TWO ARAMCONS SKEPTICAL ARAMCO CAN MEET 2009

S E C R E T RIYADH 009368 SIPDIS NOFORN SIPDIS DHAHRAN SENDS PARIS FOR ZEYA, LONDON FOR TSOU ENERGY DEPARTMENT FOR GEORGE PERSON AND DAS JOHN BRODMAN E.O. 12958: DECL: 12/18/2015 TAGS: EPET EIND PREL PGOV SA OIL SUBJECT: TWO ARAMCONS SKEPTICAL ARAMCO CAN MEET 2009 CAPACITY TARGET REF: A. RIYADH 8449 (NOTAL) ¶B. RIYADH 8444 (NOTAL) ¶C. RIYADH 7473 (NOTAL) ¶D. RIYADH 6506 (NOTAL) Classified by Consul General John Kincannon for reasons 1.4 (b) and (d). ¶1. (S/NF) Two Aramco analysts told PolOff and PAO on December 14 that they doubted Aramco would meet its target of increasing sustainable production capacity to 12.5 million barrels per day by the end of 2009. "The projections show pretty much a flat level of output - 9.6, 9.6, 9.6, ..." said one analyst, brushing aside PolOff's comment that Aramco seemed to have a well-articulated plan for increasing its capacity. The analyst noted that Aramco was having trouble lining up the rigs it needed, saying that already the company was paying USD 140,000 per day for rigs that normally cost USD 80,000 per day. The rig operators, the analyst noted, were in even shorter supply: "The drillers can make USD 1,000 per day in Midland, Texas. Why would they want to come here?" (Comment: Local businessmen have repeatedly said that it was difficult to obtain the rigs Aramco wanted, but Saudi Oil Minister Naimi, senior Aramco executives, and Aramco's senior petroleum engineer have all recently given strong assurances to USG officials that the company's plan was on track and that the company has lined up the necessary rigs (refs A-D). End comment.) ¶2. (S/NF) The other analyst noted that Aramco had not to date calculated the marginal cost of producing another barrel of oil from one field to the next. Expansion plans are determined by "orders from above," the analyst said, and not based on solid financial and technical data. The analyst gave Aramco's offshore oilfield development as one example of poor planning: "The reason there is all this excess heavy crude is that Aramco developed some offshore fields to stop Iran from pumping all the oil from a different part of the same field. They could have made invested that money much more efficiently." ¶3. (C/NF) The analyst also expressed disdain for the economic wisdom behind Aramco's production of associated natural gas. "It costs Aramco USD 2.5 per million BTU," the analyst said, "and we sell it for 75 cents per million BTU. Saudi Arabia should have just built a pipeline to import gas from Qatar to support power generation and desalinization." The analyst acknowledged that subsidized feedstock was a key component of Saudi Arabia's national development strategy but criticized the allocation process as corrupt: "We send estimates to Riyadh of the feedstock we'll produce over the next five years. Then Riyadh allocates it in a series of back-room deals to princes and other people with connections. Many of the companies don't even exist - they're just a front to get the allocations so they can sell them." ¶4. (S/NF) Comment: The analysts, whom PolOff and PAO know socially, have access to technical data, conduct sophisticated modeling, and interact with senior Aramco executives. We do not have enough information to evaluate their bona fides to give a comprehensive evaluation of Aramco's ability to meet its stated goals, but their comments do provide an important contrast to the statements Aramco executives have made to us, which are always "on message" and full of assurances that everything is "on track." End comment. (APPROVED: KINCANNON) GFOELLER