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WikiLeaks: Saudi Arabia Cannot Pump Enough Oil to Keep a Lid on Prices

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Thu, Feb 10, 2011 | WikiLeaks: Document 1, Document 2, Document 3 and Document 4

The Khurais oil field, about 160 km from Riyadh, Kingdom of Saudi Arabia. (Photo: EPA)

WikiLeaks: Saudi Arabia Cannot Pump Enough Oil to Keep a Lid on Prices

The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

Read related article “WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices” in the Guardian here.


Source: WikiLeaks

Document 1: US queries Saudi Arabia’s influence over oil prices.

Reference ID: 08RIYADH868
Created: 2008-06-03 15:03
Classification: CONFIDENTIAL
Origin: Embassy Riyadh

VZCZCXRO0122
PP RUEHDE RUEHDIR
DE RUEHRH #0868/01 1551539
ZNY CCCCC ZZH
P 031539Z JUN 08
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 8526
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHHH/OPEC COLLECTIVE PRIORITY
RUEHJI/AMCONSUL JEDDAH PRIORITY 9575
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY

Cable dated: 2008-06-03 T15:39:00

C O N F I D E N T I A L SECTION 01 OF 04 RIYADH 000868

SIPDIS

NEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, DAS AHEGBERG, AND MWILLIAMSON TREASURY PASS TO A/S CLOWERY, DAS BAUKOL AND CMORAVEC DHS PASS TO TWARRICK AND DGRANT CIA PASS TO TCOYNE

E.O. 12958: DECL: 06/03/2018 TAGS: EPET, ENERG, EFIN, SA
SUBJECT: IS THIS OIL MARKET BROKEN? VIEWS FROM RIYADH
REF: A. RIYADH 751 B. RIYADH 732

Classified By: CHARGE D’AFFAIRES MICHAEL GFOELLER FOR 12958 1.4 B, D, AND E

——-
Summary
——–

¶1. (C) Minister Naimi’s offer of an additional 300,000 barrels per day (bpd) in the wake of President Bush’s visit had minimal impact on crude prices; some analysts stated 500,000 bpd-plus would be needed to impact crude prices near $128/barrel. Market analysts in Riyadh point out widespread petrol subsidies in China, India, and the Middle East ensure price feedback mechanisms are broken; they therefore predict crude demand will continue to rise there. Governments are abandoning plans to roll back petrol subsidies in the face of escalating food inflation. Our contacts are concerned languishing refining margins are driving down refinery utilization. Recession may be the one brake on crude prices in the near term, but our contacts are divided on its impact. Their crude price forecasts range between $90 and $150/barrel.

——————————————–
Saudis Resist Continued Requests for Significantly More Production
——————————————–

¶2. (C) The oil industry newsletter “Foreign Reports” summed up the industry’s take-way from the President’s recent visit: “Responding to demand, not demands – The message from Riyadh this afternoon may be summed up: Saudi Arabia can and will respond to increased demand from its refining customers by increasing its production, but it will not respond to politically-motivated calls for more oil.” Minister Naimi was careful to point to customer requests to justify his announcement of a increase in production of 300,000 bpd. The increase should bring Saudi Arabia’s June production to 9.45 million bpd. By Monday, OPEC price hawks, Libyan oil official Shukri Ghanem among them, jumped in to criticize Minister Naimi’s decision “to cave in to requests from the U.S.”

———————–
Is this Market Broken?
———————–

¶3. (C) Here in Riyadh, our banking sector contacts are focused more on long-term market disequilibirium. Like energy economists worldwide, they are scratching their heads, asking how we can slow this spiral of escalating crude prices. Brad Bourland, Chief Economist, and Paul Gamble, Head of Research from Jadwa Investments, one of the newly-established Saudi investment banking houses, are concerned the price feedback loop between crude and finished petroleum products is increasingly tenuous globally. Bourland points to analysis by Deutschebank’s Adam Siminsky, who posits a growing disconnect between the crude and finished product markets.

¶4. (C) Bourland explains while crude has increased by nearly 6 times in the last four years, gasoline prices in the U.S. have at most tripled. While consumers complain vociferously about rising pump prices, nonetheless they are not absorbing the full brunt of rising input prices. The refining sector is absorbing the growing pricing differentials between crude and finished products, leading to plummeting refining utilization rates in the U.S. For example, refining utilization rates fell to 84 percent in the U.S. recently. Bourland noted the U.S. majors would continue to operate their vertically-integrated refineries – as they have little choice but to move their crude through the

RIYADH 00000868 002 OF 004

system. However, under these price conditions, independent refiners operate in the red, and many are simply idling their capacity. The Petroleum Economist confirmed that in March, many refiners ran at a loss.

——————————————–
Poor Price Elasticity in China, India, ME: Food Price Inflation is a New Complication
——————————————–

¶5. (C) Bourland noted that given the widespread public subsidies in China, India, and the rapidly growing markets of the Middle East, there is no pass-through of these higher crude prices to the consumer in much of the world’s market. Essentially there is no price signaling, “go slow” sign in the form of higher prices for consumers as crude rises. As a result, he expects we will continue to see unrestrained demand growth, especially in the Middle East and China.

