US embassy cable - 05KUWAIT1884

IRANIAN GAS AND PROJECT KUWAIT: THE VIEW FROM KPC

Identifier: 05KUWAIT1884
Wikileaks: View 05KUWAIT1884 at Wikileaks.org
Origin: Embassy Kuwait
Created: 2005-05-08 10:18:00
Classification: CONFIDENTIAL
Tags: EPET PREL PTER KU IZ IR OIL SECTOR
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 001884 
 
SIPDIS 
 
STATE FOR NEA/ARPI, EB 
 
E.O. 12958: DECL: 04/26/2015 
TAGS: EPET, PREL, PTER, KU, IZ, IR, OIL SECTOR 
SUBJECT: IRANIAN GAS AND PROJECT KUWAIT: THE VIEW FROM KPC 
 
REF: A. STATE 83661 
 
     B. KUWAIT 943 
 
Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d) 
 
1. (C) Summary:  During a May 2 meeting, Kuwait Petroleum 
Corporation (KPC) General Counsel, Shaykh Nawaf Saud Nasser 
Al-Sabah (strictly protect) gave Poloff a readout on the 
status of Kuwait's efforts to import natural gas, including 
details on the highly publicized March 15 MOU with Iran. 
Nawaf said Kuwait viewed Iran as a secondary source for 
natural gas, and asserted that Kuwait would ideally like to 
import gas from Qatar.  In an effort to ensure Iranian 
cooperation, he noted that Kuwait had structured the MOU so 
as to require Iran to sink substantial costs into the 
construction of a pipeline (estimated at $100 million) before 
recouping any costs.  In the event the agreement with Iran 
falls through and the Saudi-Qatari row remains unresolved, 
Nawaf said Kuwait would consider accepting a Qatari offer to 
supply LNG, although this would require the construction of a 
very costly LNG terminal.  He did not see the importation of 
Iraqi gas as a viable alternative.   On Project Kuwait, Nawaf 
said the recent favorable report on the project by the 
National Assembly's Finance Committee would virtually ensure 
the body's support for the measure once brought to the floor. 
 He said the GOK hopes to conclude a vote on the issue before 
the National Assembly's June 28 recess date.  End Summary. 
 
Iranians Duplicitous in MOU Negotiations 
---------------------------------------- 
 
2. (C) KPC General Counsel Shaykh Nawaf Saud Nasser Al-Sabah 
told Poloff May 2 that he had accompanied Energy Minister 
Shaykh Ahmed Al-Fahad Al-Sabah to Iran to negotiate the March 
15 gas MOU on behalf of Kuwait.  During the trip, Nawaf said, 
the CEO of Iran's state gas company had engaged in 
duplicitous behavior, changing "half the agreement" in the 
few hours between the end of negotiations and the signing 
ceremony and leading Nawaf to threaten to withhold his 
Minister's signature.  Although the CEO denied making 
anything more than minor changes to the document, Nawaf said 
it was clear he had authored all of them. 
 
Sunken Pipeline Equals Sunk Costs 
--------------------------------- 
 
3. (C) Wary of dealing with Iran, Nawaf said Kuwait had 
purposefully structured the MOU so as to force Iran to assume 
substantial sunk costs before realizing any profits. 
Accordingly, the MOU calls for Iran to build or contract out 
for the building of the necessary pipeline, which KPC 
estimates will cost $100 million, before any further 
agreements are made. Previous drafts of the MOU had called 
for a jointly owned pipeline, operated by an International 
Oil Company (IOC) on a Build, Operate, Transfer (BOT) basis. 
 When Iran approached IOCs about the project, however, none 
would agree to undertake it without receiving a portion of 
the upstream business, terms Iran was unwilling to accept. 
 
Iranian Gas Substandard and Secondary Source Only 
--------------------------------------------- ---- 
 
4. (C) Nawaf said KPC had queried Turkish officials about 
their gas deal with Iran, and had been informed that Turkey 
had pulled out of it after more than five years, in part 
because of the poor quality of Iranian gas.  Even if this 
turns out to be true, Nawaf said, KPC envisions an Iranian 
source as secondary to others it is pursuing. 
 
