENT OF ENERGY FOR IE, WILLIAMSON EB/ESC/IEC FOR GALLOGLY, GRIFFEN NEA/ARP FOR JACKSON E.O. 12958: DECL: 01/15/2015 TAGS: ENRG EPET ECON BEXP KU SUBJECT: AMBASSADOR DISCUSSES CEIP VISIT, KUWAIT'S FOURTH REFINERY, AND THE OIL SECTOR REF: A. 06 KUWAIT 1856 ¶B. 06 KUWAIT 3620 ¶C. 06 KUWAIT 4147 ¶D. KUWAIT 339 ¶E. KUWAIT 273 Classified By: Ambassador Richard LeBaron for Reasons 1.4 (b) and (d) ¶1. (C) Summary: The Ambassador met March 11 with Chairman of the Kuwait National Petroleum Company (KNPC) Sami Al-Reshaid to discuss current issues in the oil sector. The Ambassador briefed Al-Reshaid on the March 13-22 multi-agency USG critical energy infrastructure visit, to which Al-Reshaid pledged KNPC's full support. Ambassador raised Kuwait's plans for construction of a fourth refinery and urged the Kuwaitis and Chevron to work out an accord regarding the location of the refinery that accommodated the needs of both sides. Al-Reshaid believed mutual accommodation was possible. While Al-Reshaid said any decision to launch diret talks with Chevron would have to get the green light from the Energy Minister, the CEO of Saudi Arabian Chevron, in a subsequent conversation with the Ambassador, welcomed the idea of direct talks with KNPC to resolve the issue and USG assistance in moving the ball to this point. Al-Reshaid expected the Ministry of Oil -- and notably the Minister himself -- to be largely untouched by the impending cabinet reshuffle. He said not only were plans to privatize additional KNPC petrol stations on hold, but the parliament was blocking "anything that affects manpower." End Summary. KNPC Background -------------- ¶2. (U) Kuwait National Petroleum Company, formed in 1960, is responsible for refining, liquefied gas operations, and for the marketing of petroleum products within Kuwait. KNPC operates three refineries, one of which includes a gas liquefaction plant, and a chain of petrol retail stations in Kuwait. In 2005, forty of KNPC's 120 gas stations were privatized into the new Al-Oula company, with two additional rounds of privatization planned for the remaining stations. In early 2006, KNPC began the front-end design of its fourth refinery in Kuwait and sought international firms to design and construct this large facility. The new refinery is planned as a 615,000 bpd refinery, consisting of over 15 process units in addition to buildings, utilities, and offshore facilities. CEIP Visit -------------- ¶3. (C) The Ambassador noted the upcoming March 13-22 visit by a multi-agency USG team to assess Kuwait's strengths and vulnerabilities in the area of critical energy infrastructure. Al-Reshaid welcomed the visit and said KNPC would extend full support and cooperation. He provided the contact information for the new KNPC head of security. Kuwait's Fourth Refinery: Contract Nitty Gritty -------------- --- ¶4. (C) The Ambassador asked Al-Reshaid about the status of the fourth refinery, which the Kuwaitis have long indicated will be built adjacent to Saudi Arabian Chevron's (formerly Saudi Arabian Texaco) compound in the Mina Al-Zour area of the Partitioned Neutral Zone (PNZ). Al-Reshaid said that after carefully studying the bids on the refinery, the GOK had concluded they were exaggerated, and they would call for a second round of bids. He felt there was inadequate competition to make the bids viable. The bids were also submitted as lump sums, whereas Al-Reshaid said the trend in the industry was for cost-plus bids, which he said would reduce some of the risks to the contractor. The GOK is looking into whether to proceed with a cost-plus approach, and Al-Reshaid explained that it was possible for KNPC to get permission to do so. The other drawback with the first round of bids was that the quotes were valid only for a limited time -- a month, a few weeks -- so the bidders inserted numerous contingencies into their proposals. ¶5. (C) Al-Reshaid said there were four packages to bid on: the process units, which are the most important and expensive components of the refinery, comprising the main crude units and de-sulpherizing components; the support units; utilities and offsites, which are generally the least attractive part KUWAIT 00000383 002 OF 003 of the bid, covering the support piping between the different units and the associated civil engineering; and the marine components, which cover the oil pier, sea islands and tanks. Al-Reshaid said he had no proof of connivance between the bidders, but the same two bidders bid on the same two packages, which struck him as more than coincidence. Al-Reshaid said the Kuwait Petroleum Company (KPC) board will meet in April to decide on the timing and type of the next set of bids. Al-Reshaid noted that KPC had the right to exclude certain tenders from the purview of the Central Tendering Committee (CTC),and he hoped this would be the case for the fourth refinery. Kuwait's Fourth Refinery: The Location -------------- ¶6. (C) The Ambassador asked Al-Reshaid if there were any developments concerning the siting of the refinery. Al-Reshaid