DOW AND SAUDI ARAMCO SIGN MOU FOR $20 BILLION

C O N F I D E N T I A L SECTION 01 OF 05 RIYADH 001006

SIPDIS

SIPDIS

DOE PASS TO GPERSON AND JHART
CIA PASS TO TCOYNE

E.O. 12958: DECL: 05/14/2017
TAGS: EPET ENRG EIND SA
SUBJECT: DOW AND SAUDI ARAMCO SIGN MOU FOR $20 BILLION
PETROCHEMICAL PLANT

Classified By: ECONOMIC COUNSELOR ROBERT SILVERMAN
FOR 12958 1.4 B, D, AND E

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


1. (C) On May 12, US firm Dow Chemical's CEO Andrew
Liveris and Saudi Aramco's President and CEO Abdullah
Jum'ah signed a detailed Memorandum of Understanding
for a major petrochemical facility, the "Ras Tanura
Integrated Project" (RTIP),the cost of which will
likely reach more than $20 billion. The firms plan
to construct the plant at Ras Tanura in Saudi Arabia's
Eastern Province, with operations integrated into
those of the existing Ras Tanura Refinery and Ju'aymah
gas processing plant. Dow told Dhahran Consulate
officers that the projected plant will employ about
4,000 workers in the operational phase, and up to 50,000
during peak construction. Once completed, the plant
will be the largest foreign investment in Saudi
Arabia's energy sector. Dow officials described the
envisaged facility as the largest current petrochemical
project under construction in the world, and the largest
joint venture project in the history of Dow. The plant
will be a key component in SAG policies to increase the
size of its gas sector, diversify its economy into gas-
based manufacturing, and generate employment for a
growing Saudi population.

--------------
Commitments within the New MOU
--------------


2. (C) On May 12, Consul General Kincannon, Pol/Econ
Off Randolph, and FCS Commercial Specialist Malas met
with a Dow delegation consisting of John Dearborn,
President for the Middle East, India, and Africa;
Mike Gambrell, Executive Vice President for Plastics;
and Louis Vega, Director of Public Affairs. According
to the Dow delegation, the May 12 MOU states Dow
and Saudi Aramco have agreed to:

--Study the project further to make sure
that it is economically viable;
--Negotiate definitive and ancillary
agreements; and
--Conduct a feasibility study which will take
approximately 24 months to complete.

--------------
Dow's Product Mix Key to Winning Bid;
Aramco Unimpressed with SABIC Efforts
--------------


3. (C) The delegation told CG Kincannon that
10-12 companies initially bid on the project, but
Dow, Saudi national petrochemical company SABIC, and
German-based BASF were the finalists. Dow emerged
the final winner. For Dow's part, CEO Liveris
encapsulated the project's attraction: "a long-term,
secure, and reliable feedstock."


4. (C) Saudi Aramco's Senior Vice-President of
Finance al-Othman recently provided some insight
into the bidding process when he told CG Kincannon
that Saudi Aramco "is frustrated with SABIC."
Saudi Aramco perceives SABIC as "lazy" in continuing
to focus on the export of bulk raw petrochemicals, and
failing to push into tertiary industries. Al-Othman
indicated Dow's wide product mix and consistent push
for a deal in the Middle Eastern region gave them
the needed edge over SABIC and BASF.

-------------- --------------
Integrated Operations To Employ 4000; 50,000 Workers in
Construction; Dow Allocated Most Feedstock
-------------- --------------

RIYADH 00001006 002 OF 005




5. (SBU) The scope of the proposed project is vast.
The Dow delegation estimated that when operational,
the plant will employ about 4,000 people. At peak
construction times, it will employ up to 50,000 workers.


6. (C) Dow indicated the new plant would be
operationally integrated with the existing Ras Tanura
Refinery and the Ju'aymah gas processing plant.
Dow Director Vega generally concurred with press
reports that RTIP's feedstock will consist of 550,000
barrels of oil equivalent per day from those plants.
He added that Dow had received an allocation letter
covering most, but not all, of the feedstock. Vega
stated to Energy Attache that Dow and Saudi Aramco
have reached agreement on the base streams, but not
specific sources, for the feedstock. The plant will
utilize both oil and gas as feedstock. Saudi Aramco
CEO Ju'mah indicated in the press conference
that the plant will start operations in 2012-2013, and
produce 4.5 million tons of basic chemicals and 7
million tons of derivative plastics and chemicals
per year.


