VZCZCXRO7035
RR RUEHDE
DE RUEHKU #3751/01 2620854
ZNY CCCCC ZZH
R 190854Z SEP 06
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC 6773
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 003751 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
ENERGY FOR WILLIAMSON, STATE FOR EB/ESC/IEC, NEA/ARP 
 
E.O. 12958: DECL: 09/16/2016 
TAGS: ENRG EPET ECON KU OIL SECTOR
SUBJECT: PETROLEUM CEO ON AMERICAN AND KUWAITI REFINERIES, 
PROJECT KUWAIT, POWER SHORTAGES, AND REGIONAL THREATS 
 
REF: A. KUWAIT 3720 
     ¶B. KUWAIT 3718 
     ¶C. KUWAIT 3620 
     ¶D. KUWAIT 3326 
     ¶E. KUWAIT 0676 
 
Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d) 
 
¶1.  (C/NF)  Summary and Comment:  On 17 September, the 
Ambassador met with Kuwait Petroleum Corporation (KPC) CEO 
Hani Hussain to discuss energy issues and regional concerns. 
Hussain was reluctant to share details regarding Kuwaiti 
plans for North American refinery investment, saying that the 
economic analysis had not yet been completed.  When pressed, 
he said that joint ventures in Eastern Canada or Aruba 
appeared to be the most attractive options.  He agreed to 
accept an invitation from the Department of Energy to visit 
the U.S. this fall for further discussions.  Hussain 
expressed pessimism about Project Kuwait (the $8.5 billion 
project for foreign participation in northern oil field 
development) claiming that the project was being held hostage 
by domestic politics, specifically by populist resistance 
from newly empowered Opposition MPs and the political 
vulnerability of the new Energy Minister.  He said power 
shortages were likely to continue at least until the summer 
of 2008 and suggested that mismanagement within the Energy 
Ministry was largely to blame.  Regarding development of the 
newly discovered gas field announced in February, Hussain was 
optimistic, saying preliminary reports indicated that 
production could start at 1 million cu. ft/day in 2007 and 
eventually reach 170 million cu.ft/day.  A full assessment 
will be completed in November.  He expressed hope that 
development of this gas field could allow Kuwait to switch to 
gas-based power generation.  On fuel for Iraq, Hussain 
insisted that Kuwait was meeting all its contractual 
obligations.  On diesel shipments to Lebanon, he said that 
deliveries had been halted during the Israeli blockade but 
were expected to arrive by the end of September.  Eager to 
discuss regional security, he said Kuwait was most concerned 
about Iran's intention to establish itself as a regional 
power and Iraq's potential to fracture along sectarian lines. 
 End Summary and Comment. 
 
KPC to Talk with DOE on American Refinery Investment 
--------------------------------------------- ------- 
 
¶2.  (C/NF)  In a 17 September meeting with KPC CEO Hani 
Hussain, the Ambassador began by following up on a discussion 
about North American refinery investment from the 5 September 
meeting between POTUS and the Kuwaiti Amir.  The Ambassador 
asked which of the potential sites the GOK was leaning 
toward.  Hussain said he was reluctant to share specific 
details of investment plans due to the confidentiality 
concerns of his prospective U.S. partners, but he 
acknowledged that of all the options under consideration, 
prospective joint ventures with Irving Oil in New Brunswick, 
Canada and Valero Energy in Aruba seem to be the leading 
candidates.  He emphasized that it was important for KPC to 
select a partner with a well-established presence in the 
place where the refinery would be built.  Hussain said a 
comparative economic analysis of the different refinery 
options was due to be completed within coming weeks.  When 
the Ambassador pursued the possibility of building the 
refinery within the U.S., Hussain said this option was still 
on the table, but concerns over "developed country 
regulations" and permitting made the U.S. option less 
attractive.  He also expressed worries about exposure to 
hurricanes.  The Ambassador explained that the USG could 
offer some assistance to facilitate the permitting process. 
When the Ambassador asked about the DOE's invitation for 
Hussain to discuss the matter in Washington, Hussain said he 
welcomed the opportunity but would prefer to wait until his 
team completes the economic analysis.  He said he would be on 
vacation during the early part of October and left open the 
possibility of conducting the meeting in late October or 
early November. 
 
Project Kuwait Stalled due to Domestic Politics 
--------------------------------------------- -- 
 
¶3.  (C/NF)  Turning to Project Kuwait, the Energy Ministry's 
proposed $8.5 billion project to partner with international 
oil companies to develop four of Kuwait's northern oil fields 
(ref B), Hussain said he was pessimistic about any progress 
in the near term.  He explained that the new Energy Minister, 
Shaykh Ali Jarrah Sabah Al-Sabah, faced a difficult political 
situation due to populist resistance to Project Kuwait by a 
bloc of Opposition MPs as well as public outrage over 
 
KUWAIT 00003751  002 OF 003 
 
 
unprecedented power outages and water shortages (ref A). 
Some of these MPs, led by Ahmad Al-Saadoun, three-time former 
Speaker of the Parliament, insist that any contracts 
associated with the project should be individually ratified 
by the full Parliament.  Given the current political 
vulnerability of Shaykh Ali, who is now facing calls for his 
resignation over the electricity and water shortages, Hussain 
thought it unlikely that the Government would renew its 
efforts to approve Project Kuwait in the near future.  When 
asked if he thought the Minister would survive the political 
crisis, Hussain avoided giving a direct answer, saying that 
Shaykh Ali would be meeting with Opposition MPs to discuss 
their concerns after Ramadan (which ends o/a 24 October). 
 
