VZCZCXRO2125
PP RUEHDE
DE RUEHKU #3469/01 2391345
ZNR UUUUU ZZH
P 271345Z AUG 06
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 6452
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHTH/AMEMBASSY ATHENS 0188
RUEHRL/AMEMBASSY BERLIN 0207
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 KUWAIT 003469 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR 3131/USFCS/OIO/ANESA/RD, NEA/ARP FOR JACKSON 
 
E.O. 12958: N/A 
TAGS: ENRG ECON PGOV FCS KU
SUBJECT: AZN POWER PLANT TO BE RETENDERED IN SMALLER PIECES 
IN THE MIDST OF KUWAIT POWER SHORTAGE 
 
Sensitive but unclassified.  Not for internet distribution. 
 
¶1. (U)  Summary:  On 20 August, the GOK announced that the 
USD 2.9 billion Al-Zour North (AZN) power plant will be 
re-tendered because only one consortium out of seven 
pre-qualified groups bid for the project due to the tender's 
unfavorable terms and conditions.  The project was opened to 
international companies almost 16 months ago and the closing 
date, after two extensions, was July 25, 2006.  In accordance 
with Kuwaiti law, the Central Tenders Committee (CTC) 
canceled the tender.  The project will be retendered as four 
separate component projects for the turbines, boilers, civil 
construction, and marine works.  The Chief Engineer of Power 
Projects at the Ministry of Energy says the re-tendering 
process could take up to two years.  This announcement comes 
in the context of a country-wide power shortage.  End Summary. 
 
History of AZN Project 
---------------------- 
 
¶2. (U)  Al-Zour North (AZN) is a proposed USD 2.9 billion, 
2500 MW electricity plant.  In 1996, then Kuwaiti Amir, the 
late Shaykh Jaber, pledged the AZN contract would go to an 
American firm following the cancellation of a previous 
project that had been won by an American company. 
Subsequently, the Government of Kuwait backed away from the 
Amir's promise, saying the contract would go to the 
best-qualified firm internationally.  Concrete plans to build 
the AZN plant started in 1998 after the Ministry of Energy's 
studies showed that Kuwait's annual power consumption was 
increasing at an annual rate of 7 percent.  The Ministry of 
Electricity and Water, later incorporated into the Ministry 
of Energy, submitted a pre-qualification notice to American 
power consultants.  15 Consultants submitted 
pre-qualification documents and were shortlisted to 5.  A few 
months later, the process was canceled and the project 
postponed due to a budget deficit. 
 
¶3. (U)  In 2001 the Minister of Planning selected a German 
consultant to study and assess Kuwait's power needs until 
¶2015.  This was the first deviation from the GOK's pledge to 
the U.S. Government that AZN power project would be assigned 
to U.S. companies (consultants and contractors).  The study 
also recommended two power plants, instead of just one, to 
meet growing demand.  Early in 2004, international power 
companies were invited to pre-qualify for the design, 
construction, supply, installation, operation and maintenance 
of AZN power plant to generate 2500 MW of power.  In March 
2005 only seven companies out of 10 bidders were 
pre-qualified for the project. 
 
Retendering as Component Projects 
--------------------------------- 
 
¶4. (SBU)  In August 2005, the AZN power project was submitted 
to international manufacturers and bidders on an engineering, 
procurement, and construction (EPC) basis.  On the closing 
date, Post's Commercial Section (FCS) called the Chief 
Engineer (CE) at the Ministry of Energy, Electricity 
Division, to determine the project status.  CE Ahmad 
Al-Jassar informed FCS that only one consortium, comprised of 
Doosan (SK), the Washington group (U.S.), and the 
Consolidated Contractors Company (Greek), submitted a bid. 
As Kuwaiti law does not allow government contracts to be 
awarded in situations of only one bidder, the Central Tenders 
Committee (CTC) canceled the tender.  The CTC later called 
pre-qualified companies to ask why they did not bid.  These 
companies replied that the terms and conditions were 
unacceptable, offering inadequate returns and requiring the 
bidding companies to incur too much liability. 
 
¶5. (SBU)  The project will now be broken down into four 
component projects which will each be tendered separately: 
turbines, boilers, civil construction, and marine works. 
Technical specs will be the same.  There will be no single 
EPC for the total project.  Rather, there will be a separate 
EPC for each component project.  The smaller projects will 
mean reduced liability for contractors.  According to 
Al-Jassar, the marine works project, worth USD 50 to 70 
million, will likely be awarded to a local contractor.  The 
other three projects will be open to international 
contractors.  The Energy Ministry intends to retain Parsons 
Brinckerhoff as project consultant.  Pre-qualification of 
suppliers and designers of the turbines and boilers will be 
announced in 6 months unless the CTC decides to use the 
current list of qualified bidders for AZN.  Al-Jassar expects 
 
KUWAIT 00003469  002 OF 002 
 
 
the process for awarding the new contracts to take 18-24 
months. 
 
Kuwait's growing power needs 
---------------------------- 
 
¶6. (U)  These events are taking place in the context of a 
power shortage in Kuwait.  Since 20 August, there has been 
wide reporting in local media of residential and industrial 
power outages, non-functioning traffic lights, and trapped 
elevators.  In press statements, a spokesman for the Energy 
Ministry attributed power cuts to unexpected power 
malfunctions at three power plants. He said that the three 
plants lost nearly 1600 MW.  (Note: Kuwait produces 
approximately 10,000 MW of power daily. End Note). On 20 
August, the Cabinet announced that it would form a committee 
to investigate the matter.  At the same time, the Energy 
Ministry has called on the public to take measures to reduce 
energy consumption especially during the peak hours between 
12 noon and 3:30 pm.  When asked about rolling blackouts, a 
Ministry of Energy spokesman said, "We have to cut off the 
power supply to consumers to compensate for the mismatch 
between generation and consumption."  He said that the 
Ministry will cut power supply in various residential areas 
for no more than an hour at a time.  The spokesman cited an 
eight percent increase in electricity consumption compared to 
the same period in 2005.  He expected the cuts to last for up 
to 10 days. 
 
¶7. (SBU)  Embassy contacts in private sector energy companies 
say that power shortages in Kuwait are likely to be a long 
term problem.  They attribute the shortages to insufficient 
Government investment in new power generating capacity to 
keep up with rapid population growth, real estate 
development, and industrialization.  Another cause is 
inadequate maintenance of electrical distribution 
infrastructure.  Maintenance contracts are often awarded to 
the lowest local bidder rather than the original equipment 
manufacturers.  An Embassy contact who manages the Kuwaiti 
operations of a major U.S. energy services company said that 
shortages were likely to abate once air conditioner usage 
decreases in mid-September, but that next summer he expects 
the shortages to be more severe.  There are a few small power 
generation projects in development, but nothing on a scale 
large enough to compensate for rapidly increasing electricity 
demand.  It was hoped that the AZN project would help bring 
power supply in line with this growing demand. 
 
********************************************* * 
For more reporting from Embassy Kuwait, visit: 
http://www.state.sgov.gov/p/nea/kuwait/?cable s 
 
Visit Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
********************************************* * 
LeBaron