US embassy cable - 05KUWAIT4770

C O N F I D E N T I A L SECTION 01 OF 04 KUWAIT 004770 
 
SIPDIS 
 
SIPDIS 
 
LONDON FOR TSOU 
DEPARTMENT OF ENERGY FOR IE, MWILLIAMSON, AND OFFICE OF THE 
SECRETARY 
 
SIPDIS 
EB/ESC/IEC FOR GALLOGLY, DOWDY 
 
E.O. 12958: DECL: 11/15/2010 
TAGS: ENRG, EPET, ECON, BEXP, KU 
SUBJECT: SECRETARY OF ENERGY THANKS GOK FOR KATRINA AID, 
BRIEFS ON ENERGY BILL AND REFINERY CAPACITY, AND URGES 
INCREASED INVESTMENT IN KUWAIT'S UPSTREAM AND DOWNSTREAM 
SECTORS 
 
Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d) 
 
This cable is sensitive but unclassified; please protect 
accordingly.  Not for Internet distribution. 
 
1.  (U) Summary: During his November 13-14 visit to Kuwait, 
Secretary of Energy Samuel Bodman thanked the Government and 
 
SIPDIS 
people of Kuwait for their generous support for Hurricane 
Katrina victims, as well as their support of reconstruction 
efforts in Iraq, Pakistan and elsewhere.  The Secretary 
briefed Energy Minister and current OPEC President Shaykh 
Ahmad Fahd Al-Ahmad Al-Sabah on details of the new U.S. 
energy bill as well as plans to reactivate refining and 
production capacity lost in the recent hurricanes.  Finally, 
the Secretary urged Kuwait to increase its investment in both 
upstream and downstream capacity, and specifically asked the 
Minister and other oil sector leaders to work with other 
countries in the GCC to publicize the investments that are 
being made to increase capacity. 
 
2.  (U) While in Kuwait, the Secretary met with the Energy 
Minister and Undersecretary Issa Al-Own, dined with the 
Minister and top Ministry of Energy and Kuwait Petroleum 
Corporation officials, met with representatives of six U.S. 
companies active in the energy sector in Kuwait, and toured 
the EQUATE petrochemical facility, a highly successful joint 
venture between Dow Chemical and Kuwait's Petrochemical 
Industries Company.  The Secretary was interviewed by the 
Editor-in-Chief of the Arabic daily newspaper Al-Qabas, and 
also conducted a well-attended press conference prior to his 
departure, where he emphasized the public themes of his trip 
throughout the region.  End Summary. 
 
Secretary Thanks Kuwait For Katrina Support And More 
 
SIPDIS 
--------------------------------------------- ------- 
 
3.  (SBU) During a November 13 meeting with Energy Minister 
Shaykh Ahmad Fahd Al-Ahmad Al-Sabah, Secretary of Energy 
Samuel Bodman told the Minister that his main objective in 
coming to Kuwait was to thank the Government and people of 
Kuwait for their generous support for the people and 
communities affected by Hurricane Katrina.  Shaykh Ahmad said 
that the relations between the United States and Kuwait 
"demand this kind of help."  He added that the National 
Assembly will take up the matter soon, in order to approve 
the entire aid package. 
 
4.  (C) The Secretary also thanked Kuwait for all of its 
support for reconstruction efforts in Iraq, as well as 
support for the coalition efforts in Iraq and continuing 
logistical and financial support for Operation Iraqi Freedom. 
 The Secretary also noted the generosity of Kuwait towards 
Pakistan in its recent earthquake crisis, and thanked Kuwait 
for being part of the aid and reconstruction efforts there. 
 
Restoring U.S. Refinery and Production Capacity 
--------------------------------------------- -- 
 
5.  (SBU) Secretary Bodman provided a briefing to Shaykh 
Ahmad on efforts to restore refining and production capacity 
lost in the recent hurricanes in the Gulf region of the U.S., 
and shared with the Minister specific details on shut-in oil 
and gas production as well as damage to offshore platforms 
and other facilities.  Shaykh Ahmad was shown pictures of 
some of the destruction throughout Louisiana and Mississippi. 
 Secretary Bodman said that he expected full refining and 
production capacity to be back online by June or July of 2006. 
 
