Identifier
Created
Classification
Origin
08KUWAIT665
2008-06-11 14:00:00
SECRET
Embassy Kuwait
Cable title:  

CAUTIOUS OPTIMISM ABOUT KUWAIT'S HYDROCARBON

Tags:  EPET ENRG EINV KU OIL SECTOR 
pdf how-to read a cable
VZCZCXRO6644
PP RUEHDE RUEHDIR
DE RUEHKU #0665/01 1631400
ZNY SSSSS ZZH
P 111400Z JUN 08
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 1641
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0488
RUEHHI/AMEMBASSY HANOI PRIORITY 0020
RUEHKO/AMEMBASSY TOKYO PRIORITY 0392
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
S E C R E T SECTION 01 OF 08 KUWAIT 000665 

SIPDIS

EB/ESC/IEC FOR GALLOGLY AND GRIFFIN, NEA/ARP FOR JACKSON
AND BAGWELL, ENERGY FOR IE

E.O. 12958: DECL: 05/24/2023
TAGS: EPET ENRG EINV KU OIL SECTOR
SUBJECT: CAUTIOUS OPTIMISM ABOUT KUWAIT'S HYDROCARBON
SECTOR, BUT MANY CAUSES FOR CONCERN

REF: A. 07 KUWAIT 707

B. 07 KUWAIT 1626

C. 07 KUWAIT 1744

Classified By: Ambassador Deborah Jones for reasons 1.4 (b) and (d)

Summary and Comment
--------------------

S E C R E T SECTION 01 OF 08 KUWAIT 000665

SIPDIS

EB/ESC/IEC FOR GALLOGLY AND GRIFFIN, NEA/ARP FOR JACKSON
AND BAGWELL, ENERGY FOR IE

E.O. 12958: DECL: 05/24/2023
TAGS: EPET ENRG EINV KU OIL SECTOR
SUBJECT: CAUTIOUS OPTIMISM ABOUT KUWAIT'S HYDROCARBON
SECTOR, BUT MANY CAUSES FOR CONCERN

REF: A. 07 KUWAIT 707

B. 07 KUWAIT 1626

C. 07 KUWAIT 1744

Classified By: Ambassador Deborah Jones for reasons 1.4 (b) and (d)

Summary and Comment
--------------


1. (C) Kuwait's new Oil Minister and the new CEO of Kuwait
Petroleum Corporation (KPC) have led a number of positive
developments in Kuwait's oil sector in the past year and have
announced plans to make USD 55 billion of investments in new
projects over the next five years. After several years of
relative stagnation, ambitious projects for refineries,
petrochemical plants, gas production, and heavy crude
production finally seem to be moving forward both
domestically and internationally. Nevertheless, the outlook
for "Project Kuwait," the long delayed plan to invite
international oil companies (IOCs) to participate in the
development of a handful of Kuwait's northern oil fields
through operating service agreements, still looks bleak.
However, the leaders of Kuwait's oil sector and local country
managers of IOCs are now much more optimistic about the
prospects for Enhanced Technical Service Agreements (ETSAs),
under which KPC would pay high fixed fees and variable,
production-based incentives for IOCs to assign a significant
number of engineers and managers to Kuwait Oil Company (KOC)
as long-term "consultants." This model envisions a robust
partnership in which IOCs would devote more technology,
expertise, and resources to the expansion of Kuwait's crude
oil production capacity. At the same time, KPC's successful
partnership with Dow Chemical continues to grow.


2. (C) Significant challenges remain. Populist opposition
MPs play on public sentiments of resource nationalism and
make it difficult for the government to launch new projects,
especially those of potential benefit to foreign companies.
At the same time, problems of recruiting, training, and
retention at KPC are resulting in a growing talent deficit
that makes robust IOC involvement even more essential. The
threat of power outages looms large again this summer as the
Ministry of Electricity struggles ineffectively to build new

power plants and KPC struggles to produce the environmentally
friendly fuel (both gas and low-sulfur fuel oil) needed to
power them. Finally, the vulnerability of Kuwait's energy
infrastructure to terrorist attack remains significant. The
success of the oil sector's leaders in implementing these new
projects and partnerships over the anticipated resistance of
the new Parliament, which will become active in the fall
after Ramadan, will be a bellwether for Kuwait's oil sector
in the coming years. End Summary and Comment.

