KUWAITI OIL MARKET UPDATE

C O N F I D E N T I A L KUWAIT 000338 SIPDIS DEPARTMENT FOR NEA/ARP, EEB/ESC/IEC/EPC COMMERCE FOR ADVOCACY CENTER ENERGY FOR GINA ERICKSON E.O. 12958: DECL: 04/07/2019 TAGS: EPET ENRG EINV KU SUBJECT: KUWAITI OIL MARKET UPDATE REF: A. KUWAIT 323 ¶B. KUWAIT 302 ¶C. KUWAIT 57 ¶D. 08 KUWAIT 1259 Classified By: Economic Counselor Oliver B. John for reasons 1.4 (b & d ). ¶1. (C) Summary: Kuwait Petroleum Corporation has announced plans to invest USD 82 billion over the next five years, split roughly evenly between the upstream and downstream sector in support of its long range development plans to increase crude oil production capacity to 4 million barrels per day by 2020, modernize and expand refinery capacity, and further develop the petrochemical industry. However project schedules for elements of this plan have slipped due to the current economic crisis and the ongoing GoK-National Assembly infighting. Most KPC officials were unsure as to whether Kuwait's Supreme Petroleum Council would retender the fourth refinery product. Our interlocutors expressed their hope that the new parliament would include members who were more interested in the national interest then in scoring political points, but most were doubtful that they would see it. They also stressed that the GoK needed to take a stronger stand in support of necessary oil sector projects, but were generally not optimistic in that regard, either. End Summary. Kuwait's long term development plans unchanged - for now -------------- -------------- ¶2. (U) The Kuwait Petroleum Corporation (KPC) has an ambitious long range development plan to increase oil production capacity from 3 million barrels per day (mmb/d) to 4 mmb/d by 2020, modernize and expand its refinery facilities, and further develop its petrochemical sector. To achieve these goals, KPC has announced plans to invest 24 billion KD (USD 82.5 billion) over the next five years to develop upstream and downstream capacity. Planned investments will be split roughly equally between upstream projects (USD 38.5 billion) and downstream infrastructure (USD 41.2 billion). KPC plans to spend an additional USD 718 million on petrochemical projects, and the remainder (USD 2.4 billion) on other projects. The funding for petrochemical expansion is in stark contrast to the USD 7.5 billion it had committed to the K-Dow joint venture before the GOK cancelled the project on the eve of its launch. ¶3. (SBU) KPC CEO, Saad Al-Shuwaib told Econoffs that the current global economic crisis has caused some projects to be delayed and that a continued downturn in the global economy and oil prices would almost certainly have an impact on investment and delay the attainment of the 4 mmb/d production capacity goal. (Note: In the late 90,s the KPC had set 2015 as the date for reaching the 4 mmb/d mark. End note.) In addition, a large portion of the downstream financing was dedicated to building Kuwait's fourth refinery and for Kuwait's clean fuels project to upgrade two of Kuwait's three existing refineries to meet more stringent international standards. In March, the fourth refinery tender award was cancelled and the fate of the project now rests with the Supreme Petroleum Council which will decide whether to retender it or cancel the entire endeavor. Upstream -------------- ¶4. (C) According to KPC, Kuwait recently reached a production capacity of 3 mmb/d after improving surface oil production infrastructure. Sami Al-Rushaid, Chairman and MD of Kuwait Oil Company (KOC - a wholly owned subsidiary of KPC) recently outlined Kuwait's plans to reach 4 mmb/d to econoff. According to Rushaid, KOC plans to increase production primarily from three sources: 450,000 b/d from development of the heavy oil Ratqa field, 350,000 b/d from further development of several other northern fields including Sabriyah and Raudhatain, and 300,000 b/d from the non-associated Sabriyah gas field. This would provide an additional 1.1 mmb/d in capacity, which would offset an anticipated small decline in Burgan field production from the current 1.7 mmb/d according to Rushaid. (Note: ExxonMobil representatives said that they expect production from Burgan to become increasingly difficult in the near term and to begin experiencing a significant decline within 10 years. End note.) ¶5. (SBU) Rushaid highlighted some of the investments that KOC will need to make to increase oil production including construction of approximately one gathering center per year until 2020. Two new gathering centers currently being developed (expected to be completed by 2012) will add 200,000 b/d of processing capacity. KOC expects to complete expansion of its offshore single point mooring system, which loads the overwhelming majority of Kuwait,s