SAUDI ARAMCO TRIMS CRUDE ALLOCATIONS AS IT CUTS PRODUCTION

S E C R E T RIYADH 008252 SIPDIS SIPDIS DOE PASS TO GPERSON CIA PASS TO TCOYNE E.O. 12958: DECL: 10/16/2016 TAGS: SUBJECT: SAUDI ARAMCO TRIMS CRUDE ALLOCATIONS AS IT CUTS PRODUCTION -------------- Summary -------------- ¶1. (S) Saudi Aramco has cut some allocations to major oil company customers, per a contact in a position to know who has reported consistently and reliably in the past. For November, Aramco has provided crude allocations to customers consistent with an approximate five percent reduction in production. Our contact told us the SAG has now budgeted new projects to increase oil production to 10.5 million bpd (mbpd),and characterized as unfunded plans to reach 12.5 mbpd production. He described &scenarios,8 for reaching 15 mbpd as unfunded and unplanned, and frankly speculative. Post will report new crude allocation information as available. -------------- -------------- Allocation Cut Consistent with Five Percent Aramco Production Cut, Announced OPEC Production Cut -------------- -------------- ¶2. (S) A contact in a position to know who has reported consistently and reliably in the past told us Saudi Aramco was no longer willing to fully meet some monthly nominations for crude purchases. For example, for November delivery, Aramco agreed to supply a quantity of crude to a major customer which was a 23 percent shortfall from the requested allocation. From July through October, shortfalls were more typically in the 19 percent range. ¶3. (S) Our source believes Aramco's allocation reductions are consistent with it reducing overall crude production by five percent, and also in line with OPEC,s recent announcement of plans to trim a million barrels in production. Our source told us operational personnel at Aramco were &relieved8 with the production cutback, as they were increasingly concerned with declining performance of equipment and wells in need of rest and maintenance. They had indicated they could not continue much longer at recent high production levels. -------------- Read my Lips: We will Increase Capacity (but Maybe Not Production) -------------- ¶4. (C) Our source also remarked on Minister Naimi,s September 12 announcement that the SAG plans to increase production to 12.5 mbpd. He noted Minister Naimi was &very careful in his choice of words,8 and while Naimi made a public commitment to expand production capacity, he made no commitment to expand actual production. He pointed out Minister Naimi made no further commitment regarding the sustainability of increased production, if and when deployed. Our source remarked on the clever, jijutsu-like manner by which Minister Naimi in recent years has countered western and U.S. demands for &security of supply,8 with SAG demands for &security of demand.8 Finally, he said Minister Naimi deliberately maintains a certain &slop8 in the numbers to avoid distinguishing between Aramco production within KSA territory, and Chevron (operating under the Saudi Texaco name)/Kuwait National Petroleum Company production in the Partitioned Neutral Zone (PNZ). At approximately 250,000 bpd, PNZ production is not particularly large, but our source explained this fuzziness in production numbers further helps Naimi to leave his audiences guessing a bit. ¶5. (C) If and when the KSA reaches production of 12.5 mbpd, our source questioned how long Aramco could maintain this peak production, given natural and on-going production declines in aging fields. Answering his own rhetorical question, our interlocutor stated that when Aramco reaches 12.5 mbpd production capacity, he believes they could likely sustain this level for 18 months to two years. -------------- -------------- Funding Approved in September for Production Increases To 10.5 MBPD; 12.5 MBPD Remains an Unfunded &Plan8 -------------- -------------- ¶6. (C) Our source discussed Minister Naimi,s propensity to carefully weigh words when discussing funded &projects8 versus unfunded &plans.8 He explained Minister Naimi had publicly disclosed &projects8 to increase crude oil production to 10.5 mbpd, but only &plans8 to reach 12.5 mbpd. During September, our source told us that Minister Naimi had significantly requested and received Supreme Petroleum Council budgetary approval for projects to increase production to 10.5 mbpd. Finally, our source stated the Ministry of Petroleum also had &scenarios8 to increase SAG oil production to 15 mbpd, a level he assessed as the SAG,s probable maximum production, barring significant new discoveries. He indicated the SAG was unlikely to publicly commit to 15 mbpd, describing this leap as a &stretch,8 which would involve difficult geology. In sum, our source assessed that scenarios for 15 mbpd oil production remain unplanned and unfunded, and likely far from realization. ¶7. (C) Note: Minister Naimi,s comments track well with information provided to us in a recent meeting by Advisor to the Minister of Petroleum and Mineral Resources, Dr. Al-Muhanna. Al-Muhanna explained SAG plans to increase production capacity to 12.5 mbpd included 1.5 to 2 mbpd spare capacity. He was clear the SAG did not actually expect to routinely utilize this full capacity. End note. -------------- -------------- Manifa Field: 900,000 BPD of Insurance; SAG Will Do the Necessary to its Maintain Power in Oil Markets -------------- -------------- ¶8. (C) Minister Naimi and Aramco have recently detailed plans for to begin construction of the Manifa field, expected to produce 900,000 bpd of Arabian Heavy crude by 2011. Our source explained the SAG looked at Manifa largely as insurance to offset declines in other fields. Finally, our source concluded by noting the SAG would maintain enough spare capacity to &stay in the catbird seat,8 and would not allow another country to displace its power as the key swing producer. ¶9. (C) Comment: At a time when Russia claims to have displaced Saudi Arabia as the world,s largest oil producer, the SAG is nonetheless determined to maintain the power its pivotal spare capacity, and to stay above the fray as OPEC,s anchor. Despite the significant investment needed to maintain 1.5-2 mbpd swing capacity, we expect the SAG will find it in its continued interest to do so. How much additional capacity they will commit to financing is far more speculative.