¶6. (C) Bourland was not optimistic about prospects for encouraging greater price elasticity in the world energy markets. Inflation, particularly food inflation, recently has become a front-burner issue for many nations. Pressed consumers in many nations have recently found themselves on a knife’s edge regarding food security, and are not likely to peacefully accept the rolling back of petrol subsidies which have become effectively institutionalized. Bourland also cautioned that Saudi Arabia’s domestic consumption of crude continues to grow by about 100,00 bpd annually, ensuring a tight global market for the foreseeable future.

——————————————–
U.S. Market Demonstrates Elasticity, but Price Responses in Europe also Limited
———————————————

¶7. (C) Bourland believes the U.S. market is demonstrating some price elasticity in the downstream market, and this is beginning to curb consumption. In the U.S., pump prices are rising sharply. He noted gasoline in Connecticut, for example, had hit $4.50/ gallon. Gamble, a British citizen, noted that in Europe, the pump price is heavily weighted towards the government’s tax take, so the impact of rising crude prices is felt much more slowly. Consumer response in Europe is also correspondingly slower. Europe’s ability to respond with transport measures that might have a near-term impact on per capita fuel consumption is also limited, as most people already take public transportation or drive fuel efficient cars.

———————————-
IEA Pessimistic on Prospects for Greater Price Elasticity
———————————-

¶8. (C) Energy Attache queried Dr. Nobuo Tanaka, the Executive Director of the International Energy Agency, during a recent presentation at the International Energy Forum in Riyadh about the prospects for introducing greater price elasticity in the global market. Specifically, in November 2007, China had announced it would begin rolling back subsidies. Dr. Tanaka indicated that the harsh winter weather and the associated transportation problems at the Chinese New Year had largely halted roll-out of China’s program. He was not optimistic about other large developing nations following suit with new roll-backs. In light of the recent tragic earthquake in Sichuan, it is likely China will be in no position to force a politically unpopular subsidy roll-back on the population now.

—————————————-
Jadwa Forecasts $90 Barrel Oil for 2008; SABB Forecasts $150
—————————————-

RIYADH 00000868 003 OF 004

¶9. (SBU) Looking forward, Jadwa Investments forecasts an average price of $90/barrel for oil 2008, with a drop to $70/barrel by the end of 2008. Jadwa forsees a constant monthly downward trend in demand, due to the U.S. economic recession and its impact on the global economy. Bourland noted Jadwa’s analyses departed from DeutscheBank’s forecast of an average barrel of $105 for 2008. On the other hand, Dr. John Sfakiankis, from the Saudi British Bank, an HSBC subsidiary, remarks that the U.S. is already in recession, and crude prices nonetheless continue to rise. He predicts crude prices topping $150/barrel “are not unlikely” by the end of the summer.

—————————————-
$15 Billion/Month into Official Reserves
—————————————–

¶10. (C) Bourland estimates the Saudi state is earning roughly $1 billion/day now in oil revenues, of which it expends roughly half, and adds the other half to its official reserves. He noted SAMA added $15 billion to its reserves in March, the seventh month running that reserve additions totaled more than $10 billion. “The amounts are overwhelming,” Bourland summarized. He also explained that although the Saudi Arabian Monetary Authority (SAMA), the central bank, continued to hold U.S. Treasury bills, it was also diversifying. SAMA’s Investment Department “prides themselves on being diversified,” he related.

—————————————-
Dollars: The Unloved Currency as Saudis Wait for a Possible Re-Valuation
—————————————-

¶11. (C) This enormous influx of petro-dollars is largely held by SAMA. Bourland explained that Saudi investors, however, are currently hoarding riyals. They continue to be afraid of being caught out by a possible re-valuation in the USD-pegged currency. He noted investors continue to anticipate an eventual re-valuation, but “the pressure is not like it was last fall” when the fixed exchange rate came under heavy speculative attack in November. Instead, Bourland sees Saudis hoarding riyals because the “U.S. markets would go on sale” if the Saudi government re-values. Bourland pointed out it was difficult for Saudi investors to even find large quantities of U.S. dollars, saying “it’s hard to get $500 million or $1 billion in USD, the banks don’t want to hold that much.” Bourland stated he does not see much Saudi money involved in hedge funds or other speculative instruments allegedly running up crude prices.

———————————–
“The Money is Safer in the Ground”
———————————–

¶12. (C) Bourland noted that the confluence of demands to manage this enormous cash flow, and the challenges to managing growth in the oil sector were beginning to worry the Saudi leadership. He referenced recent comments from an informed source in the oil sector who explained that Saudi Aramco was scaling back proposed future expansion plans. Quoting King Abdullah’s recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and “leave crude in the ground for its children”, Bourland remarked, “There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn’t want to see it squandered.”

