KUWAIT OIL PRODUCTION UPDATE

1. (C) Summary: In separate meetings with CDA and Econcouns,
two senior Kuwaiti oil officials asserted that Kuwait could
sustainably produce 3 million barrels per day of crude oil,
but acknowledged that exceeding that level without
international assistance would be difficult. The Amir's oil
advisor said that he thought Project Kuwait had the Prime
Minister's interest and would be "back on the table.8 He
also expressed guarded optimism that the new parliament would
be able to amend some key economic laws, despite the
opposition of the "usual" parties. End Summary.

Capacity at 3 million barrels per day


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2. (C) Kuwait Petroleum Corporation Managing Director for
International Marketing Abdulatif Al-Houti said that Kuwait's
sustainable production capacity had reached 3 million barrels
per day (mmb/d), although it was only producing in line with
its 2.2 mmb/d OPEC quota. Kuwait exports between 1.3-1.5
mmb/d of crude, almost entirely on long-term contracts, and
refines around 900,000 b/d. Currently, Kuwait exports about
200,000 barrels per day of crude to China. Although China
wants more crude, Kuwait is unable to increase its exports to
China substantially, given the term structure of its current
exports. With the expertise of the oil majors, Al-Houti said
that over time Kuwait could expand to produce up to 4 mmb/d
) a prudent investment given rocketing domestic consumption
for electricity generation ) but said an absence of
government leadership and vision, combined with stiff
parliamentary opposition to the kind of production-sharing
arrangements needed to secure IOC technology and field
management expertise, meant that this goal, while worthy,
remained remote.



3. (SBU) Both Al-Houti and Amiri Oil Advisor Khaled Al-Fulaij
stressed the need for international oil company (IOC)
participation to develop Kuwait's oil production capacity
further. Al-Fulaij said that he thought Kuwait's
long-delayed initiative to develop its northern oil fields
(Project Kuwait) could be "back on the table." According to
Al-Fulaij, Project Kuwait had the Prime Minister's interest
and, as a practical matter, Kuwait's technical resources were
insufficient to dramatically increase oil production. KOC
was looking to have 80 rigs (including 7 exploration rigs)
operational in the 2013 timeframe, which would be a major
challenge to manage. Al-Fulaij said that KOC intended to
hire 1000 new employees, but questioned the availability of
that number of qualified new recruits. As Al-Fulaij saw it,
the only solution would be to bring in the IOCs with their
significant management infrastructure. He reiterated that
concessions or production sharing agreements were "off the
table." He thought, however, that the enhanced technical
services agreement model would work.

Advice to Exxon: Set up a Company


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4. (SBU) Al-Fulaij said that he had met with Exxon
representatives to discuss the company's lengthy negotiations
over the Ratqa oil field (ref b). He suggested that Exxon
establish a shareholding company to run the downstream joint
venture (24.5% Exxon owned, 24.5% KOC owned, and 51% publicly
traded). This ownership structure would turn the JV into a
Kuwaiti "investment" under Central Tender Committee (CTC) and
State Audit Bureau rules, significantly reducing bureaucratic
interference. Exxon would operate upstream under an Enhanced
Technical Services Agreement with KOC. Al-Fulaij added that
he had briefed Al-Rushaid about his conversation and received
generally positive feedback: "we can look at that."

Change the Laws


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5. (C) Al-Fulaij acknowledged that Kuwait needed legal reform
in order to better attract foreign business, specifically
citing the tender law and the build operate transfer (BOT)
law. He noted that the CTC did not have the technical
expertise it needed to evaluate complicated technical
projects and tended to deal with its ignorance by retendering
projects. On a positive note, the head of the CTC recognized
the problem and had approached Al-Fulaij seeking oil sector

KUWAIT 00000831 002 OF 002


experts to provide technical advice. So far, Al-Fulaij said,
he hadn't been able to find anyone, but he would keep
looking. He expressed optimism that the current parliament
would be able to pass needed legislation, given the changes
in its composition. The same old 11-12 people (specifically
Ahmed Saadoun) were likely to block progress, but the
government only needed 32 people to pass legislation and he
thought that number was doable.

Comment


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6. (C) Most Kuwaiti oil sector officials acknowledge the need
to bring in IOC expertise to maintain their aging fields and
to develop new fields (ref a). It is still too early to tell
whether Al-Fulaij's optimistic view of parliament (or of the
government for that matter) will be borne out by actual
progress on the ground. Absent a changed environment,
Kuwaiti constitutional limitations on concessions, out of
date tendering regulations, and heavy political interest in
the oil sector make for a difficult business environment.
End Comment.

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For more reporting from Embassy Kuwait, visit:
visit Kuwait's Classified Website at:

http://www.intelink.sgov.gov/wiki/Portal:Kuwa it
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WILLIAMS