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


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Summary
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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.

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Allocation Cut Consistent with Five Percent Aramco
Production Cut, Announced OPEC Production Cut
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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.

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Read my Lips: We will Increase Capacity
(but Maybe Not Production)
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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.

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Funding Approved in September for Production Increases
To 10.5 MBPD; 12.5 MBPD Remains an Unfunded &Plan8
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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.

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Manifa Field: 900,000 BPD of Insurance; SAG Will Do
the Necessary to its Maintain Power in Oil Markets
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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.