US embassy cable - 04KUWAIT4557

C O N F I D E N T I A L SECTION 01 OF 04 KUWAIT 004557 
 
SIPDIS 
 
STATE FOR NEA/ARP, INR 
STATE PLEASE PASS DEPARTMENT OF ENERGY FOR IE 
EB/CBA FOR J.F. MERMOUD, W. BEHRENS 
EB/ESC/IEC FOR GALLOGLY, DOWDY 
USDOC FOR 4520/ITA/MAC/AME, 3131/USFCS/OIO 
 
E.O. 12958: DECL: 12/29/2014 
TAGS: PINR, EPET, ENRG, BEXP, KU, IZ 
SUBJECT: KUWAIT ENERGY UPDATE: PROJECTS, EXPANSION, 
COOPERATION, AND BIO NOTES 
 
Classified By: Ambassador LeBaron for reason 1.4 (b) 
 
1.  (U) Summary:  Ambassador met December 2004 separately 
with KPC board members, executives and chairmen of the 
various KPC divisions, and also met with American oil company 
executives.  Most of the discussions concerned the Kuwait 
Project (septel), but other topics discussed include: 
Kuwait-Iraq energy cooperation; Kuwait's gas needs; 
production levels and export capacity; training and workforce 
issues; privatization; and refining sector expansion 
projects.  The meetings also produced considerable biographic 
information on key Kuwaiti oil executives.  End Summary. 
 
Kuwait-Iraq Energy Cooperation 
------------------------------ 
 
2.  (SBU) On Iraq-Kuwait cooperation on energy projects, KPC 
CEO Hani Hussain said that they have a joint committee to 
look at various projects and keep the lines of communication 
open.  "We're gas-short," Hussain said of Kuwait, adding that 
an agreement has been signed for the provision of gas by Iraq 
but that it was "not much" and that a larger supply will 
require a significant investment in facilities and pipeline 
construction.  He also said that KUFPEC (the state-owned 
exploration firm) was looking at the potential for work in 
Iraq, and that KNPC had hosted some Iraqis on visits to 
Kuwait's refineries.  At a December 27 "diwaniya" gathering 
of Kuwaitis influential in the oil industry, KUFPEC Chairman 
Bader Al-Khashti said that KUFPEC exploration in Iraq was 
"only a matter of time" and that the Iraq Oil Ministry was 
eager for KUFPEC's involvement.  He said that when the 
security situation stabilized further, KUFPEC would become 
actively involved in the Iraqi exploration sector.  When 
asked about cooperation with Iraq on production at the 
northern oilfields Kuwait Project Managing Director Ahmad 
Al-Arbeed said that the two sides have "good cooperation" 
right now and that Kuwait would like to sign a "unitization" 
agreement, which would mean surveying the field, splitting 
the reserves proportionally, developing the fields and 
maximizing the recovery of oil for both sides. 
 
Kuwait's Gas Needs 
------------------ 
 
3.  (SBU) KNPC Chairman Sami Al-Rushaid explained that Kuwait 
has a tremendous need for gas to fuel its power plants, both 
immediately and long-term.  While Kuwait's plans for 
expanding its refining capacity will meet some of those 
long-term needs, in the short-term Kuwait has explored 
importing gas for nearby countries.  Qatar and Kuwait were in 
negotiations to build a pipeline from Qatar through Saudi 
Arabia's waters to Kuwait to bring gas.  The deal was "signed 
and agreed" according to Al-Rushaid, but then the deal was 
held up by Saudi Arabia on the basis of territorial water 
rights.  (Note: Post's understanding is that the SAG is 
holding up the deal because of what they consider to be 
inflammatory reporting by the Qatar-based Al-Jazeera 
satellite network.)  Al-Rushaid said that once in a while he 
hears indications of movement on the deal, but does not know 
when it will go through, if ever.  KUFPEC Chairman Al-Khashti 
confirmed Post's understanding of the reason behind the 
hold-up, and added that the gas supply from Qatar would still 
not be enough to meet all of Kuwait's needs even if it did go 
forward. 
 