New Domestic Projects
--------------


3. (U) KPC, the parent corporation of Kuwait's ten
state-owned hydrocarbon companies, has announced plans to
invest USD 55 billion in new projects over the next five
years. Domestically, these projects are divided between KOC,
which handles upstream exploration and production; Kuwait
National Petroleum Company (KNPC),which handles downstream
refining and marketing; and Petrochemicals Industries Company
(PIC). The following domestic and international projects
(along with prospective ETSAs listed in the IOC section
further below) will consume the bulk of the USD 55 billion:


A. New Refinery Project (NRP): the contracts for this
USD 14 billion (est.) project will finally be awarded later
this summer after years of delay. The refinery, to be
located in the Kuwait portion of the Partitioned Neutral Zone
(PNZ) adjacent to the Saudi Arabian Chevron (SAC) compound at
Mina Al-Zour, will be rated to produce 615,000 bbl/d but is
designed primarily to produce 225,000 bbl/d of
environmentally-friendly, low-sulfur fuel oil for use in
Kuwait's thermal (steam) power plants. It will process
Kuwaiti heavy crude, which is difficult for the Kuwaitis to
market internationally. KNPC's CEO says it is impossible to
import sufficient quantities of low-sulfur fuel oil for power
generation, so in the interest of protecting the environment,
Kuwait has decided to build this refinery to produce the fuel
locally despite the astronomical cost of the project which

KUWAIT 00000665 002 OF 008


far exceeds KNPC's original budget. A long-running dispute
involving the GOK, Saudi government, KNPC, and SAC over the
location of the refinery was finally resolved after an April
meeting between the Amir of Kuwait and the King of Saudi
Arabia. The Kuwaitis agreed to move the refinery a few
hundred meters southward and inland in order to avoid
interfering with SAC's current operations and expansion
plans. On 11 May, KNPC announced the winners of the major
contract packages for the refinery. These include Korean,
Japanese, and Kuwaiti companies, as well as U.S.-based Fluor.
Contracts are expected to be signed in July. Unusually for
Kuwait, the contracts are being awarded on a cost-plus basis,
so the ultimate cost of the project remains to be determined.


B. Clean Fuels Program: this is a USD 19 billion
(est.) project to expand and upgrade two existing refineries
at Mina Al-Ahmadi and Mina Abdullah. Unlike the low-sulfur
fuel oil produced through NRP, the low-sulfur middle
distillates produced through CFP will be produced primarily
for export to western countries with stringent emissions
regulations. The combined processing capacity of the two
refineries will be increased by 200,000 bbl/d by 2012 when
Kuwait's aging and accident-prone Shuaiba refinery is due to
be retired. Contracts will likely be awarded in August. U.S.
companies Bechtel and KBR are expected to bid. Once NRP and
CFP are fully onstream and Shuaiba is retired, Kuwait's total
refining capacity will have increased from 900,000 bbl/d to
1.4 million bbl/d.


C. Non-associated Gas Early Production Facilities
(EPFs): this three-stage project is for the development of
the 35 trillion cubic foot (est.) non-associated, Jurassic
gas field, whose discovery was announced in early 2006.
Initial estimates predict that 60-70 percent of this gas is
ultimately recoverable. The USD 240 million, five-year,
first-phase contract was awarded to the local Safwan
Petroleum Technologies. It is essentially a
build-operate-transfer (BOT) contract under which Safwan is
expected to produce 175 million cf/d of gas as well as 50,000
b/d of condensate. Production began in early June, two
months behind schedule. A second phase will increase
production to 600 million cf/d by 2011, with a third phase
bringing output to 1 billion cf/d by 2016, according to KOC.
The second phase has yet to be tendered. Methane from the
EPFs will primarily go to domestic power generation, whereas
ethane and condensate will go to Kuwait's petrochemical
plants. It is worth noting that under the EPFs, KOC is
effectively paying a private company to extract upstream
resources on its behalf. This marks a significant departure
from KOC's previous position that private companies could do
no more than provide technical services.