———————————
Saudi MinPet: “Blame it on the Weak Dollar”
———————————

¶13. (C) The Saudi Ministry of Petroleum has noted to us in

RIYADH 00000868 004 OF 004

consultations throughout 2007 and in January 2008 that much of the run-up of the price of crude could be blamed on the gradual decline in the USD, as crude contracts are priced in dollars. We concur to a certain extent, but as crude has surged beyond $110/barrel, and the dollar seems to have found a bit of a floor in recent weeks, we find this argument less compelling. As well, crude priced in euros and yen has also surged to new record highs in recent weeks. Taking inflation into account is another issue. The Economist noted in April that crude would have to hit $134/barrel to equal in inflation-adjusted terms 1981’s record crude prices. Two weeks ago, the NYMEX market did just that.

———
Comment
———

¶14. (C) Our Mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period. The May announcement of a 300,000 bpd increase in production barely dented price escalation. It appears unlikely Saudi Aramco could muster the million or more barrels which appear to be needed to make a dent in the normally upwards price trajectory. Saudi Aramco’s ability to sustain such a production increase for a year or more raises serious questions. A series of major project delays and accidents XXXXXXXXXXXX over the last couple of years is evidence that Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production. Additional production would likely come from increasingly heavy crude which the world lacks sufficient capacity to easily refine. The Saudis appear dis-inclined to discount its heavy crude sufficiently, so the market is dis-inclined to purchase it. In neighboring Iran, the regime is now purchasing floating storage for heavy crude which has no takers. While this Mission is far from embracing doomsday “Peak Oil” theorists, Saudi Aramco’s challenges are significant.

¶15. (C) King Abdullah’s recent comments on “leaving some oil in the ground” did not set new oil production policy, but hewed to the previous Saudi commitments to build a capacity of 12.5 million bpd. Nonetheless, his remarks may hint at an emerging conservationist ethic in Saudi Arabia — extending beyond energy to encompass how the Kingdom will more broadly husband its resources for future generations. Bourland highlights the King’s concerns with energy issues, but also his growing worries with how his successors will manage and secure the Kingdom’s financial patrimony as well.

GFOELLER


Source: WikiLeaks

Document 2: US concern over Saudi Arabia oil production

Reference ID: 08RIYADH732
Created: 2008-05-07 17:05
Classification: CONFIDENTIAL
Origin: Embassy Riyadh

VZCZCXRO7737
OO RUEHDE RUEHDIR
DE RUEHRH #0732/01 1281753
ZNY CCCCC ZZH
O 071753Z MAY 08
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8343
RHEBAAA/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHHH/OPEC COLLECTIVE PRIORITY
RUEAHLC/HOMELAND SECURITY CENTER WASHINGTON DC PRIORITY 0213
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHRMAKS/COMUSNAVCENT PRIORITY
RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY

Cable dated: 2008-05-07T17:53:00

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000732

SENSITIVE SIPDIS

NEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, MWILLIAMSON, AND DASAHEGBURG TREASURY PASS TO A/S CLOWERY CIA PASS TO TCOYNE

E.O. 12958: DECL: 05/07/2018
TAGS: EPET, ENERG, ECON, NI, SA
SUBJECT: PRINCE ABDULAZIZ ON ENERGY MARKETS, OPEC LAWSUITS

Classified By: DCM Michael Gfoeller for reasons 1.4 (b) (c) and (d).

——–
Summary
———

¶1. (C) In a May 6 meeting with Assistant Minister of Petroleum (MinPet) Prince Abdulaziz bin Salman bin Abdulaziz Al-Saud, he outlined the Ministry’s latest thinking on record-high crude prices, and OPEC’s general refusal to budge on possible production increases. Contrary a few months ago, Prince Abdulaziz promised no relief on production or pricing. He told the Energy Attache that the Ministry was “extremely worried about demand destruction” in the U.S. as a result of the latest financial crisis indicators. However, he also fretted about squeezed refining margins in the U.S. and globally, noting the grave impact on U.S. refining utilization, currently running a scant 84 percent. He asked if the USG could assist the current political situation in Nigeria, where the production has collapsed to about a million barrels per day (mbpd) during the last week as a result of militant attacks and strikes. On the anti-OPEC lawsuits, he explained Saudi Arabia continued to gather amicus briefs for the now-consolidated cases in Texas. He generally dismissed the further threat of NOPEC legislation, saying if Congress could have passed the legislation, they would have done so already.

—————————–
“Refining Margins Shocked,” Refining Utilization Falling
—————————–

¶2. (C) Queried about Monday’s record surge in crude prices to above $120/barrel, Prince Abdulaziz noted, “We are extremely worried about demand destruction, like in the early 1980s. Aramco is trying to sell more, but frankly there are no buyers. We are discounting crudes, now we’re at a $10 differential between West Texas Intermediate (WTI) and Dubai Light, sometimes as much as a $12-$13 differential. Our buyers still bought less in April than they did in March.” Prince Abdulaziz attributed the lack of willing buyers to the current low refining margins. He indicated that that current high crude prices were squeezing refining margins, as refiners were unable to pass on the full brunt of crude prices to the end consumer. “There are no refining margins, refining margins have been shocked. It’s purely technical, not policy-induced. There are commercial impediments.” The consequence of poor refining margins was a declining refining utilization rate. Prince Abdulaziz fretted, “the U.S. refining utilization is 84 percent now, it’s usually above 90 percent. The quickest relief would be if crude prices would come down from these highs, if some of these political crises would resolve.” He queried if the USG could do anything to assist current political situation in Nigeria.