The New Energy Bill: "Seeds of Recovery" 
---------------------------------------- 
 
6.  (SBU) The Secretary told Shaykh Ahmad that, with the 
recently passed Energy Policy Act of 2005, the "seeds of 
recovery" had been sown for the U.S. energy industry to 
embark on a long-term effort to build capacity throughout the 
system.  He also explained that, in Dubai that morning, he 
had just announced the publication of the first-ever Arabic 
translation of the Energy Information Administration's 
International Energy Outlook.  Turning to the issue of power 
generation, Shaykh Ahmad asked about the use of gas for power 
plants in the U.S., to which the Secretary responded that the 
gas has become very expensive in the U.S. and that an 
increase in nuclear power generation is expected over the 
 
KUWAIT 00004770  002 OF 004 
 
 
long-term. 
 
More Dialogue Needed Between Producers and Consumers 
--------------------------------------------- ------- 
 
7.  (SBU) The Minister said that he was very glad that the 
Secretary had come for this visit and that it was "important 
 
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to have dialogue between OPEC members and the major 
consumers."  During the November 13 meeting Shaykh Ahmad 
called for increased cooperation between producers and 
consumers, and he repeated this point during the dinner that 
evening.  He noted that the announcements and intentions by 
producers to increase production combined with conservation 
strategies announced by consuming nations was a good overall 
strategy and worth continuing. 
 
More Investments Needed in Upstream and Downstream 
--------------------------------------------- ----- 
 
8.  (U) Secretary Bodman emphasized the importance of 
increased investments in upstream and downstream capacity, 
especially in the current climate of high prices for 
consumers and high profits for producers.  Within that 
framework, he also urged the GOK to move forward on specific 
new investments, such as development of the northern 
oilfields and construction of a new refinery. 
 
9.  (SBU) Shaykh Ahmad said that the Kuwait National 
Petroleum Company (KNPC) was currently looking for a joint 
venture partner for the new refinery to be constructed in 
Kuwait, and that the end-market for this refinery would be 
the power sector in Kuwait.  He added that most companies 
"are reluctant to do the downstream side" because of the 
smaller profit margins.  He said that "the Chinese, Spanish, 
and others get involved" in downstream operations, but not 
the large IOCs.  Secretary Bodman noted that oil producers 
are increasingly needing to create their own product 
distribution networks, which includes refineries, and that 
includes both companies and countries involved in oil 
production.  Ministry of Energy Undersecretary Issa Al-Own 
agreed, noting that Kuwait's "investments are tied to 
strategy, not profits," and that Kuwait needed to find a way 
to "announce that to the U.S. public." 
 
Many Projects, Few Bidders, High Costs 
-------------------------------------- 
 
10.  (SBU) Shaykh Ahmad noted that the Ministry of Energy, 
KPC, and its subsidiaries all have many tenders out for bid, 
but that they were only finding two or three bidders for each 
project, whereas in the past they have always had more.  He 
said that the resources of the engineering, construction, and 
energy services companies are "stretched thin," especially 
for Kuwait's large projects involving expansion of its export 
facilities and oil infrastructure.  The huge number of 
projects throughout the region and the scarcity of bidders 
translated into Kuwait paying "70% more than the real price" 
for any oil infrastructure project, according to Shaykh 
Ahmad, with further cost increases expected.  He gave the 
example of the new refinery, which has gone from an estimated 
cost of $3.5 billion to $5.5 billion. 
 