D. Early Production Facilities for Wet Sour Crude:
this relatively small (USD 117 million) contract is
noteworthy because an American company, California-based
Processes Unlimited, has been hired by KOC to independently
produce 120,000 bbl/d of wet sour crude and 80 million cf/d
of liquefied petroleum gas. This is a BOT contract similar
to the gas EPF. To the best of our knowledge, it is the only
instance of an American company being given what amounts to a
production contract, albeit without production sharing,
outside of Chevron's work in the Neutral Zone.


E. LNG Processing Facilities: in March, Kuwait signed
a USD 150 million contract with Texas-based Excelerate Energy
to build import facilities for liquefied natural gas (LNG)
for completion by April 2009. In April, Excelerate accepted
delivery of an advanced-technology LNG regasification vessel
under a 25-year charter from Daewoo Ltd. of South Korea.
KNPC plans to import 500 to 750 million cf/d of LNG from
Qatar starting in summer 2009 for power generation during
Kuwait's peak consumption season of May-September. LNG
negotiations between KNPC and RasGas of Qatar are ongoing.
LNG imports are intended to be a temporary measure for three
to four years until domestic gas production reaches
sufficient scale to make Kuwait self-sufficient in producing
natural gas for power generation and petrochemical feedstock.



F. New Petrochemical Facilities: through its joint
venture with Michigan-based Dow Chemical Company, PIC is
completing its USD 5 billion Olefins II and Aromatics

KUWAIT 00000665 003 OF 008


projects which will produce ethylene, polyethylene, glycol,
and styrene. The first phase of Olefins II will be online in
August 08. Aromatics is expected to come online in the first
quarter of 2009. American contractors Fluor and Bechtel are
participating in the construction.


G. Additional Projects: KOC and KNPC are also tendering
projects for pipelines, gathering centers, export
infrastructure, gas trains, and security installations.

International Projects
--------------


4. (U) Internationally, Kuwait's upstream (exploration and
crude oil and gas production) projects are managed by Kuwait
Foreign Petroleum Exploration Company (KUFPEC) and downstream
(refining and retail marketing) projects are managed by
Kuwait Petroleum International (KPI). Petrochemical projects
are managed by Petrochemical Industries Company (PIC).


A. In April, KPI announced a USD 6 billion refining and
petrochemical joint venture in Vietnam's Thanh Hoa province
with Japanese partners Idemitsu Kosan and Mitsui and
Vietnamese partner Petrovietnam. KPI will hold a 35 percent
stake. The 200,000 bbl/d refinery will process only Kuwaiti
crude. It is expected to come online in 2013.


B. KPI is partnering with Sinopec, Dow Chemical
Company, and possibly Shell to build a 300,000 bbl/d refinery
and petrochemical complex in China's southern Guangdong
Province. Approval for the USD five billion complex, which
will also process only Kuwaiti crude, is awaiting the
completion of feasibility studies and environmental permits.


C. KPI has also been in talks with Reliance Industries
and other Indian companies about building a 150,000-400,000
bbl/d refinery-petrochemical complex in India.


D. In December, Dow Chemical announced a new 50-50
joint venture with PIC to be established by the end of 2008.
The joint petrochemical company will be headquartered in the
United States and employ about 5,000 people including staff
from each of the parent companies. The managing director
will be from Dow and his deputy will be from PIC. The
venture will manufacture and market polyethylene,
ethylenamines, ethanolamines, polypropylene, and
polycarbonate. To create the company, Dow is selling PIC
portions of its production facilities in Canada, Argentina,
Spain, Texas, and Louisiana for USD 9.5 billion, 50 per cent
of the asset value of the new venture. Revenues for the
first year of operations are projected to be USD 11 billion.
This major investment by PIC will be one of the first cases
to go through the recently revamped CFIUS process.


E. For a number of years, KPC has been considering
investment in a new refinery in the United States but has
been deterred by perceived regulatory and permitting
challenges. KPC managers say they have not ruled out the
possibility of such a project, but they would want an
established, reputable U.S. partner, assurances of assistance
with the regulatory red tape and political support from the
government of the host state. Pending anti-OPEC legislation
which might place KPC's U.S. assets at risk is another
significant deterrent to investment.