——————————————— ————-
“Grey Area of Demand Destruction, We Must Hold Our Guard”
——————————————— ————-

¶3. (C) Prince Abdulaziz dis-missed speculation that King Abdullah’s press statements last week on Saudi Arabia planning to cap production capacity at 12.5 million barrels per day and leave oil in the ground for future generations represented a new policy. He stated, “It’s a statement of fact, we need to be credible. We’re pumping more than 9 million bpd, and right now, there is a grey area of demand destruction. We must hold our guard, and wait and see what happens with potential demand. Vice President Cheney was very complimentary about our maintaining spare capacity. We are honest with our commitments, we’ve been credible with our program. The other producing countries should do it the way

RIYADH 00000732 002 OF 002

we do. If we announce new capacity, we budget for it, we allocate for it, we acquire rigs, we have timelines. We don’t have pipedreams, if we make an announcement, we are certain to supply it.

————————————
Anti-OPEC Lawsuits and NOPEC Updates
————————————-

¶4. (C) On the issue of pending lawsuits against Saudi Aramco and the national oil companies of other OPEC member and oil producing nations, Prince Abdulaziz indicated:
–the lawsuits had been successfully consolidated into one court in Texas;
–Saudi Arabia had worked with most other OPEC nations to file amicus briefs with the court.
–To Iran’s offer to file an amicus brief, Saudi Arabia had said, “thanks, but no thanks,” recognizing it probably would not be helpful in a U.S. court;
–The Mexicans and Russians would also file amicus briefs.
–The Norwegians also now have a case filed against them in Florida, so are reluctant to file an amicus brief.
Prince Abdulaziz believes the Departments of State and Justice seem to be coming around to filing a Statement of Interest (SOI) on behalf of the Saudi government in the lawsuits, but noted the White House was still concerned about the political optics of such a move. He felt such concerns were mis-placed now, particularly with respect to possibly fueling NOPEC legislation.

¶5. (C) Prince Abdulaziz indicated that if NOPEC had the strength to pass it would have done so already, but it hasn’t, in large part he felt due to the Administration’s clear opposition. He argued the lawsuits and NOPEC had much in common: “The Adminstration needs to be consistent in its policy. The effects of the lawsuits are very similar to that of NOPEC, but the plaintiffs are individual companies, rather than the Attorney General.” Prince Abdulaziz added, “Frankly our Embassy feels that once people are aware of the ramifications of such legislation, they’ll be reluctant to abuse it. The Minister has been very candid to explain the ramifications, which would be far more serious for the U.S. economy and energy markets than the Saudi markets.”

——–
Comment
——–

¶6. (C) Prince Abdulaziz seemed more comfortable with the state of play in the anti-OPEC lawsuits, his considerable earlier anxiety much diminished. He appears to have largely dis-missed NOPEC legislation as a credible threat for now. We are concerned that the Saudi energy leadership does not seem sufficiently well-advised on how the current high oil price environment is fueling U.S. election year “resource nationalism,” and how this might impact our bilateral relationship in future years. In this vein, King Abdullah’s recent comments that Saudi Arabia would cap its production capacity at 12.5 million bpd and leave crude in the ground for its children — while representing no new initiative or substance — seemed ill-timed at a moment when the market is looking for calming words from the world’s energy market leader.

GFOELLER


Source: WikiLeaks

Document 3: Saudi Arabia tackles western shift towards energy independence

Reference ID: 09RIYADH1557
Created: 2009-11-23 14:02
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin: Embassy Riyadh

VZCZCXRO5998
OO RUEHDE RUEHDH RUEHDIR
DE RUEHRH #1557/01 3271444
ZNR UUUUU ZZH
O 231444Z NOV 09
FM AMEMBASSY RIYADH
TO RHEBAAA/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 1975
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE

Cable dated: 2009-11-23T14:44:00

UNCLAS SECTION 01 OF 04 RIYADH 001557

SENSITIVE

SIPDIS

DOE FOR S2, AL HEGBURG, AND BILL BRYAN DEPT FOR S/CIEA, EEB/ESC DAS HENGEL, AND NEA/ARP
E.O. 12958: N/A TAGS: ENRG, EPET, PREL, SA
SUBJECT: SCENESETTER FOR VISIT OF DOE DEPUTY SECRETARY PONEMAN TO SAUDI ARABIA
REF: A. RIYADH 1492 B. RIYADH 1393 C. RIYADH 1549 D. RIYADH 1526 E. RIYADH 1520 F. RIYADH 1484 G. RIYADH 1464 H. RIYADH 1461 I. RIYADH 1450 J. RIYADH 1444 K. RIYADH 1397 L. RIYADH 1302 M. RIYADH 1219 N. RIYADH 1207 O. RIYADH 1203 P. RIYADH 1068 Q. RIYADH 903 R. RIYADH 895