Electricity and Water Shortages Will Persist 
-------------------------------------------- 
 
¶4.  (C/NF)  Regarding electricity and water shortages, 
Hussain blamed the problems on "tremendous overusage," 
inefficiencies in the distribution system, and poor 
management at the Energy Ministry's Electricity and Water 
Division.  He said power and water problems would continue at 
least through 2007 due to the lead time required to bring 
additional generating capacity online.  Hussain said the 
Minister was "very upset" with some of the managers at 
Electricity and Water, some of whom have recently been 
suspended pending the outcome of the Ministry's internal 
investigation into the shortages.  He did not know if any of 
these individuals would be fired since there might not be any 
qualified candidates to replace them. 
 
Gas Discovery Looks Promising 
----------------------------- 
 
¶5.  (C/NF)  In speaking about power generation, Hussain added 
that new capacity could be brought online more quickly and 
more economically if Kuwait switched from fuel oil/steam 
turbine generation to natural gas/gas turbine generation.  He 
said that in November, the Kuwait Oil Company (KOC) would 
report its assessment of the 35-trillion cu.ft (est.) 
non-associated gas field discovery announced in February (ref 
E).  Hussain said that preliminary reports indicated that 
production of 1 million cu.ft/day could start as early as 
2007, eventually ramping up to 170 million cu.ft/day.  He 
said KOC was very optimistic about this field which could 
allow Kuwait to convert all of its power plants to gas, thus 
freeing up more oil for export. 
 
Neutral Zone Refinery Controversial but Necessary 
--------------------------------------------- ---- 
 
¶6.  (C/NF)  When the Ambassador asked about KPC's plans to 
build its fourth and largest refinery at a controversial site 
in the partitioned neutral zone between Kuwait and Saudi 
Arabia (ref C), Hussain said he could not understand Saudi 
Arabian Texaco's (SAT) objection to the proposed site.  He 
explained that he had visited the site three weeks earlier 
and did not believe the refinery construction would have any 
impact on SAT's operations, although he understood that this 
had become a "big political issue" since the GOK received a 
letter from Prince Saud Al-Faisal stating the KSA's objection 
to the plans.  Nevertheless, he said that the project was 
moving forward since Kuwait could "not afford to delay." 
Bidding for the project's contracts will close within the 
next month.  He added that KPC had good relations with 
Chevron (the parent company of SAT) in other areas, 
especially Chevron's technical assistance to KOC in 
processing heavy crude.  The Ambassador offered to talk with 
SAT to ensure that they clearly communicate their specific 
objections to the project. 
 
Diesel Deliveries to Lebanon 
---------------------------- 
 
¶7.  (C/NF)  On fuel deliveries to Lebanon, Hussain said that 
diesel shipments which had been en route to Lebanon in July 
had to be diverted once the conflict between Israel and 
Hizballah erupted  and the blockade was imposed.  He said 
these shipments were now due to arrive in Lebanon by the end 
of September.  Contradicting previous reports (ref D), 
Hussain said that Kuwaiti fuel was not sold to Lebanon at a 
discount but that under the contract, Lebanon was granted an 
unusually long term for payment.  He said Kuwait offered 
similar terms to a number of developing countries.  He added 
that even though there was no discount, the Kuwaiti fuel was 
still significantly cheaper than anything Lebanon would have 
been able to obtain from the Mediterranean. 
 
 
KUWAIT 00003751  003 OF 003 
 
 
Providing Fuel to Iraq 
---------------------- 
 
¶8.  (C/NF)  Hussain said Kuwait was fulfilling all of its 
contractual obligations in providing fuel to Iraq.  He added 
that he was surprised that the GOI had not requested an 
increase in the volume of Kuwaiti fuel delivered.  He 
admitted that some of this fuel was "lost" en route due to 
problems with transportation but said that per their existing 
contract, the Kuwaitis left it up to the Iraqis to contract 
and manage the fuel carriers. 
 
Brain Drain in Kuwaiti Oil Sector 
--------------------------------- 
 
¶9.  (C/NF)  Hussain said that he and several senior managers 
within the Kuwaiti oil sector would be retiring within the 
next one to two years.  He said that he would have retired 
this year, but given the appointment of the new Energy 
Minister in July and the Minister's current political 
difficulties, he feels it is an inopportune time to retire. 
In addition to the departure of retirees, Hussain said KPC is 
suffering from an exodus of many of its most qualified 
managers and engineers who, given the current profitability 
and growth of the petroleum industry, are leaving to pursue 
better salaries with private companies or in some cases to 
start companies of their own. 
 
Regional Threats from Iran and Iraq 
----------------------------------- 
 
¶10.  (C/NF)  Hussain was eager to talk with the Ambassador 
about regional threats and said that Iran and Iraq were the 
biggest areas of concern for Kuwait and the other Gulf 
countries.  Hussain said a number of friends and colleagues 
who traveled to Iran remarked on the difficulty of the 
domestic economy and the increasing reluctance of the Iranian 
public to make sacrifices domestically in order to fund the 
"exporting of the revolution."  Conversely, Hussain thought 
the Iranian government's position on nuclear technology was 
the one issue that all Iranians supported and rallied around. 
 He said that Iran clearly aspired to regional superiority, 
as this ambition was inherent in the "Persian character."  On 
Iraq, he said Kuwait's biggest fear was the spread of 
political instability and sectarian violence.  Iraq's 
division into three quasi-independent entities was an 
increasingly likely outcome, a development Hussain said would 
significantly undermine regional stability. 
 
********************************************* * 
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