crude exports, in June. It will then have four mooring points each with a dedicated pipeline from one of two pumping tanks in the Shuaiba Industrial Area. Rushaid noted that development of the heavy oil from Ratqa would require a series of major construction projects involving the installation of special infrastructure at every point of the production cycle including the export facilities. ¶6. (SBU) Rushaid told Econoff that discussions with Shell regarding phase three of the development of the Sabriyah gas field were in an advanced stage. KOC is expected to handle development of the gas field during the first two phases, but believes that IOC participation will be essential during the third phase due to the deep, highly pressurized reservoirs and KOC,s lack of experience in working with non-associated gas. The field is currently in the first phase of production and KOC is moving to stage two, which is expected to increase production from the current 150 million cubic feet per day (mmcf/d) to 600 mmcf/d by 2012 and increase oil and condensate production from 50,000 b/d to 175,000 b/d. Downstream - Whither the fourth refinery? -------------- ¶7. (C) According to KPC DMD and General Counsel Shaykh Nawaf Saud Nasser Al-Sabah, Kuwait's downstream investment plans have centered on the fourth refinery (Al-Zour),which would provide low-sulfur fuel oil for the country's power plants, and the clean fuels project which will upgrade Kuwait's existing refineries to produce export fuel that will meet more stringent international environmental requirements. Shaykh Nawaf explained that the GoK had referred the fourth refinery tender to the State Audit Bureau to gain political cover in response to parliamentary opposition. He said once the State Audit Bureau had identified "irregularities," some in areas outside its area of competence, the government saw no option but to cancel the tender. All of our interlocutors criticized the State Audit Bureau for focusing on the fact that the refinery was not &commercially viable.8 Shuwaib stressed that no one in KPC ever argued otherwise. He said a key element of the project was that it would help meet KPC's social responsibility to reduce power plant emissions and help create cleaner, healthier air for its citizens. ¶8. (C) As noted above, Kuwait's Supreme Petroleum Council will now decide whether to move forward on the project and will need to address the concerns cited by the State Audit Bureau (especially the cost-plus nature of the contract). Shuwaib said that if retendered it would not be as a cost plus contract. It was not clear to our interlocutors whether the SPC would indeed approve a retender. Rushaid was most optimistic, arguing &we will never give up on it.8 Both Sheikh Nawaf and Farouk Al-Zanki, Chairman and Managing Director of the Kuwait National Petroleum Company (which operates Kuwait's refineries),were somewhat less optimistic, observing that it was quite possible that the SPC would cancel the project. ¶9. (SBU) Zanki noted that there were already USD 1 billion in sunk costs for services and equipment for the fourth refinery project and added that there were no clear alternatives to increasing Kuwait's refinery capacity if the refinery were not built. He said that if the SPC approved a retender of the fourth refinery project that it would go to the Central Tender Committee (CTC) which would add approximately one year for CTC review and an additional three months for the tendering process. (Note: According to KPC officials, the problem with the CTC is that cost is the only criteria for a decision. The oil companies can set the standards but it is a "pass fail process." If you meet the criteria, the CTC bases its decision solely on cost. There is no mechanism for the oil companies to factor in technical/managerial competence or performance into the process. In several cases, we understand, the low bidder has been unable to perform the work in a timely or effective manner and cost overruns have quickly increased the cost far beyond the original "low ball" tender. End note.) ¶10. (C) The clean fuels project, Kuwait's other major downstream project, would modernize two of Kuwait's existing refineries to meet stringent new international environmental standards. Tenders on these projects have been delayed pending a resolution of the fourth refinery project. Zanki told econoff that the clean fuels project would either be tendered about a year after the fourth refinery retender or -- in the event the SPC decided not to retender the fourth refinery -- at the end of 2009. Sheikh Nawaf was far more pessimistic, saying that he was not optimistic about the prospects of the clean fuel project if the SPC decided not to retender the fourth refinery. ExxonMobil