Summary and introduction
————————

¶1. (SBU) Saudi officials are eagerly awaiting your visit, which they expect will begin a new chapter in our bilateral energy dialogue. You will arrive at a time when Saudi Arabia is confronting a number of difficult challenges. While it has managed to weather the international financial crisis, Saudi officials are keenly aware of the need to foster economic development quickly to provide jobs for its rapidly growing population (more than 2% per year). They are also anxious to diversify the base of the economy away from its current predominant reliance on hydrocarbons, which directly provide close to 50% of GDP and indirectly account for much of the rest of Saudi industry. Saudi officials understand the challenges they face, including the need to make Saudi education more relevant to today’s workplace and the need to increase the role of women in the economy, both of which are controversial in the socially conservative Kingdom. Saudi officials are looking to the U.S. to help them meet these challenges, both through increased engagement at the government level, including educational exchanges, and more Foreign Direct Investment, particularly in energy, high tech, and manufacturing. Saudi officials strongly welcomed the President’s Cairo speech and its promise of greater outreach, which provides a good context for your visit.

¶2. (SBU) Saudi officials feel under the gun, as they are aware that a number of other countries are years ahead of them in pursuing the same strategy. They are very concerned by the tenor of discussion in the West about shifting away from reliance on oil and gas, and moves to develop “energy independence.” While they, too, want to develop a more sustainable economy and address environmental degradation, they are concerned that the world will turn away from their main source of livelihood before they have a chance to catch up. In that regard, your visit offers a great opportunity to reset our energy dialogue with Saudi Arabia and explore areas of energy interdependence, rather than energy independence. Your visit will also demonstrate our continued interest in helping Saudi Arabia fulfill the King’s vision of developing a knowledge-based economy, which dovetails nicely with the agenda of the President’s Cairo speech. It also offers the opportunity to encourage the Saudis to be more forthcoming in areas of concern to us, such as climate change.

Schedule
——–

¶3. (SBU) We have scheduled meetings for you in Dhahran with Minister of Petroleum Ali Al-Naimi, CEO for Saudi Aramco Khalid Al-Falih, and in Riyadh with the President of the King Abdulaziz City for Science and Technology (KACST, Saudi Arabia’s Science Ministry) Abdullah Al-Suweil and the Governor of the Electricity and Co-Generation Regulatory Authority (ECRA) Fareed Zedan. We have also scheduled your participation in the quarterly review of the critical infrastructure protection initiative with the Ministry of Interior. You will also have an opportunity to meet leading members of the Eastern Province’s business community in Dhahran in a dinner at the Consulate, and informally meet Ministry of Petroleum Officials at a dinner in Riyadh.

Saudi Aramco
————

RIYADH 00001557 002 OF 004

¶4. (SBU) On your first day, you will meet Minister Al-Naimi and Aramco CEO Al-Falih in Aramco’s offices in Dhahran, which will give you an opportunity to tour this fascinating facility, including Aramco’s advanced technology operations center. In the 20 years since its amicable nationalization, Aramco has developed into one of Saudi Arabia’s most efficient and modern institutions, developing several generations of world-class leaders, like Al-Falih and his predecessor once removed, Al-Naimi. It is noteworthy that, when the King wants something done quickly and right, like completion of his signature project of the King Abdullah University of Science and Technology (KAUST), he turns to Aramco. It is also noteworthy that Aramco continues to enjoy very close relations with the USG and with American companies, based in part on the fact that many top officials studied in the U.S.

Direction of markets
——————–

¶5. (SBU) Saudi Minister of Petroleum Ali Al-Naimi is most interested in pursuing two topics with you, a discussion of current oil market issues and the potential for future cooperation. In terms of current issues, Al-Naimi and Aramco CEO Al-Falih will be very interested in your views of the long-term direction of international oil and gas markets. They will be particularly interested in your sense of what policies the Administration will introduce to improve energy efficiency and reduce overall demand, as well as your sense of the prospects for a Climate Change bill from Congress. You may wish to elicit their views on long-term prospects for Asian markets, especially China, which has become a more important destination for Saudi crude. Recognizing the long-term prospects for this market, on November 11, Aramco and Exxon opened a multibillion dollar joint venture with SINOPEC in Fujian, China, to add 8 million tons of annual refining capacity. Chinese firms are also performing significant engineering and construction work in the Saudi petroleum and petrochemical sectors. Saudi officials have recently reaffirmed to us that they continue to value being a major crude supplier to the U.S. market, although they are watching the direction of future demand carefully, and will make sure they retain a significant position in all the major Asian markets.