4.  (SBU) Iran has gas to supply to Kuwait and the two sides 
have had discussions on a supply deal many times, according 
to Al-Rushaid.  He said that whenever the two sides speak, 
they almost reach agreement, and then other "religious" 
authorities get involved and the deal gets changed or set 
aside.  (Note: Econ Officer has heard this opinion expressed 
before, that the Kuwaitis "never know who they are really 
dealing with" in Iran.)  Al-Rushaid said that the GOK cannot 
count on gas supplies from Iran. 
 
5.  (U) When asked about a just-announced deal for Iraq to 
supply Kuwait with gas, Al-Rushaid said that this will meet a 
very small part of Kuwait's short-term needs, but much more 
will be needed.  He explained that Iraq does not have the 
infrastructure to actually use the gas but Kuwait does, so a 
deal makes sense.  The pipeline, transport and other 
facilities need to be upgraded and maintained though, 
Al-Rushaid said, so the deal will require some investment. 
The short-term plan of importing 35 million cubic feet of gas 
per day by the end of 2005 is possible with an investment of 
$6-8 million, but the long-term plan of importing up to 200 
million cubic feet per day will require an investment of 
approximately $200 million, Al-Rushaid said.  Kuwait will 
still need much more gas than this to fuel its power plants, 
so it will have to look at expanding its own refining 
capacity. 
 
Production Levels, Export Capacity, and New Directions 
--------------------------------------------- --------- 
 
6.  (U) KPC CEO Hussain described the overall vision of KPC 
as operating as much like a private business as possible. 
Hussain said that KPC planned on producing 4 million bpd by 
2020, and looked to increase and diversify the refined 
products coming from Kuwait.  The petrochemical sector was 
seeing a major expansion, he explained, with KPC,s 
Petrochemicals Industry Company (PIC) partnering with Dow in 
a number of ventures, both in Kuwait and abroad.  He saw the 
advantage of these joint ventures as being the influx of U.S. 
best practices and the ability to avoid some of the 
difficulties of the Kuwaiti labor market.  Hussain said that 
KPC was currently looking at $30-40 billion in planned new 
investments and capital expenses, all part of what he 
described as a "busy, ambitious program" of expansion. 
Al-Rushaid also described a number of upcoming 
"mega-projects" in the oil sector, and said that projects of 
this size and scope have not been proposed in Kuwait since 
the 1960,s.  These included the Kuwait Project, construction 
of a new refinery, upgrades at existing refineries, pipeline 
construction, export facility expansion and more. 
 
7.  (U) KOC Chairman Farouk Al-Zanki said that KOC was 
planning on expanding export capacity to three million bpd -- 
two million of crude and one million in refined products. 
KOC plans to sign a contract for pipeline and export facility 
construction by the end of 2005, and also plans to upgrade 
existing pipelines and facilities.  These contracts would be 
of interest mostly to construction companies, Al-Zanki said. 
Al-Zanki said that KOC has been exploring in other areas of 
northern Kuwait and has found "good quality light crude," 
about 16,000 feet deep.  He did not give any indication of 
quantity of a timeframe for further development, other than 
to say that KOC "hoped to produce light crude in a few years." 
 
No, Seriously, How Much Oil Do You Have? 
---------------------------------------- 
 
8.  (SBU) ChevronTexaco GM Hani Iskander (please protect) 
said that he thinks Kuwait has about 30 billion barrels of 
oil left, not the 96 billion that KPC and the GOK report. 
The production costs are increasing as the fields mature, he 
explained, with the last third of every field being the most 
expensive to produce.  KOC shuts wells down when they start 
producing 5-10% water, Hani said, while ChevronTexaco can 
keep operating at 90% water.  The water-handling costs and 
the volume of water will continue to increase as Kuwait's 
fields mature and as KOC goes after more difficult 
reservoirs.  The Burgan field has a water table beneath it 
providing pressure, but it too will run out and will require 
water injection someday, according to Iskander. 
 