Cooperation with IOCs, Service Companies
--------------


5. (C) International Oil Companies (IOCs) including
ExxonMobil, Chevron, BP, Total, and Shell continue to
maintain a permanent (if token) presence in Kuwait even
though the outlook for Project Kuwait, the (originally) USD
8.5 billion proposal to invite IOCs to participate as
partners in the development of some of Kuwait's more
difficult northern oil fields through Operating Service
Agreements, is bleak. Despite press statements by the Amir,
Prime Minister, and Oil Minister in apparent support of the
Project, and a recent statement suggesting that the terms of
conditions of the prospective Project Kuwait contracts have
been updated, the combination of contentious relations
between the Parliament and the Government, exceptionally
strong government finances which make the project seem

KUWAIT 00000665 004 OF 008


unnecessary, and a lack of consistent political leadership of
Kuwait's oil sector (eight ministers in the 17 years since
liberation, compared to Saudi Arabia's three oil ministers in
the last 45 years) all diminish the chances of getting
Project Kuwait through the Parliament.


6. (C) Resource nationalism is ably exploited by several of
Kuwait's more strident opposition MPs. One embassy contact
from the Supreme Petroleum Council says that most MPs
understand the need for Project Kuwait but continue to play
politics and cater to special interests, allowing patronage
and tribalism to trump broader, long-term national interests.
Furthermore, local IOC managers suspect that the current
terms and conditions of contracts would not adequately
account for current market conditions, so even if the Project
Kuwait legislation were to be approved by the Parliament, the
major IOCs might decline to bid.


7. (C) As reported previously (reftels),in the long absence
of any progress on Project Kuwait, KOC managers and several
of the IOCs are now pursuing "enhanced" technical service
agreements (ETSAs) as an alternative. In order to meet its
production targets, KOC recognizes that more IOC technology
and expertise is needed to develop more complex reservoirs
and process heavier and more sour crude. Under the ETSA
model, Kuwait would pay premium prices to have IOCs assign
engineers and managers to Kuwait Oil Company as long-term
"consultants." High fixed fees would be complemented by
variable, performance-based pay contingent upon meeting
agreed production targets.


8. (C) Former KOC Chairman Farouk Al-Zanki told the
Ambassador in January 2007 that under existing TSAs the IOCs
do "everything for us" (i.e. provide assistance with
exploration, reservoir mapping, production planning, and
field operations),but "they don't get paid enough for doing
it." The IOC managers agree that they are not getting paid
enough under existing TSAs; so, given the bleak outlook for
Project Kuwait and the increasing scarcity of qualified
petroleum engineers, the IOCs are now prepared to let their
existing TSAs with KOC expire. BP's expired on May 31.
Chevron's expires in August. Country managers from both
companies tell us that if they fail to reach favorable terms
with KOC for a TSA, they are prepared to close up their shops
in Kuwait since the meager returns they have to show after
more than a decade of pursuing unrealized opportunities (such
as Project Kuwait) make it difficult for them to justify
dedicating any more resources here. Chevron's presence in
Kuwait has already diminished from 40 expatriate engineers
last year to only four today. BP's presence has been
gradually reduced to seven expatriate engineers from a high
of 45 four years ago.


9. (SBU) On the bright side, the local IOC managers are
guardedly optimistic about the prospects for lucrative ETSAs.
Exxon is the most enthusiastic and currently seems to be the
best positioned. In October, KOC announced it had signed a
Heads of Agreement (similar to a memorandum of understanding)
with ExxonMobil to develop heavy crude oil reserves under an
ETSA. As Kuwait's light crude reservoirs age, KOC will
increasingly need to turn to its abundant reserves of heavy
crude to meet its ambitious oil production targets.
According to KOC Deputy Managing Director for North Kuwait
Khalid Al-Sumaiti, as reported in the Middle East Economic
Digest, "The plan is to have heavy oil constituting almost 25
per cent of Kuwait's 2020 oil production." Yet, KOC has
almost no experience with heavy oil production, processing,
or marketing; so under the terms of the prospective deal,
Exxon would be "involved in all aspects of the production
chain from upstream to downstream," said Al-Sumaiti. "We will
use the enhanced TSA framework for the upstream element, and
probably a joint venture for the downstream aspect." The
final terms will be ironed out once an ongoing feasibility
study is completed. KOC announced that this study would be
completed in July 2008. Exxon expects it to be completed
later in the year and hopes to have the contract(s) ironed
out by early 2009.