¶6. (SBU) Saudi officials (including Saudi Finance Minister Al-Assaf and Al-Naimi) have made it clear both publicly and privately they do not support moves to shift oil pricing away from dollars. They are concerned, however, about volatility in oil markets, which they believe are unduly influenced by speculation. Saudi officials explained to us (septel) that they will shift in January from reliance on the WTI benchmark to the Argus Sour Crude Index because they believe ASCI is less subject to speculative price swings, which in turn will help protect their revenue stream. Saudi officials are keenly interested in keeping the world economy on track for sustainable recovery, and therefore support a continuation of stimulus measures, coordinated through the G20 process. They also want to avoid any undue shocks to the international economy, and support the current price level, which the King has declared is “fair.” Saudi Arabia is committed to maintaining sufficient reserve capacity to stabilize prices. Aramco is completing its $120 billion worth of projects to increase production capacity towards 12.5 million barrels a day, an investment that Saudi officials have noted the Kingdom made at the peak of prices for engineering and construction services. The Kingdom is also exploring other projects to bring non-conventional oil on line to meet the evolving needs of the international market and expand reserves, such as Saudi Arabian Chevron’s project in the Partioned Neutral Zone with Kuwait to steam flood heavy oil in limestone cavities (septel). Thanks to this project, which Al-Naimi strongly supports, Chevron is the only International Oil Company producing oil upstream in the Kingdom.

Future cooperation on renewables and efficiency projects
——————————–

¶7. (SBU) Al-Naimi is keen to discuss potential areas of cooperation, particularly on solar energy (ref a). He has publicly called for Saudi Arabia “to become the Saudi Arabia of solar energy.” Al-Naimi also supports biomass energy projects, including involving algae. As Chairman of the

RIYADH 00001557 003 OF 004

Board of the King Abdullah University for Science and Technology (KAUST), he will want to brief you on research projects in these areas going on at KAUST, and invite DOE participation in joint projects. Al-Naimi is very much looking forward to escorting Secretary Chu to meet the scientists involved in these projects early in the new year when the Secretary visits the Kingdom.

¶8. (SBU) Saudi officials in several ministries have explained their interest in developing renewable energy projects, which they expect to play a major role in meeting the Kingdom’s future energy needs (electricity demand is growing at 8-10% per year, ref b). Developing renewables will reduce the need to divert increasing amounts of crude from exports to fuel domestic electricity generation. It will also help the Kingdom deal with growing pollution. KACST plays a major role in researching renewable energy potential. As part of our bilateral Science and Technology dialogue, KACST and Aramco expressed interest in holding an energy working group to explore opportunities for joint projects and cooperation in a number of areas, including renewables and in oil production technology. Your visit offers an ideal opportunity to explore in greater detail their areas of interest. KACST would like to identify key players for a working group in January or February, which could schedule scientific exchanges over the next year and agree on a list of joint research projects by December 2010.

¶9. (SBU) The Electricity and Co-generation Regulatory Authority (ECRA) is working hard to maintain a difficult balancing act between meeting the rising demand for electricity, which is fueled by a heavily subsidized price, and encouraging private investment in new generating facilities. ECRA is the main driver behind the moves to unify the electricity grids of the six Gulf Cooperation Council (GCC) nations, which formally happened this year. This linkage will help national power generation authorities meet peak demands in other countries, which ECRA estimates will make the whole system more efficient and reduce the need for new generation plants in the short-term. Over the longer term, ECRA is acutely aware that it must continue to scramble to meet projected increases in demand. ECRA is very interested in any potential cooperation on efficiency projects, both for generation and for transmission. It has recently persuaded Saudi authorities to approve differentiated prices, which it hopes will begin to moderate residential demand.

Civilian nuclear program
————————

¶10. (SBU) KACST also supervises Saudi Arabia’s civilian nuclear energy program. Saudi Arabia is actively considering the development of a civilian nuclear program, which a number of analysts believe is the only possibility the Kingdom has to generate sufficient electricity to meet projected demand from economic and population growth and increasing affluence without wastefully burning large quantities of fuel oil. In May 2008, the United States signed an MOU with Saudi Arabia on the Peaceful Uses of Nuclear Energy and offered to exchange technical experts to discuss areas for potential cooperation. Since that time, the French and other potential suppliers have actively talked about supplying Saudi Arabia with a nuclear power plant. Regional energy experts believe that only two plants are likely to be needed to meet the needs of the entire GCC, and expect that the UAE is likely to be the first country to announce a contract to build a plant, perhaps as early as January 2010. It would be useful to ask your interlocutors about their plans to develop nuclear power, noting our willingness to exchange technical experts.

The importance of the IEF
————————-

¶11. (SBU) The International Energy Forum (IEF) has provided a forum for producers and consumers to talk frankly for more than 20 years. Al-Naimi and his senior officials strongly support this organization. At the December 2008 London energy meeting, later referenced in the G-20 Pittsburgh Summit leader’s statement, the IEF was asked to prepare a report on the causes of oil price volatility and potential measures to deal with them, which would be considered at the next IEF energy minister’s meeting in Cancun in March 2010. The IEF selected a group of experts who prepared a report in October that suggested the formalization of the IEF

RIYADH 00001557 004 OF 004

secretariat. Saudi officials made it quite clear that they consider it critical that the U.S. remain involved in the IEF. They offered the U.S. a blank sheet of paper to suggest what the organization’s goals should be. We strongly recommend that we take the Saudis up on this offer and provide specific suggestions reflecting our key priorities. Our constructive participation in this organization would demonstrate that we take seriously Saudi Arabia’s long-term economic and political concerns, set a precedent for engagement on other USG priorities, and steer the IEF in a direction that better supports U.S. interests.

