US embassy cable - 04KUWAIT786

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 000786 
 
SIPDIS 
 
STATE ALSO PASS TO DEPT OF ENERGY 
PENTAGON FOR DESC 
 
E.O. 12958: DECL: 03/07/2014 
TAGS: ENRG, ETRD, EINV, KU, IZ, SA, QA, IR 
SUBJECT: (SBU) KUWAIT AND IRAQ BEGIN ADDRESSING BILATERAL 
ENERGY CONCERNS 
 
REF: KUWAIT 05756 
 
Classified By:  DCM FRANK C URBANCIC; REASON 1.4 (B) 
 
 
1.  (SBU) Summary.  Energy Ministry Undersecretary Al-Own 
told USG officials that Kuwait and Iraq have begun direct 
discussion of bilateral energy issues through the creation of 
a technical committee, but he remains concerned that Iraq is 
lacking well-organized plans for the sector.  (See septel on 
Ambassador's March 8 meeting with Kuwaiti Energy and Iraqi 
Electricity Ministers in Kuwait City.) Of primary immediate 
concern for the bilateral technical committee is planning the 
supply of fuels from Kuwait to Iraq to begin 1 April and most 
likely to continue after the dissolution of the CPA in Iraq 
on 30 June.  Al-Own confirmed that any firm could bid on 
humanitarian fuel contracts tendered by the USG and its 
agents.  Al-Own said the technical committee is considering 
the longer term exportation of Iraqi oil via Kuwait and 
tapping Iraq as a partial solution to Kuwait,s growing 
demand for natural gas.  The committee also is looking at 
ways to encourage Kuwaiti investment in southern Iraq. 
However,  security and political sensitivities remain a large 
concern for Kuwaiti companies.   Al-Own said Kuwait is 
committed to engaging the new Iraqi government on these 
issues, but he stressed that American support for Iraq would 
be necessary for years to come if these and other energy 
issues are to be successfully resolved.  End Summary. 
 
(SBU) Bilateral Technical Committee Formed 
------------------------------------------ 
 
2. (SBU)   In a March 2 meeting with Econcouns, Econoff 
(notetaker) and visiting officials from the U.S. Defense 
Energy Support Center (DESC), Undersecretary for Oil Issa 
Al-Own said Kuwait and Iraq have recently created a technical 
committee to begin resolving bilateral energy concerns and to 
find areas for future mutual cooperation.  "Kuwait is talking 
to the Iraqis directly and looking for the development of 
strategic cooperation between the two countries," Al-Own 
said.  He reported that the technical committee, which "has 
the blessing of the Prime Minister," has met three times in 
Kuwait since December 2003 (December 11, January 17, February 
29) and the next meeting is scheduled for May 4, 2004.  The 
Undersecretary heads the Kuwaiti delegation, which is 
composed of chairmen from the production, marketing and 
refining sectors representing the oil, gas, and related 
commercial industries.  Although Al-Own described the Iraqis 
as committed to the work of the committee, he told us Iraqi 
politics handicap Iraq's energy operations. He expressed 
concern that he would be dealing with "new faces" after the 
June 30 transfer of sovereignty to a transitional Iraqi 
government. 
 
(U) Kuwait Supplying Fuels to Iraq: How Much for How Long? 
--------------------------------------------- -------------- 
 
3. (C)  Al-Own said the Iraqis informed the technical 
committee that Iraq would need 6.2 million liters of fuels a 
day, beginning April 1st.  He said he was uncertain how Iraq 
arrived at this figure, but stressed he hoped it had been 
decided in close coordination with the USG.  Al-Own said 
Kuwait is prepared and able to supply 3.6 million liters/day 
to Iraq, but more than that would be logistically difficult 
to accomplish due to loading and transport limitations.  He 
said he suspected Iraq,s oil production and refining would 
be crippled for a long time, and thus more permanent 
solutions, such as new pipelines, would be needed to meet 
Iraq,s growing fuel needs.  Al-Own estimated that it would 
take Iraq seven to nine years to get back on its feet in 
terms of production.  Referring to the Iraqi State Oil 
Marketing Organization (SOMO), he said he was "not confident 
of SOMO,s capabilities to transport and pay" for any fuels 
received, and that the only way to ensure continuity would be 
to have the "Americans lay down the structure of operations, 
which Iraq must accept as reasonable." 
 
4.  (C) DESC officials briefed the Undersecretary on the 
state of commercial negotiations to find a replacement for 
the current KBR administered humanitarian needs contract due 
to expire March 31.  Al-Own appeared satisfied with how these 
contracts were being negotiated.  He emphasized the need for 
all contracts to be openly bid, and for the winners to comply 
with all safety and trucking specifications.  He said that 
this contract represented "a new situation, an open 
opportunity, and it is in the interests of all parties to 
comply." 
 
