Identifier
Created
Classification
Origin
06RIYADH8253
2006-10-16 16:03:00
CONFIDENTIAL
Embassy Riyadh
Cable title:  

ARABIAN CHEVRON,S VIEWS ON THE REFINERY DISPUTE

Tags:  EPET ENRG EINV PREL KU SA 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 008253 

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/16/2016
TAGS: EPET ENRG EINV PREL KU SA
SUBJECT: ARABIAN CHEVRON,S VIEWS ON THE REFINERY DISPUTE
WITH KUWAIT: BACKGROUND FOR P MEETING

REF: A. RIYADH 5605

B. GLENN GRIFFIN E-MAIL 13 OCTOBER 2006 "P MEETING
WITH CHEVRON CEO" WITH ATTACHED CHEVRON
MEMO

C. RIYADH 8237

Classified By: ACTING DEPUTY CHIEF OF MISSION DAVID RUNDELL FOR REASONS

12958 1.4 B, D, AND E

---------
Summary
---------

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 008253

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/16/2016
TAGS: EPET ENRG EINV PREL KU SA
SUBJECT: ARABIAN CHEVRON,S VIEWS ON THE REFINERY DISPUTE
WITH KUWAIT: BACKGROUND FOR P MEETING

REF: A. RIYADH 5605

B. GLENN GRIFFIN E-MAIL 13 OCTOBER 2006 "P MEETING
WITH CHEVRON CEO" WITH ATTACHED CHEVRON
MEMO

C. RIYADH 8237

Classified By: ACTING DEPUTY CHIEF OF MISSION DAVID RUNDELL FOR REASONS

12958 1.4 B, D, AND E

--------------
Summary
--------------


1. (C) This is a response to an action request, Ref B, for
additional background for a 17 October meeting between P and
Chevron CEO Reilly regarding a SAG disagreement with Kuwaiti
plans to construct a refinery in the Partitioned Neutral Zone
(PNZ) shared by the two countries. Executives from Arabian
Chevron told us they had recently formally submitted a
request to the SAG to extend their 60-year concession in the
PNZ. They had received a positive initial response from the
SAG. While they did not need USG assistance on the
concession negotiation at this point, they strongly
reiterated Chevron,s requests for assistance in working with
the SAG to dissuade the Government of Kuwait and the Kuwait
National Petroleum Company (KNPC) from plans to build a
refinery on PNZ land currently occupied by Chevron,s Saudi
Arabian Texaco facilities.

-------------- --------------
Chevron: 2009 Concession Negotiations Well in Hand
Minister Naimi: Outside Interference not Welcome
-------------- --------------


2. (C) On October 15, Arabian Chevron executives Saudi
Relations Representative Rasheed al Rasheed and Business
Manager Mohammed Ayaz told us Chevron had recently formally
submitted a request to the SAG to extend their concession,
due to expire in 2009, in the neutral zone shared by Saudi
Arabia and Kuwait. They indicated Chevron had received a
positive initial response from the SAG. Rasheed and Ayaz
believe the negotiations are well in hand, and Chevron does
not need specific USG assistance or advocacy at this point.
They told us Chevron is engaged in exclusive negotiations
with the SAG for the concession extension, although they

might expect the concession to be competitively bid if their
negotiations fail.


3. (C) Rasheed and Ayaz sounded a cautionary note regarding
possible USG intervention in the concession issue. When
Chevron submitted its application to extend the concession,
Petroleum and Mineral Resources Minister Naimi took the
opportunity to spin a warning tale for Chevron, admonishing
it not to repeat the mistake made by the Japanese-owned
Arabian Oil Company (AOC) of using third party pressure in
the quest to renew its concession. AOC lost its 40-year
concession in 2000. For now, Chevron is clear USG
interference could prejudice their case with the SAG to renew
the PNZ concession.

-------------- --------------
Historical Background on Chevron,s PNZ Operations
-------------- --------------


4. (C) Rasheed and Ayaz laid out the historical background,
and financial and operational basics of Chevron's work in the
neutral zone: Chevron, first as Getty Oil, and later under
the Saudi Arabian Texaco (SAT) brand, has operated in the PNZ
since 1949 under a 60-year concession from the SAG. Rasheed
indicated the SAG had provided the entire &reserved area8
to Chevron to utilize for its operations, including the area
in which the Kuwait National Petroleum Company (KNPC) now
plans to build a refinery. Rasheed explained the SAG and
Government of Kuwait (GOK) had negotiated an agreement to
merge operations in the early 1950,s; since then, SAT and
the Kuwait Oil Company (KOC) had jointly operated the field
in a 50/50 joint venture. Rasheed was emphatic that Getty
(later Chevron,s) contract and operations pre-dated the
later agreement between the two countries to establish joint
operations. Since the initiation of joint operations, both
SAT and KOC have equally split equity requirements and crude
lifting. PNZ operations currently produce about 250,000
barrels per day; during the lifetime of the field, it has

RIYADH 00008253 002 OF 003


produced about 3 billion barrels of crude oil.