Climate change
————–

¶12. (SBU) Despite sharing similar interests in developing renewable energy and viable technological solutions to mitigate carbon emissions, such as Carbon Capture and Sequestration (CCS), the Saudi delegation has been very unhelpful in technical talks leading up to the Copenhagen summit. The delegation has insisted that no changes be made to the structure of the UNFCCC (UN framework convention on climate change) agreement, despite the fact that the underlying economic condition of a number of developing countries has changed since the agreement was drafted. Saudi delegates have insisted that any such change would represent a diminution of developed countries’ commitment to help developing countries cope with the requirements of new technology. They also have pushed for some form of compensation for energy producers. Privately, Saudi officials have stressed their interest in capturing investment credits for clean development mechanisms in the Kingdom. They believe that no agreement can be reached without a U.S. commitment to cut emissions. Your visit offers an important opportunity to engage one of the leading Saudi decision-makers, Al-Naimi, on what the U.S. will be looking for in Copenhagen and beyond.

Eastern Province merchants
————————–

¶13. (SBU) Several of the powerful business family groups that dominate the EP trace their origins to modest but industrious Saudi employees of Aramco, encouraged by their American managers to become private contractors in the late 1940s and 1950s. Many of the younger generations of these families have been educated in the U.S. These families often have informed and insightful views on a host of issues. The Consulate in Dhahran has arranged a dinner in your honor that will include several notable merchant families, which will give you a flavor of the commercial operating environment in this important part of the Kingdom.

OPM-MOI
——-

¶14. (SBU) In May 2008, the Secretary of State and the Saudi Interior Minister signed an agreement creating the Office of Program Management – Ministry of Interior (OPM-MOI). OPM-MOI is a State-led interagency effort to assist the Saudi MOI with protection of critical infrastructure, including Aramco’s petroleum production and transport facilities, which were the subject of a terrorist attack on the Abqaiq production facilities in Dhahran in 2004. OPM-MOI is developing projects in a number of areas, which will improve the security of Saudi Arabia’s critical ports, electricity transmission lines and oil pipelines. OMP-MOI is also training a new 35,000-man Facilities Security Force, largely trained and equipped by DOD elements, which will protect key critical infrastructure sites throughout the Kingdom. The Ministry of Interior has invited you and your delegation to participate in the quarterly review, which will give you an up-to-date understanding of the project. MOI officials are very appreciative of DOE’s very constructive role in this important, high-profile initiative.

SMITH


Source: WikiLeaks

Document 4: Saudi oil company oversold ability to increase production, embassy told

Reference ID: 07RIYADH2441
Created: 2007-12-10 05:05
Classification: CONFIDENTIAL
Origin: Embassy Riyadh

VZCZCXRO7441
PP RUEHDE RUEHDIR
DE RUEHRH #2441/01 3440554
ZNY CCCCC ZZH
P 100554Z DEC 07
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 7183
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY

Cable dated: 2007-12-10T05:54:00

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 002441

SIPDIS

SIPDIS

DHAHRAN SENDS DEPT OF ENERGY PASS TO MWILLIAMSON, GPERSON, AHEGBURG, AND JHART CIA PASS TO TCOYNE

E.O. 12958: DECL: 12/10/2017
TAGS: EPET, ENRG, ECON, SA
SUBJECT: FORMER ARAMCO INSIDER SPECULATES SAUDIS WILL MISS 12.5 MBD IN 2009
REF: RIYADH 1950

Classified By: Consul General John Kincannon for reasons 1.4 b, d and e .

¶1. (C) SUMMARY: On November 20, 2007, CG and Econoff met with Dr. Sadad al-Husseini, former Executive Vice President for Exploration and Production at Saudi Aramco. Al-Husseini, who maintains close ties to Aramco executives, believes that the Saudi oil company has oversold its ability to increase production and will be unable to reach the stated goal of 12.5 million b/d of sustainable capacity by 2009. While stating that he does not subscribe to the theory of “peak oil,” the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline. Additionally, al-Husseini expressed the view that the recent surge in oil prices reflects the underlying reality that global demand has met supply, and is not due to artificial market distortions. END SUMMARY.