said he hoped an arrangement could be made with Chevron to satisfy both sides. He acknowledged that Energy Minister Shaykh Ali Jarrah Sabah Al-Sabah had received Energy Secretary Bodman's January letter on the issue, and referred SIPDIS to communications from the Saudis as well. He hoped that KNPC and Chevron could sit down and discuss the issue, but said that Minister of Energy needed to supply the authorization for KNPC to talk with Chevron Texaco about the issue since it had reached a political level. The Ambassador said the USG remained interested in a resolution of the issue and hoped it could be settled to accommodate both sides. Al-Reshaid said the GOK did not want to interfere with the Saudi Chevron site, but that the nearby site was the ideal location for the refinery, and this was a matter of strategic importance to Kuwait. Alternative sites had been considered and rejected for technical, environmental, or strategic reasons. Chevron's argument that it needed the land around its compound for steam flooding and oil production was not valid; this could be done in nearby Wafra. It was not practical in Al-Reshaid's view for Chevron to want to produce steam in one place and pipe it to fields at some distance. KNPC was willing to discuss with Chevron, but the instructions had to come from the minister first. ¶7. (C) The Ambassador said the U.S. recognized the market and Kuwait's need for expanded refining capacity. The challenge was to operationalize the discussion between KNPC and Chevron. The two entities should be talking to each other. The Ambassador noted that in prior conversations KNPC had discounted Chevron's concerns. Al-Reshaid concurred, saying initially the GOK wanted a strip of land accessing the Gulf for the refinery, but after Chevron protested, the GOK adjusted the location, then went to the municipality to release the land. Things got bogged down, he said, when Saudi Chevron CEO Ahmed Al-Omer sent a memo to the municipality protesting planned moves to start preparing the site. (See Refs B and C for further background.) ¶8. (C) Ambassador subsequently spoke on March 13 and 14 with the Amir's Petroleum Advisor Khalid Fulaij and Saudi Chevron CEO Al-Omer, respectively. Fulaij noted that Al-Reshaid had spoken to him about the refinery following the Ambassador's meeting and indicated a willingness to encourage discussion between the GOK and Saudi Chevron. Al-Omer (who is Saudi) told the Ambassador that the Saudi Ambassador in Kuwait had told him that Saudi FM Saud Al-Faisal had sent a letter (the second letter we belive) to the Kuwaiti FM on the issue in the past week. He, too, supported the idea of direct talks with the GOK. (Note: Embassy believes that direct talks between Saudi Arabia Chevron and KNPC are exactly the right way to go and we will encourage constructive engagement.) Few Aftershocks Expected in Ministry of Energy -------------- - ¶9. (C) The Ambassador asked about the impact on the Energy Ministry of the pending cabinet reshuffle. Echoing comments from the U/S of Energy (Ref D),Al-Reshaid said he did not foresee a major impact on the ministry, and he believed that Minister Aly Al-Sabah would remain in place. He said the minister had no specific problems with members of parliament. Al-Reshaid did note, however, that the electricity portfolio may be split off from the Ministry of Energy. He said electricity was too critical an issue -- and too big a problem -- to maintain within the same ministry as oil. (See Ref E for post's latest reporting on anticipated power cuts this summer.) KUWAIT 00000383 003 OF 003 Privatization of Gas Stations on Hold -------------- ¶10. (C) The Ambassador asked about KNPC's progress in privatizing petrol stations. Al-Reshaid said privatization was on hold, as parliament had interfered. KNPC had what Al-Reshaid viewed as a generous set of incentives to transition personnel to the new companies, or into early retirement. Some staff had complained to parliamentarians about the packages. Al-Reshaid said, "I don't want to sound anti-parliament, but they interfere." He said staff were offered the same salaries as they enjoyed at KNPC, with an allowance package guaranteed for five years, as well as a cash package (for a gas station foreman) of KD 32,000 (equal to approximately USD 100,000). There are additional bonuses provided for good performance. Still, people complained, and now the parliament has taken up the issue. Al-Reshaid said Kuwait has 116 petrol stations but needs 200 to meet demand. The businesses have every potential to expand and be profitable, he said. Other KPC subsidiaries have privatization plans, Al-Reshaid said, but now "everything that affects manpower is on hold," until the parliament approves a privatization law. Bio Note -------------- ¶11. (U) Sami Al-Reshaid has worked in various positions at KNPC since receiving his B.A. in Industrial Engineering from Miami University in 1978. He was born in 1954. ********************************************* * 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