11.  (SBU) "Everybody is busy," Shaykh Ahmad said, referring 
to the companies needed for expansion of the upstream and 
downstream sectors.  In the past, he explained, companies 
like Bechtel and Fluor "usually only took one project at a 
time.  Now they have numerous projects" each.  He rattled off 
a list of projects with involvement by U.S. companies in 
Kuwait, including the refinery expansion projects (Fluor) and 
a new olefins petrochemical facility (Foster Wheeler).  He 
said that Kuwait is "ready to accept a partner" in its new 
refinery, with a steady supply of crude secured by KOC. 
Shaykh Ahmad described the EQUATE petrochemical company as a 
"successful model" for such a joint venture and that Kuwait 
"could do this with refineries."  According to the Minister, 
Kuwait has committed to invest $52 billion in expansion of 
the upstream and downstream sector over the next twenty years. 
 
12.  (SBU) The Minister offered a brief overview of projects 
in the electricity and water sector, explaining that both 
sectors were seeing critical shortages.  Kuwait needs to 
double its power and water capacity in eight years, he said, 
and the increase in power capacity alone will cost Kuwait KD 
 
KUWAIT 00004770  003 OF 004 
 
 
6 billion ($20.5 billion).  (During the breakfast with the 
Secretary on November 14, one U.S. engineering company 
 
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executive said that he expected to see an increasing amount 
of power shortages and blackouts in Kuwait without 
significant investment in new capacity.) 
 
A Need For Public Announcements Of Investments 
--------------------------------------------- - 
 
13.  (SBU) Secretary Bodman explained to Shaykh Ahmad how he 
had asked executives of U.S. oil companies to provide him 
with information on how their companies are investing in 
expanding capacity, and asked the Minister to consider 
providing similar information through the GCC countries.  He 
told the Minister that it would be useful to have a GCC 
statement on total investments in new capacity and plans for 
future investments.  Shaykh Ahmad responded by saying that he 
could try to raise the investment issue at the final OPEC 
meeting of the year, to be held in Kuwait in December, and he 
said that he thought that "most sides will be happy to reveal 
their downstream investments."  He said that he would "look 
at making public announcements" at the OPEC meeting, "and 
expand from there."  He asked for specific proposals for such 
announcements, and the Secretary explained that most useful 
would be an official statement of the facts of actual 
upstream and downstream investment. 
 
White House Statements On OPEC Appreciated 
------------------------------------------ 
 
14.  (C) Turning back to the issue of prices, Shaykh Ahmad 
took exception to the common instinct to blame OPEC for high 
oil prices.  "OPEC, OPEC, OPEC," he declared, jabbing his 
finger in the air for emphasis.  "Everybody says it's OPEC, 
but there are many other issues, including taxes."  The 
Minister then said that he wanted to thank the White House 
and the U.S. Government for making "reasonable announcements" 
regarding OPEC policy during his time as OPEC President. 
"They supported OPEC, they didn't attack it," he said, and he 
added that it was "helpful not to have the blame put on 
OPEC."  He repeated that he appreciated the "public support" 
of the USG. 
 
Kuwaiti Still Waits For A Partner For U.S. Refinery Investment 
--------------------------------------------- ------ 
 
15.  (SBU) Shaykh Ahmad said that the GOK is ready to invest 
in a joint venture for the construction of a new refinery in 
the U.S., but that it needed to identify a U.S. partner that 
could bring the technical expertise and construction 
experience to the table.  He added that he has already 
received requests from Louisiana and Mississippi to build a 
new refinery in those states.  DoE Senior Advisor Molly 
Williamson was told by KPC officials over dinner that the 
interest by Kuwait in investing in refining capacity in the 
U.S. is sincere.  She provided an update to these officials 
on current legal issues concerning refinery construction in 
the U.S. 
 
Gas Need Remains Critical 
------------------------- 
 
16.  (C) Throughout the visit the Secretary heard about 
Kuwait's shortage of gas and how this affects its ability to 
generate power and meet the increasing demands of the growing 
petrochemical sector.  The Minister put it simply: "We don't 
have a lot of gas, this is our problem".  He described the 
holdup over a proposed pipeline to bring gas from Qatar to 
Kuwait as a "big problem" with Saudi Arabia, and noted that 
Kuwait did not have enough refining capacity to meet its own 
current and future needs.  While suggesting that Kuwait has 
some new gas reserves, he said that it still had a "problem 
offshore with the Iranians," referring to the disputed 
offshore Al-Dorrah gas field.  He added that Kuwait would 
like to have a choice to rely on a reliable source of gas or 
to refine it from crude, but did not want to be forced into 
one or the other. 
 