heavy oil negotiations -------------- ¶11. (C) Rushaid said that KOC and Exxon were in wait and see mode until after parliamentary elections. He praised Exxon,s patience and flexibility during the lengthy Ratqa field development talks. He was generally positive about the prospects for an ultimate deal with Exxon. He said one possible structure for the deal would involve a Technical Services Agreement for the upstream exploration and production, a joint venture for &midstream8 processing (largely involving the special handling that would be required by the heavy oil) and a downstream refinery joint venture. He confirmed that the profit centers for Exxon would be in the two joint ventures. Shaykh Nawaf, however, identified ExxonMobil's continued interest in ownership of the oil while it was in Kuwait as a "non-starter." ¶12. (C) While not offering any concrete strategies for dealing with the virtually inevitable opposition from some MPs to a complex major oil project involving an international oil company, Rushaid said that KOC and Exxon had begun discussing how best to deal with parliamentary criticism. He spoke of the need not to merely react in the face of parliamentary attacks. He added that the public needed to be educated on oil sector issues and even suggested that KOC might weigh in publicly in some fashion during the current election campaign. Oil Ministry Acting Under Secretary Sa'ad Al-Wasmi echoed the need for greater understanding of the petroleum sector by the public and parliamentarians. Blame Parliament? GoK? -------------- ¶13. (C) All of our interlocutors agreed the process for approving and implementing major projects was broken and risked tarnishing Kuwait's reputation as a place to do business. By and large officials of Kuwait,s several national oil companies, while critical of MPs, laid a substantial part of the blame for past failures to overcome parliamentary opposition to major projects at the feet of the government. They expressed the feeling that even when the previous Oil Minister mounted a strong defense of a project, as in the K-Dow deal, the government did not back him strongly in the face of parliamentary opposition and critical press coverage. Oil company officials, particularly Shuwaib, believed it was the job of the government, rather than the K-companies, to confront the parliament. Shuwaib argued that leadership needed to start with the Prime Minister. His exasperation was visible as he exclaimed, &the government should just tell us what it wants us to do and we,ll do it. We don,t care. But don,t tell us one thing and then change your mind a month later.8 Wasmi, in response to a question about who in the government would lead the engagement strategy with the parliament, first paused, then shrugged and said &I don,t know,8 before finally smiling and saying &Make that, no comment.8 Wasmi then decried the destructive and uninformed attacks leveled by MPs on past oil projects. He said that parliamentary committees were often peopled by MPs who were largely ignorant about the petroleum sector. He continued that when he was asked to meet with parliamentarians from the, recently dissolved National Assembly he would send staff, because the members are ¬ able to understand what I am saying.8 However when asked about a governmental strategy for dealing with the predictable criticisms, Wasmi could only say that it was &difficult.8 Both Shuwaib and Wasmi noted that the extended disputes made it difficult to attract the best people to be ministers, with Wasmi adding that during his time at the ministry, he had averaged "one oil minister a year," making it difficult to obtain sustained leadership from that quarter. Comment -------------- 14 (C) Kuwait's oil sector officials all realize the need to increase investment both to maintain and to expand production. Wasmi went so far as to say that "we need to invest more than we are." Unfortunately, absent any improvement in the current political impasse, it is hard to see large projects moving forward in a timely fashion, especially given the current economic climate. Currently the officials are pinning their hopes, such as they are, on a better class of parliamentarians and a stronger government to work with parliament. Absent these changes or an immediate crisis in the oil sector, it appears likely that the current "two steps forward -- one step back" will continue in the oil sector, and that it will continue to be a difficult place for U.S. firms to do business. End comment. ********************************************* ********* For more reporting from Embassy Kuwait, visit: visit Kuwait's Classified Website at: http://www.intelink.sgov.gov/wiki/Portal:Kuwa it ********************************************* ********* JONES