(SBU) Future Export of Iraqi Oil via Kuwait 
------------------------------------------- 
 
5. (SBU)  Al-Own said Kuwait is considering Iraq,s recent 
request to export a portion of Iraqi crude oil through 
Kuwait,s ports.  He explained that Iraq originally had asked 
that one million barrels per day be exported via Kuwait, but 
now reduced its request to 250,000 barrels/day.  He said 
Kuwait was already intending to expand its export facility 
from the current capacity of two million barrels/day to a 
capacity of three million/day within seven years and to four 
million/day within 15 years.  Any new expansion plans will 
factor in the additional Iraqi shipments, Al-Own said.  He 
expected a technical team to have preliminary cost estimates 
for such a project within the next two months, although he 
emphasized there are major hurdles to this effort, 
particularly since there currently are no functioning oil 
pipelines that can be used to accommodate the Iraqi 
shipments. 
 
(SBU) Kuwait,s Growing Demand for Natural Gas 
--------------------------------------------- 
 
6.  (SBU) Al-Own described the challenge of securing 
much-needed new supplies of natural gas for Kuwait as a 
"headache" for him as Undersecretary.  (Note:  Although 
Kuwait is blessed with extensive oil deposits, it has 
insufficient natural gas supplies.  End note.)  Al-Own 
explained that Kuwait needs additional natural gas for two 
purposes:  power generation and the growing petrochemical 
industry.  Kuwait wants to convert its oil burning energy 
plants to more efficient and clean natural gas.  Likewise, 
Kuwait is expanding its petrochemical industry, with a $6 
billion deal with Dow Chemical being the cornerstone of this 
expansion. 
 
7.  (C) Al-Own said Kuwait is exploring four separate 
options, or a combination thereof, for securing this needed 
natural gas and said a final decision would be made sometime 
this year.  One option is a project with Qatar that could 
potentially provide 1.2 billion cubic feet of gas per day. 
Al-Own said ExxonMobil is exploring this project and would be 
in Kuwait for renewed talks in May of this year.  Kuwait was 
also considering imports of natural gas from Iran (Reftel A). 
 Another possibility was to develop the offshore Al-Durra gas 
fields in connection with Saudi Arabia and Iran, but he said 
the dispute with Iran regarding their competing claims on the 
field would need to be resolved first. 
 
8.  (C) The final option under consideration by the technical 
committee is for Iraq to provide some natural gas to Kuwait. 
Al-Own said from 1986-1990, prior to the first Gulf War, Iraq 
provided Kuwait with 200-300 million cubic feet per day, but 
much of the gas was "wet" and therefore of inferior quality. 
Importing Iraqi gas would further enable consumers to 
rationalize their use of Kuwaiti gas for maximum efficiency. 
Under such an export plan, Iraq would no longer need to flare 
its gas, resulting in reduced pollution and increased export 
revenues.  Al-Own said the infrastructure was in place for 
these deliveries to begin again, noting that a connected gas 
pipeline was in good condition, although metering instruments 
would need to be installed.  He, however, remained concerned 
about the quality of the gas from Iraq.  Econcouns asked 
about possibly entering into a gas for debts swap with Iraq, 
which Al-Own said was a possibility but that Kuwaitis still 
harbor a lot of animosity towards Iraq for the damage caused 
in 1990-91, for which they still demand compensation. 
 
9. (C) Equate Petrochemical Company (a joint venture of Dow 
Chemical and Kuwait Petroleum Investment Company) has 
previously expressed to us strong interest in purchasing 
Iraqi gas for its Kuwait facility. Additional supplies of gas 
would allow Equate to fully utilize its plant's capacity and 
boost its profitability.  Equate also expressed its 
willingness to make the necessary minor upgrades to the 
pipeline system in return for a supply contract. 
 
(C) Kuwaiti Investment in Iraq:  Wait and See 
--------------------------------------------- 
 
10. (C)  Iraq, through the technical committee, has asked 
Kuwait to encourage investment in Iraq,s energy sector in an 
effort to help revitalize that sector.    When Econcouns 
asked about the possibility of the two countries jointly 
developing the Rumaila oil fields as a means of encouraging 
Kuwaiti investment, Al-Own said the committee considered this 
issue at its first meeting, but due to the political 
sensitivity of the subject, Iraq had asked that this issue be 
tabled.  (Al-Own recalled that Saddam Hussein's regime's 
demand for control of these fields was one of Iraq,s primary 
reasons for launching the 1990 invasion.)  Due to the 
sensitivity surrounding the idea of joint exploitation of the 
Rumaila fields, this part of the technical committee's 
discussion was not even recorded into the meeting's minutes, 
Al-Own said. Plans, however, are currently being considered 
to open a Kuwaiti investment office in Basra, but the 
security situation remains a concern.  Such an office could 
help facilitate various outsourcing contracts with Kuwaiti 
firms, helping bring the energy sector back on line more 
rapidly. 
 
(U) Comment 
---------- 
 
11. (C)  Al-Own frankly discussed the efforts Kuwait and Iraq 
are currently undertaking to rebuild the energy sector and to 
mutually improve bilateral relations.  He stressed, however, 
that any solutions would only be for the long term and that 
Iraq would continue to rely upon US assistance for the 
foreseeable future.  He said Kuwait remains committed to 
helping the US achieve success in Iraq, recognizing the dire 
implications for Kuwait otherwise.  Post views this working 
level bilateral energy committee as a positive step for 
Kuwait-Iraq economic and strategic partnership relations.  We 
will continue to monitor its progress and undertakings. 
Baghdad minimize considered. 
JONES