10. (SBU) Separately, Chevron and BP are negotiating ETSAs
with KOC for the Burgan field complex and Kuwait's western
oil fields respectively. Chevron and KOC have essentially
agreed on all the terms except the price. At this point, it

KUWAIT 00000665 005 OF 008


is unclear whether they will arrive at a mutually acceptable
figure. BP has a draft Heads of Agreement but continues to
be frustrated at KOC's unwillingness to treat it as an
integrated oil company rather than a service company. BP
essentially wants to be able to operate autonomously in the
fields assigned to it and receive adequate remuneration for
the risk it assumes. KOC has approached Shell about an ETSA
for gas production and development, but Shell is apparently
uncomfortable with any arrangement that does not allow it to
take some kind of equity stake. Total is expected to abandon
Kuwait after its existing TSA expires. Conoco Phillips is
reportedly positioning itself to negotiate an ETSA for the
western fields in case BP's negotiations fall through. KOC
has also reportedly approached Statoil, Repsol, and Marathon
about ETSAs, but none of the talks has advanced very far.


11. (C) KOC is proceeding with the hope that the ETSA
framework will attract more robust participation by IOCs
while obviating the need for parliamentary approval that
Project Kuwait would have required. However, the Parliament
is bound to watch developments closely. Populist MP Ahmed
Al-Saadoun, a long-time critic of IOC involvement in Kuwait
who was re-elected on May 17, has already demanded
clarification from the Oil Ministry on the terms of the Exxon
deal.


12. (SBU) Meanwhile, as IOC involvement remains constrained
and KOC's own levels of technology and talent remain limited,
the big winners are oil field service companies like
Halliburton and Schlumberger and project management
consultants like Fluor and Amec. Halliburton and
Schlumberger each have several hundred employees on the
ground in Kuwait to whom KOC has outsourced almost all of its
field work and some of its management responsibilities.
Fluor and Amec have both signed multi-million dollar
contracts in the past year to manage both upstream and
downstream projects.

Plans for R&D and Environmental Innovation
--------------


13. (C) The leaders of Kuwait's energy sector are also
considering new investments in Kuwait's virtually
non-existent research and development capabilities. A blue
ribbon panel established by the Amir in 2007 produced a
proposal, subsequently endorsed by the Amir, calling for new
funding for research focused on petroleum (especially heavy
crude),solar energy, and water desalination. KPC also has
tentative plans to create a new petroleum research center in
partnership with Texas A&M, Colorado School of Mines, MIT,
IFP (France),Schlumberger, and/or Exxon. KPC and the Oil
Ministry have also announced plans to invest in Carbon
Capture and Storage (CCS) technology to reduce Kuwait's
greenhouse gas emissions and possibly inject captured CO2
into underpressurized oil reservoirs.

Leadership, Strategy, and Staffing
--------------


14. (C) The current leadership of the Oil Ministry and KPC
provides cause for cautious optimism. KPC CEO Saad
Al-Shuwaib, who took the helm of KPC only a year ago, has
been remarkably successful in launching important projects,
expanding KPC's international presence, and streamlining
corporate management. A University of Wisconsin-educated
engineer, Al-Shuwaib worked his way up through the ranks of
KPC's Petrochemical Industries Company (PIC) before being
selected as CEO of KPC in April 2007. While at PIC,
Al-Shuwaib built the company's hugely successful partnership
with Dow Chemicals, first creating a petrochemical joint
venture in Kuwait, and then exporting the Dow-KPC partnership
to other parts of the world. Al-Shuwaib has a reputation for
being a hands-on manager who is not shy about asserting
control. Since becoming KPC CEO, with the support of a
non-interfering Oil Minister, Al-Shuwaib changed the
composition of the KPC corporate board, created an
International Advisory Board, appointed new CEOs and Deputy
CEOs at each of KPC's subsidiaries, streamlined and
consolidated KPC's chain of command to improve communication
and decision-making, and announced plans for USD 55 billion
in new investment over the next five years after years of
underinvestment and unrealized projects. Since becoming CEO,

KUWAIT 00000665 006 OF 008


Al-Shuwaib has met with the CEOs of all of the major IOCs in
person, except Chevron's David O'Reilly, and visited all of
KPC's leading customers in Asia.