Training and Workforce Issues 
----------------------------- 
 
9.  (U) The KPC executives all said that they consider 
training and development important and that the company tries 
to start people off with training right out of high school. 
Some KPC divisions had offered scholarships to the U.S. in 
the past, he said, but had problems with the students not 
being disciplined enough with their studies, and falling 
behind their colleagues during their time in the U.S. 
Al-Rushaid said that the company was looking at reintroducing 
some scholarship programs with more controls.  Hussain said 
that training and career development are also being given a 
priority, with the creation of a new position overseeing 
training and budgetary authority. 
 
Privatization: Three Competing Gas Station Companies 
--------------------------------------------- ------- 
 
10.  (U) Al-Rushaid said that a directive had been issued to 
all public sector companies to identify areas ripe for 
privatization, and KNPC had identified its petrol stations 
sector as a viable candidate.  The reasons given for 
privatizing gas stations: fewer restrictions on hiring and 
firing, fewer restrictions on services offered, and more 
competition.  After the first round of 40 of the 
approximately 120 petrol stations are privatized, the 
government will offer a second round in February or March of 
2005, according to Al-Rushaid.  The third round of the 
remaining stations will be privatized at a later date.  The 
three separate rounds of privatization will result in three 
separate gas station companies competing against one another. 
 The gas prices will still be regulated, but the three 
companies will have different brands and will have an 
operating margin within which they can adjust the prices. 
They will also be able to operate convenience stores and 
repair garages, something KNPC cannot do without generating 
justifiable complaints from the private sector.  According to 
Al-Rushaid, the GOK wants to allow the private sector to 
flourish, so this was the best way for KPC to participate. 
Previously, the lubrication oils plant was privatized, as was 
the coke smelter operations. 
 
11.  (SBU) When asked about KNPC,s privatization of petrol 
stations, Hussain said that it was a necessary step and that 
Kuwait "should let capitalism work a bit."  He said that 
Sheikh Hamad, the Prime Minister's son, wanted to get control 
of the first privatized gas station company (Al-Owla), but 
that KPC fought against it and he was not given control. 
Hussain said that the petrochemicals sector was a candidate 
for more privatization, and that the tanker and transport 
division was also a potential candidate.  He said 
privatization was being pushed by the GOK and by the Supreme 
Petroleum Council (SPC.) 
 
Refining Sector Expansion 
------------------------- 
 
12.  (SBU) Fluor-Daniels was recently awarded the contract to 
be the Project Management Consultant for a fourth refinery, 
planned for the Shuaiba area.  Fluor-Daniels will also 
prepare the tendering documents for the Engineering, 
Procurement and Construction (EPC) portions of the new 
refinery project, and supervise the EPC contractors. 
Al-Rushaid said that the main purpose of the construction of 
a fourth refinery was to provide fuel for Kuwait's power 
plants.  Kuwait has been waiting a long time for gas from 
Iran or Qatar, he said, and would prefer to be self-reliant 
and produce its own environmentally-friendly fuels.  At the 
same time, KNPC will begin upgrading the three remaining 
refineries to be in line with the environmental standards of 
the consumers of its refined products.  The refinery upgrades 
will cost about $2 billion, and the construction of the new 
refinery will cost $3 billion.  In the Project Management 
Consultant contract with Fluor-Daniels for the new refinery, 
KNPC has the option to retain the company for work on the 
refinery upgrades.  Al-Rushaid said that it was "most likely 
that KNPC will use them," because the work would be very 
similar, and it was already in the contract. 
 
13.  (U) When asked about the future directions of KNPC, 
Al-Rushaid said that his focus now was on improving the 
financial performance of the company and on upgrading the 
refineries to be able to produce better products.  He 
specifically wanted to bring the fuel oil portion of their 
refined products down to 10% and increase the production of 
higher-value products.  With the new refinery completed in 
2010, Al-Rushaid said that the planned production of 225,000 
bpd of low-sulphur fuel oil would meet all of Kuwait's power 
requirements through 2020.  He also said that he wanted to 
work on safety, health and environmental issues. 
 