Qatar Offers LNG Until Political Settlement with SAG 
--------------------------------------------- ------- 
 
5. (C) Chief among Kuwait's planned sources is Qatar, which 
Nawaf said KPC is still hoping will settle its differences 
with Saudi Arabia, thereby allowing for a pipeline across 
Saudi territorial waters.  In the meantime, he said, Qatar 
has approached Kuwait with an offer to supply Liquified 
Natural Gas (LNG) via ships.  Nawaf said KPC estimates for 
the construction of an LNG terminal were in the range of $500 
million, an extremely high cost, and one that KPC is 
unwilling to bear for transport from such a close distance. 
On sourcing from Iraq, Nawaf said that this would also 
require significant investment in a pipeline for a very small 
amount of flare gas, and would not be worth the expense. 
(Note:  He did not address Iraqi gas exports to Kuwait that 
could be used to power electricity generation for sale back 
to Iraq.  End Note.) 
 
Project Kuwait To Pass National Assembly 
---------------------------------------- 
 
6. (C) The recent favorable report from the National 
Assembly's Finance Committee on the Northern Oilfields 
Project (Project Kuwait) makes it almost certain that the 
project will be approved by the entire National Assembly, 
said Nawaf.   He said KPC and the GOK hope to have the 
assembly vote on the project before the June 28 recess date 
which will mark the end of the legislative year.  Although he 
admitted the GOK may not meet this deadline, Nawaf said the 
Minister is committed to the project and is willing to make 
every effort to ensure its passage by year's end. 
 
Debate Over Bookable Reserves 
----------------------------- 
 
7. (C) Responding to Poloffs comment that IOC's were losing 
interest in Project Kuwait, Nawaf said there is ongoing 
debate inside KPC over whether the project would allow IOCs 
to book Kuwaiti reserves.  So far, he said, the Minister and 
other key actors have not been convinced that the potential 
benefit of sweetening the deal this way for IOCs would be 
worth the possible political ramifications.  (Note: Some MPs 
have opposed Project Kuwait on the grounds that it would 
somehow transfer or imply IOC ownership of Kuwaiti reserves. 
They would presumably be similarly suspicious of allowing 
IOCs to book Kuwaiti reserves.  End Note.) 
 
New KPC CEO Management Style 
---------------------------- 
 
8. (C) Nawaf said new KPC CEO Hani Hussein is less outwardly 
focused than predecessor Nader Sultan, and shuns attendance 
at international conferences in favor of an increased focus 
on corporate governance issues.  Accordingly, he has ordered 
the formulation of a corporate ethics policy which include 
anti-sexual harrassment and religious freedom provisions. 
 
Assembly Dissolution Unlikely 
----------------------------- 
 
9. (C) Discussing the passage of Project Kuwait, Nawaf noted 
that many important issues were being crowded out by the 
current debate over women's rights.  Although the situation 
had proved frustrating for the government, Nawaf said 
dissolution of the assembly would be highly unlikely given 
that the GOK had "paid a lot for this National Assembly" and 
the Prime Minister would not want to have to start from 
scratch or risk losing his key ally, Speaker Jassem 
Al-Khorafi. 
 
10. (C) Comment: Despite the MOU between Iran and Kuwait, the 
behavior of Iranian negotiators and the Kuwaiti desire to 
structure the gas deal in their favor in order to guarantee 
forward movement are both strong indicators that the project 
may never come to fruition.  The difficulty of Kuwait and 
Iran to deal with each other in good faith does not bode well 
for this project.  Kuwait has not lost hope that Qatar will 
be able to supply gas in the near future and continues to 
seek a diplomatic solution to the Saudi-Qatari row.  As a 
last option, Kuwait may eventually build an LNG terminal, 
albeit at great cost.  Either way, it is post's estimation 
that Kuwait would prefer not to rely on Iran as its primary 
source. 
 
********************************************* 
Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
 
You can also access this site through the 
State Department's Classified SIPRNET website 
********************************************* 
LEBARON 

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