U.S. Companies Offer Mixed Reviews 
---------------------------------- 
 
17.  (SBU) In the delegation's breakfast meeting with 
Kuwait-based representatives of U.S. companies, the Secretary 
 
KUWAIT 00004770  004 OF 004 
 
 
heard mixed reviews of the business and investment 
opportunities in Kuwait's energy sector.  Despite the 
insistence by the Minister and others that the vote for the 
enabling law allowing foreign companies to participate in the 
development of the northern oilfields would pass through the 
National Assembly, representatives of Chevron and ExxonMobil 
remained skeptical.  "They do have the National Assembly 
votes if they push it," said one executive, "but they (the 
GOK) won't."  They also expressed concern about the 
profitability of the project and the need for Kuwait to 
compete with other, more promising, investment opportunities 
throughout the region. 
 
18.  (SBU) The oil company executives were in agreement that 
Kuwait would see a production drop in the future if it did 
not bring in outside technical assistance, with one executive 
saying that "that's what it will take to change things." 
Those providing equipment for the new power plants and 
petrochemical facilities noted that plans were being made for 
these facilities without a secure supply of gas, and that 
Kuwait could not produce the amount or type of gas it needed 
for these projects. 
 
19.  (SBU) The executives were all in agreement with the 
Minister's comments to the Secretary, that there were fewer 
bidders on energy infrastructure projects because the 
companies were all stretched thin.  The lump-sum mentality 
with small margins was keeping many companies away, according 
to one executive, who added that he was beginning to see a 
change in mentality by some elements of the Kuwait oil 
industry away from lump-sum bids to smaller packages that 
could be negotiated with numerous bidders.  The provision of 
energy infrastructure equipment and services has gone from a 
buyer's to a seller's market, he noted. 
 
20.  (U) The breakfast meeting concluded with some of the 
executives describing the ways in which they and their 
companies are involved in community outreach, skills 
development, and private sector development in Kuwait. 
Chevron, for example, provides funding through AMIDEAST for 
young Kuwaitis to go the U.S. and study English in summer 
camps.  Fluor has twenty young Kuwaiti engineers currently in 
the U.S. for training, and is getting involved with the LOYAC 
youth organization to provide summer jobs for Kuwaiti youth. 
The ExxonMobil executive spoke of the rejuvenation and 
expansion of the American Business Council.  The Secretary 
thanked the companies for this involvement and encouraged 
them to do more. 
 
EQUATE: A Kuwait-American Success Story 
--------------------------------------- 
 
21.  (U) The Secretary's last stop in Kuwait was a visit to 
the EQUATE petrochemical facility, a joint venture between 
Dow Chemical and the GOK's Petrochemical Industries Company 
(PIC), with a minor stake held by two publicly-traded Kuwaiti 
companies.  EQUATE CEO Hamad Al-Terkait provided an overview 
presentation on the company and its future expansion plans, 
followed by a tour of the facilities.  Established in 1995 
with a $2 billion investment, the company is now the number 
one producer of glycol in the world and PIC has become Dow's 
largest co-investor in other projects around the globe. 
Al-Terkait emphasized the reliability of the feedstock that 
Kuwait can provide to such projects, but noted that the 
increased amount needed for future projects might be harder 
to secure.  Dow and PIC now have a total of over $6 billion 
in investments together worldwide. 
 
22.  (U) Secretary Bodman's visit to Kuwait received 
widespread positive press coverage, to be summarized in a 
separate mdeia reaction cable. 
 
******************************************** 
Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
******************************************** 
LEBARON