7. (U) Dow has publicly stated that the core
units in the plant are an ethane and naptha cracker,
a catalytic cracking unit, and an aromatics unit to
convert sour Saudi crude to high value plastics.
Dow Director Vega confirmed press reports for Energy
Attache that the project would feature 30 downstream
process units and produce more than 300 different
products, including etheylene, propylene, aromatic
and chlorine derivatives. These petrochemicals
could provide inputs for manufacturing numerous
products, including water purification chemicals,
pharmaceuticals, plastics, piping, carpeting, paint,
coatings and sealants, electronics, automotive
parts, personal healthcare items, furniture, and
shoes.

--------------
Looking Ahead: A Conversion Park
for Industrial Manufacturing
--------------


8. (C) In line with the SAG's goal to expand Saudi
manufacturing, Dow Director Vega outlined Dow's
vision for the next phase of the project: an integrated
facility for conversion of petrochemical products into
industrial goods. Dow has such a facility in Germany,
where it substantially minimizes transport and storage
costs. Vega noted most of the RITP's products would be
in liquid form which could piped "next door" to
manufacturing facilities. Dow supports such an
arrangement because it delivers them a "captive
customer base," while downstream manufacturers
would enjoy the advantages of a reliable and efficient
feedstock. Vega explained the SAG strongly supports
such an initiative; the petrochemical industry creates
seven indirect ("downstream") jobs for every one
direct job, and the SAG is anxious to retain this
employment in-country.


9. (C) Vega told us the SAG is not yet discussing
the conversion plant option publicly, and has
expressed concern to Dow regarding the Ras Tanura
community's willingness to accept a chemical plant
and additional associated facilities. He noted
the SAG believes Ras Tanura community is accustomed
to oil facilities, but not yet familiar with the
concept of a chemical plant in their midst.
There are also concerns with congestion in the Ras
Tanura area.

-------------- --------------
Dow Soon to Launch Public Affairs Campaign in KSA;
Dow Concerned with Charitable Contributions
-------------- --------------

RIYADH 00001006 003 OF 005




10. (C) To introduce the citizens of Saudi Arabia
to Dow, and to address community concerns with
construction of a major chemical plant, Dow soon
plans to launch its "human element" public affairs
campaign in Saudi Arabia. The campaign will emphasize
Dow's themes of leadership in customer service,
environmental stewardship, sustainability, and
charitable outreach. Given USG concern with specific
Saudi charitable organizations, Director Vega also
requested US Mission assistance in determining which
Saudi charities might be appropriate partners for Dow.

-------------- --------------
Petrochemical Expansion in Line with SAG Drive for
Growth in Natural Gas, Diversification, Employment
-------------- --------------


11. (U) Prior to the Dow announcement, on May 10,
Minister of Petroleum and Mineral Resources Naimi
announced a much-publicized expansion of Saudi Arabia's
gas sector. He forecast a 40 percent increase in
domestic gas demand from 2006 to 2012, and emphasized
the need to further open the natural gas sector to
foreign investment to meet this demand. Minister Naimi
also stated the SAG plans to invest $70 billion in
petrochemicals through 2015 to move from the
number 10 to number 3 producer in the world, increase
petrochemical production from 60 million tons to 100
million tons by 2015, and double the number of
petrochemical products. The RTIP advances key SAG
policies on a number of fronts: expanding the natural
gas sector, moving up the petroleum value chain into
more complex manufacturing processes, and generating
significant employment for Saudi citizens. In a
statement issued at the MOU signing, Saudi Aramco
CEO Jum'ah also highlighted the role of the plant in
expanding the national economic base and promoting
economic diversification.

--------------
Financial Structure; Dow Dismisses
Concerns with Project's High Costs
--------------


12. (C) During the meeting with CG Kincannon, the Dow
delegation highlighted their experience in joint venture
operations, stating they operate more than 80 such
projects around the world. The Dow delegation stated
Dow and Saudi Aramco would contribute equally towards
the estimated $20 billion USD investment. Final costs
will depend partly on the number of processing units,
currently about 30. The project's debt/equity ratio
will be 70/30. The delegation indicated the project
will start off with an initial equity infusion of about
$2 billion USD, with a larger amount from debt. Dow
CEO Andrew Liveris stated during the press conference,
"The investment is Dow's largest in the region, and
our biggest joint venture. It is the largest proposed
joint venture in our 110-year history."