——————————————— ——-
SAUDI ARABIA WILL BE UNABLE TO MEET PRODUCTION GOALS
——————————————— ——-

¶2. (C) Dr. Sadad al-Husseini met with CG and EconOff on November 20 to discuss current trends in the international energy market, as well as his thoughts on the Saudi energy sector. Al-Husseini served as Executive Vice President for Exploration and Production from 1992 until his retirement in 2004. He also served as a member of the Aramco Board of Directors from 1996 to retirement. (COMMENT: Al-Husseini retired in the midst of an executive dispute, supposedly caused when he unsuccessfully attempted to engineer his ascension to the position of CEO. Although he continues to live at Aramco’s main camp and has close interpersonal relationships with key Aramco executives, many of al-Husseini’s views on Aramco are shaped by the perception that the company would be better off if he were running it. END COMMENT). It is al-Husseini’s belief that while Aramco can reach 12 million b/d within the next 10 years, it will be unable to meet the goal of 12.5 million b/d by 2009. The former EVP added that sustaining 12 million b/d output will only be possible for a limited period of time, and even then, only with a massive investment program.

¶3. (C) According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51 percent are recoverable. He then offered the promising forecast – based on historical trends – that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.

¶4. (C) Al-Husseini disagrees with this analysis, as he believes that Aramco’s reserves are overstated by as much as 300 billion bbls of “speculative resources.” He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini’s view, once 50 percent depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini’s calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.

¶5. (C) Al-Husseini elaborated that oil field depletion rates also play a significant role in determining the Aramco – and

RIYADH 00002441 002 OF 003 12.5 MBD IN 2009

global – production timeline. Increasing output is not simply a function of adding new capacity to already existing operations. Instead, due to depletion rates, new reserves must be brought online to both replace depleted production and satisfy growth in consumption. The International Energy Agency (IEA) has estimated global depletion rates at 4 percent, while a 2006 Aramco statement has estimated Saudi Arabia’s overall depletion rate at 2 percent. Al-Husseini estimates that moving forward, satisfying increases in global demand will require bringing online annually at least 6 million b/d of worldwide output, 2 million to satisfy increased demand and 4 million to compensate for declining production in existing fields.

¶6. (C) The second issue that will limit any proposed Aramco output expansion can be broadly defined as a lack of supporting resources. For example, in al-Husseini’s estimation, it is not the amount of oil available that will prevent Aramco from reaching 12.5 million b/d by 2009, but rather issues such as a lack of available skilled engineers, a shortage of experienced construction companies, insufficient refining capacity, underdeveloped industrial infrastructure, and a need for production management (if too much oil is extracted from a well without proper planning and technique, a well’s potential output will be significantly damaged). As previously reported by post (Reftel), the Eastern Province economy is facing severe industrial expansion limits, and despite Aramco’s willingness to invest up to 50 billion USD to achieve the 2009 goal, availability of labor, materials and housing may end up as determinative factors.

—————————————–
GLOBAL OIL PRICES: DEMAND HAS MET SUPPLY
—————————————–

¶7. (C) Considering the rapidly growing global demand for energy – led by China, India and internal growth in oil-exporting countries – and in light of the above mentioned constraints on expanding current capacity, al-Husseini believes that the recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply (global energy supply having remained relatively stagnant over the past years at approximately 85 million barrels/day). He estimates that the current floor price of oil, removing all geopolitical instability and financial speculation, is approximately 70 – 75 USD/barrel. Due to the longer-term constraints on expanding global output, al-Husseini judges that demand will continue to outpace supply and that for every million b/d shortfall that exists between demand and supply, the floor price of oil will increase 12 USD. Al-Husseini added that new oil discoveries are insufficient relative to the decline of the super-fields, such as Ghawar, that have long been the lynchpin of the global market.

¶8. (C) COMMENT: While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA’s expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this “inconvenient truth.” Al-Husseini was clear to add that he does not view himself as part of the “peak oil camp,” and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered. END COMMENT.

—————–
BIOGRAPHICAL DATA
—————–

¶9. (U) Dr. Sadad Ibrahim al-Husseini was born in Syria but raised in Saudi Arabia, his father a Saudi government official. He received a BS in Geology from the American University of Beirut in 1968, as well as an MS and Ph.D. in geological sciences from Brown University in 1970 and 1972, respectively. Al-Husseini also attended a Professional Management Program at Harvard Business School in 1982.

RIYADH 00002441 003 OF 003 12.5 MBD IN 2009

Joining Aramco in 1972, al-Husseini quickly advanced, becoming Senior Vice President for Exploration and Production in 1986. He was given the title Executive Vice President in 1992. Al-Husseini served on Aramco’s Management Committee from 1986 until 2004, and sat on the Aramco Board of Directors from 1996 – 2004. He retired on March 1, 2004. XXXXXXXXXXXX

(APPROVED: KINCANNON) FRAKER



2 Comments to “WikiLeaks: Saudi Arabia Cannot Pump Enough Oil to Keep a Lid on Prices”

  1. #WikiLeaks: #SaudiArabia Cannot Pump Enough #Oil to Keep a Lid on Prices | #US #MiddleEast http://j.mp/fQI1E0

  2. avatar Elisabeth says:

    RT @CrethiPlethi: #WikiLeaks: #SaudiArabia Cannot Pump Enough #Oil to Keep a Lid on Prices | #US #MiddleEast http://j.mp/fQI1E0


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