15. (C) In terms of strategy, Al-Shuwaib touts KPC's
ambitious domestic crude oil production targets of 3.0
million bbl/d by 2010, 3.5 million by 2015, and 4.0 million
by 2020. He freely admits that ETSAs are the only way KPC
can hope to reach these targets. KPC is also clearly more
focused under Al-Shuwaib on developing international markets,
especially emerging markets in Asia, through partnerships
with both local companies and world-class refiners and
petrochemical companies like Shell and Dow Chemical. Many of
these new international ventures are in the downstream and
follow the model of building a joint-venture refinery and
petrochemical facility designed, and contractually obligated,
to accept only Kuwaiti crude. KUFPEC, Kuwait's subsidiary
for foreign exploration and production in the upstream,
remains a minor player, producing only 60,000 bbl/d.
Institutionally, Al-Shuwaib wants to remove politics from the
oil sector and make KPC run more like a commercial company
and less like a government ministry. In the medium term, he
hopes to consolidate KPC's ten subsidiaries into an upstream
company, a downstream (refining and marketing) company, and a
petrochemical company. Eventually, he would like to convert
Kuwait Petroleum Corporation, which is currently incorporated
as a government body, into Kuwait Petroleum Company, which
would be regulated by Kuwaiti commercial law and function
with greater independence from the government. This final
goal is probably a bridge too far since the necessary
enabling legislation would require Parliamentary approval.


16. (C) Oil, Electricity, and Water Minister Mohammed
Al-Olaim, whose appointment was renewed on June 1, has,
despite being an Islamist and formerly a politically
aggressive MP, performed more like a technocrat as
Electricity Minister since March 2007, and Acting Oil
Minister since June 2007. He has a degree in industrial
engineering degree from North Carolina A&T and previously
worked as Director of Planning at KOC. He is well respected
by the oil sector managers, largely because he has been
exceptionally hands-off, allowing KPC's management team to
run the business without the usual unwelcome political
interference from the Ministry and Parliament. He is
supportive of plans to expand KPC's cooperation with
international oil companies (IOCs),but, as discussed above,
the Parliament is likely to thwart any such plans. As
Electricity Minister, he continues to fight a difficult
battle to make new investments to expand Kuwait's
insufficient power generating capacity, but a sclerotic and
politicized public contracting system has largely tied his
hands.


17. (C) Turning to KPC's limited capabilities to increase
production without the support of IOCs, oil sector managers
complain that they face significant challenges in recruiting,
training, motivating, and retaining qualified professionals.
Kuwait University's petroleum engineering department has
difficulty attracting talented students and graduates only 20
petroleum engineers per year. A petroleum engineering
professor and member of Kuwait's Supreme Petroleum Council
(SPC) says he encourages his best students to work for IOCs,
where they will receive mentoring and continual professional
development, which they would not receive at the KOC. This
contact added that, in his opinion, the 1975 nationalization
of KOC was one of the greatest blunders in the history of the
country. He contrasts the high level of training and
exposure that his generation of petroleum engineers received
from BP and Gulf (now Chevron) with the lack of attention
paid to professional development in today's KOC. One IOC
country manager explains that "within KOC, employees are
treated as a cost center, rather than as assets to be
invested in." Several contacts have remarked that the
Government effectively uses the KPC companies as a jobs
program. Within the Kuwaiti system, job placement and
advancement are generally based on family connections more
than talent and qualifications, so there is little extrinsic
incentive to excel at work. Those with an innate desire to
achieve tend to gravitate towards the private sector. In
recent years, a number of the more talented engineers and
managers at the KPC companies have left to join IOCs or start
consultancies or services companies. These difficult

KUWAIT 00000665 007 OF 008


circumstances have led many of KPC's senior managers to the
inevitable conclusion that greater participation by IOCs is
critical to the long-term health of Kuwait's oil sector.