Bio Notes 
--------- 
 
14.  (C) None of the oil executives currently leading KPC 
appear to have political ambitions.  They have all just 
assumed new positions on the board and will likely lead KPC 
through this next major phase of expansion, and will be the 
key interlocutors for the USG on a range of petroleum issues 
for the foreseeable future.  Biographical information on four 
of the top executives is included below. 
 
Hani Hussain, Deputy Chairman and CEO, Kuwait Petroleum 
Company (KPC) 
Born 1949.  Chemical Engineering degree, University of Tulsa, 
1971.  Worked in KPC and divisions from 1972 to the present. 
Hussain says that he considers himself a "religious person" 
and can easily shift from discussions of the most intimate 
details of the oil sector to far-reaching philosophical 
discussions of religion, history and politics.  In a recent 
lengthy, meandering conversation about religion, politics and 
reform, Hussain said that Kuwait was "still trying to find 
itself" and still trying to figure out what the "final 
system" would be, in terms of leadership and governing 
structure.  He saw the need for more economic reform, noting 
the problems in counting on oil revenues for an infinite 
stream of wealth.  "People need to get it through their 
heads," he said, "you can't just live by digging this stuff 
up out of the ground forever." 
 
Farouk Al-Zanki, Chairman, Kuwait Oil Company (KOC) 
Born 1953.  BS and Master's degrees in Petroleum Engineering, 
Oklahoma University, 1976, 1980.  Worked in KOC from 1980 to 
the present.  Al-Zanki spent 12 years in the United States 
completing his undergraduate and advanced studies in 
petroleum reservoir engineering and enjoys reservoir 
management, rather than the more popular and lucrative 
production side.  He studied in New Mexico, Oklahoma, and 
Texas.  He met and married an American woman and they had one 
child together.  This child died in a car accident in Kuwait. 
 The woman did not want to live in Kuwait and they are either 
separated or divorced.  Al-Zanki has another son now who is 
in high school and considering studying in the U.S.  Al-Zanki 
has a great fondness for the United States and travels there 
often.  He says that he "must go the U.S. every year."  He is 
a clever, humorous conversationalist and clearly enjoys 
talking with Americans. 
 
Sami Al-Rushaid, Chairman, Kuwait National Petroleum Company 
(KNPC) 
Born 1956.  BS in Industrial Engineering, Miami University, 
1978.  Worked in KNPC from 1978 to the present.  Al-Rushaid 
has 4 children.  One daughter is finishing her pharmacy 
degree in Kuwait, and another is in dentistry school in 
Dublin, Ireland.  His son is finishing high school in Kuwait 
and plans to study in the U.S. 
 
Ahmad Al-Arbeed, Managing Director, Kuwait Project 
Born 1955.  BS in Petroleum and Natural Gas Engineering, 
University of Pennsylvania, 1977.  Worked in KOC, KUFPEC , 
and KPC from 1977 till his appointment in the newly created 
Kuwait Project position in August 2004.  While Al-Arbeed has 
been described as an "Islamist" in the Kuwaiti press and by 
other post contacts, he is clearly familiar with the West, 
was educated in Pennsylvania, and speaks fondly of his many 
visits to the United States since attending college in the 
1970,s.  He spent time in New York after September 11, 2001 
when many other Arabs were staying away, and said that he 
enjoys himself whenever he travels to the U.S.  He explained 
how, on his last visit, the immigration and security 
personnel at the airport treated him the same as Americans 
were treated, and that he appreciated that.  He has eight 
children, seven girls and one boy (the youngest).  He is 
planning a family holiday to the U.S. for the summer of 2005, 
and explained that he has put out a request for proposals to 
his daughters to determine the summer vacation.  The best 
package will earn the winning daughter a spending money 
bonus. 
 
******************************************** 
Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
******************************************** 
LEBARON