-------------- --------------
Chevron,s Request: USG Weigh in to have Refinery
Relocated; PNZ Operations Otherwise at Risk
-------------- --------------


5. (C) Rasheed and Ayaz reiterated Chevron,s view that
their ability to operate their oil concession is at risk from
a plan to build a Kuwait National Petroleum Company (KNPC)
refinery in the neutral zone. They requested the USG raise
the Kuwaiti refinery issue with the SAG, without touching on
the overall concession extension issue. They were at
significant pains to stress the delicacy of Chevron's
current negotiating situation. Rasheed and Ayaz refuted GOK
claims that the proposed refinery would interfere only with a
chalet and not impact oil operations. Instead, they charged
the proposed refinery site would require the destruction of a
significant portion of their PNZ housing and administrative
offices, and would significantly interfere with operations.

--------------
Chevron Claims Kuwaitis Moving to Begin
Construction, Making a Land Grab
--------------


6. (C) Rasheed and Ayaz indicated the Kuwaitis seemed
prepared to begin construction of the refinery shortly, with
a view to starting operations shortly after the Chevron
concession lapses in 2009. They marshalled the following
points to support their view: Chevron told us the Kuwaitis,
via the local municipality, have asked shops and villagers to
evacuate to prepare for final land clearance for the
refinery. Rasheed presented the Kuwaiti actions as a new
sovereignty claim, and stated there was no good technical or
business case to locate the approximately $1 billion refinery
at the proposed PNZ site. He stated it would cost KNPC
several hundred million dinars to locate the refinery in the
neutral zone, rather than closer to existing port facilities
which would better serve KNPC's commercial goals. Rasheed
and Ayaz characterized the Kuwaiti view as, &the Texaco
concession expires in 2009, and then we can do what we want
with the land.8 Chevron also stated SAG is considering
extending the current Chevron concession, rather than
entering into a new agreement, to block Kuwaiti attempts to
use any lapse in the concession as a wedge to permit KNPC,s
entry.

--------------
Chevron: SAG is &Supporting Us to the Utmost8
--------------


7. (C) Rasheed and Ayaz were optimistic Chevron has lined
up key support from Petroleum Minister Naimi, and Deputy
Minister for Petroleum Affairs Prince Abdulaziz bin Salman.
They characterized Minister Naimi as &very enthusiastic8 to
solve the issue, and &angry8 at the Kuwaiti approach. They
explained Deputy Minister Prince Abdulaziz is &the main
person defending us, and very critical of the Kuwaitis.8
They stated the SAG was &doing its utmost8 to assist
Chevron with the Kuwaitis. Rasheed and Ayaz told us Ministry
of Foreign Affairs had been helpful in sending a letter to
the Government of Kuwait (reftel A) telling them the proposed
site for the refinery violates existing agreements between
the governments, and a new location must be found. Rasheed
and Ayaz groused the GOK had only provided their response to
the SAG letter via statements in the media. Finally, they
noted the Deputy Minister Abdulaziz sits on an
inter-ministerial committee with the Ministries of Interior
and Defense, charged with examining all border dispute
issues; they also hoped for some movement from this quarter.
--------------
Mission Reporting Indicates
SAG Views not so Clear Cut
--------------


8. (C) While our local Arabian Chevron interlocutors
portray the SAG as forward-leaning in resolving this issue to
Chevron,s satisfaction, Mission reporting indicates their
full participation may be more reluctant. As per reftel A,
both Minister Naimi and Ministry of Petroleum Advisor Dr.
Al-Muhanna have told the Mission they preferred Chevron (with
Saudi Arabian Texaco) and the Kuwaiti firm to work out the
dispute between themselves; the SAG had somewhat reluctantly

RIYADH 00008253 003 OF 003


-------------- --------------
New Technologies ) Bearing Unripe Fruit in the PNZ?
-------------- --------------


9. (C) Chevron in the meantime is attempting to deploy new
steamflood technology for extraction of heavy oil in its PNZ
operations. Despite Chevron Vice-Chairman Robertson,s 19
September announcement in Platts that the pilot steamflood
project was proving &quite promising,8 in the PNZ, Rasheed
was less sanguine. He told us test results were
inconclusive, and the technology's use in the limestone
characteristic of their PNZ fields was entirely new and still
being evaluated. Rasheed stated frankly the project remains
a pilot, and Chevron had until the end of the present
concession period, 2009, to evaluate it.

--------------
New Steam Technology Could Prove Key to
Chevron,s Concession Extension
--------------


10. (C) Comment : Until Chevron,s concession extension is
assured, there is little incentive for the firm to invest
heavily in new technology in the PNZ fields. However,
Chevron,s successful ability to deploy new proprietary
technology in the PNZ could be the nut it must crack to gain
extension of its concession. Some heavy oil in the PNZ is so
thick it has proved impervious to more traditional production
techniques. Additional oil recovery through steam technology
would allow Chevron to bring a unique asset to the table and
strengthen its negotiating hand. Unfortunately, Chevron,s
results to date do not yet tell us if the steam technology
will help the firm clinch its concession, or merely indicate
the vaporizing of Chevron,s research dollars. End comment.

--------------
A Rose by Any Other Name(.
--------------


11. (U) Finally, in the final lap of wrapping up the
ChevronTexaco merger, Arabian Chevron is under orders from
Chevron headquarters to consolidate operations under the
Chevron name. Arabian Chevron continues to hold the PNZ
concession under the "Saudi Arabian Texaco" name, while they
await a royal decree to allow them change the name to the
Chevron moniker, which their CEO is keen to do.
OBERWETTER