Fuel for Power Generation
--------------


18. (C) Kuwait's electrical generating capacity has come
under strain due to years of underinvestment in new power
plants and rapidly rising (eight percent per annum)
consumption, which is heavily financed by government
subsidies. The level of subsidies and the impunity enjoyed
by those who refuse to pay their electrical bills mean that
there is effectively no price mechanism to moderate usage.
The current capacity of Kuwait's six power plants is about
10,500 MW. The maximum peak loads for summer 2008 are
expected to exceed this capacity, leading to rolling
blackouts during the peak consumption hours of the afternoon.
Last summer, the Ministry of Electricity and Water barely
avoided widespread outages by shutting down power to
government offices after sending employees home in the early
afternoon. Unfortunately, the Ministry has probably squeezed
as much spare capacity as it can out of this forced
conservation measure, so the likelihood of major outages this
summer is great. (Note: These outages are not expected to
significantly affect the Embassy or DoD facilities in Kuwait.
Many of these facilities have their own generators and the
Ministry of Electricity and Water assures us that they will
be treated as vital load centers. End note.)


19. (C) A lack of new power plants is the biggest problem
affecting Kuwait's power sector, but figuring out how to fuel
these plants is another dilemma. According to the CEO of
KOC, Kuwait currently consumes about two billion BTU/day.
This figure is expected to rise to 5 billion by 2020.
According to figures provided by the Ministry of Electricity
and Water, about 66 percent of Kuwait's power is currently
generated by traditional thermal (steam) plants with the
remaining 34 percent generated by gas turbines. In terms of
fuel, 58.2 percent of Kuwait's power comes from the burning
of high-sulfur heavy fuel oil (resulting in high levels of
air pollution),18.4 percent from the burning of crude oil,
2.4 percent from gas oil, and 20.9 percent from cheaper and
cleaner burning natural gas. KOC's CEO says Kuwait's
oil-fired power plants consume 125,000 bbl/d of crude, which
equates to more than USD 12 million/day or USD 4.4
billion/year in lost export revenues. While the burning of
crude oil and heavy fuel oil accounts for 76.6 percent of
Kuwait's power, it accounts for 92.4 percent of fuel costs.
In light of this lost revenue and the environmental impact of
burning crude oil and heavy fuel oil, the GOK has decided
that all of Kuwait's new power plants will be gas turbines.
However, domestic gas production is still limited and it will
be a number of years before Kuwait's thermal plants can be
decommissioned.


20. (C) Once the new refinery is complete, the low-sulfur
heavy fuel oil it produces will be burned to produce about
1.2 billion BTU. An additional 1.6 billion is expected to
come from the burning of associated gas from Kuwait's oil
fields. (Note: KOC claims that it currently flares ten
percent of the associated gas produced from Kuwait's oil
fields. It recently announced plans to reduce flaring to
zero to protect the environment and capture more gas for
power generation. End note.) Once the domestic production
of Kuwait's non-associated gas reaches full scale, by about
2016, Kuwait hopes to produce enough gas domestically to meet
all its power needs. In the meantime, the GOK plans to use
LNG imports from Qatar to fill the gap. Despite sporadic
conversations with Iran about a possible pipeline to supply
gas from Iran to Kuwait, the leaders of Kuwait's oil sector
say they have no serious plans to import gas from Iran, which
they consider to be an unreliable supplier. Occasional talks
about importing gas from Iraq have made little progress.


Critical Infrastructure Protection
--------------


21. (S) Kuwait's efforts to reduce the vulnerability of its
critical energy infrastructure to physical attack remain
piecemeal, uncoordinated, and generally inadequate. While

KUWAIT 00000665 008 OF 008


projects have been implemented to physically strengthen
perimeter security, security forces still lack resources and
training; command, control, and communications remain
dysfunctional; access controls are insufficient; and security
upgrades are installed without giving adequate consideration
to integration or a broader, systemic approach. The GOK
remains hesitant to sign an MOU with the USG to create a
Joint Working Group for Critical Energy Infrastructure
Protection (CEIP),citing problems with the GOK's internal
bureaucracy which make it impossible to place overall
authority for CEIP under any single government entity. A
well coordinated attack on Kuwait's refineries, export
facilities, or petrochemical plants (which are almost all
co-located) could have a crippling effect on the country's
capacity to export both crude oil and refined products.

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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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JONES