13. (SBU) Public Affairs Director Vega dismissed
speculation in the press that escalating costs in the
petroleum sector could endanger the project, stating
that "yes, while costs in the sector have increased,
Dow realized it could do more on the project." He
explained that a decision to add processing units to
increase plant capacity was responsible for most of
the increase in the proposed budget, rather than
rising costs in the energy supply chain.

-------------- --------------
Initial Public Offering Demand Muddies Financial
Waters, Dis-pleases Dow and Saudi Aramco
-------------- --------------


14. (C) Dow confirmed reports there will be an
initial public offering (IPO) for the 30% of the

RIYADH 00001006 004 OF 005


project at cost to the Saudi public. (Note: The SAG
has frequently mandated IPOs for major projects to
spread proceeds from the oil revenues, and promote
greater Saudi participation in an "ownership society."
End note.) However, Dow remains concerned the IPO
could constitute a sizable "value leak," and is
concerned that the Saudi stock market lacks a
strong regulatory process. Dow continues to argue
for a later IPO, once the project has a track record
and has begun to create value for shareholders.


15. (C) In a separate meeting, Saudi Aramco's
Senior Vice-President of Finance al-Othman told
CG Kincannon that Saudi Aramco shared Dow's view
that an IPO should come much later in the process.
He described the SAG's earlier policy of consistently
pushing for early IPOs, but said it has become more
cautious after the 2006 stock market crash. Instead,
the SAG is now coming around to a view that mature
projects with solid earnings make a better offering
than a greenfield project which has not booked
any revenue. Al-Othman took a more favorable view
than Dow did on the current state of Saudi stock
market regulation, noting that while many regulations
were not yet codified in law, the SAG's "guidelines"
were quite good, and close to American practices.
He particularly highlighted a recent provision
that holds the director of a company civilly and
criminally liable if he is found negligent in
not acting in the best interests of all shareholders.

-------------- --------------
Moving Ahead: Four US Firms Shortlisted for FEED;
Three Would Base Work in UK or Canada
-------------- --------------


16. (C) The next major phase of the RTIP is to conduct
the front end engineering and design (FEED) work. On
April 29, Aramco and Dow announced four US firms
shortlisted to carry out the FEED study: KBR, Fluor,
Foster Wheeler, and Bechtel. Unique among the four
firms, KBR is planning to bid the project out of
Houston, but has contacted our Foreign Commercial
Service to express concern the US visa situation
may adversely impact their bid. The other three
firms are planning to bid either from their London
or Calgary offices.

-------------- --------------
Visa Concerns Drive Most Work to Dubai, Europe
-------------- ---


17. (C) President Dearborn underscored Dow's
serious concerns with their ability to obtain US visas
for Saudi staff in a timely manner, and how this is
impacting their decision on where to locate staff for
the RITP project. Most of the FEED work will be carried
out in Dubai. Dow is not yet prepared to re-locate
their staff to Saudi Arabia yet, but they plan to
establish a legal entity in the KSA soon. Due to
visa concerns, Dow also plans to carry out all
engineering training in Europe.

--------------
Comment
--------------

18 (C) Yesterday's agreement was the announcement
of a two year engagement, one which will hopefully
lead to a happy marriage. The RITP project is a rare
recent example of a US firm landing a major Saudi
Aramco project. Instead, large-scale projects in past
years have gone to Chinese, Russians, Italian, and Dutch
interests (the Rub al-Khali joint venture gas projects)
and others to the Japanese (PetroRabigh Refining and
Petrochemical plant). Nonetheless, Dow and its
potential FEED contractors have made it clear that
at present, significant value from this multi-billion

RIYADH 00001006 005 OF 005


project will not flow to the US, due to concerns with
obtaining visas for its staff. Mission hopes
appropriate measures can be taken to ensure Dow is
able to source some work for the Ras Tanura Integrated
Project from its US offices, rather than relocate this
work elsewhere.

FRAKER