Identifier
Created
Classification
Origin
07RIYADH1624
2007-08-01 16:00:00
CONFIDENTIAL
Embassy Riyadh
Cable title:  

CHEVRON UPDATE ON CONCESSION EXTENSION, KUWAIT

Tags:  EPET ENRG EINV ECON SA 
pdf how-to read a cable
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TO RUEHC/SECSTATE WASHDC IMMEDIATE 6153
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RUEHKU/AMEMBASSY KUWAIT PRIORITY 2273
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C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001624 

SIPDIS

SIPDIS

DEPT OF ENERGY PASS TO MWILLIAMSON, AHEGBURG, GPERSON, AND
JHART

E.O. 12958: DECL: 08/01/2017
TAGS: EPET ENRG EINV ECON SA
SUBJECT: CHEVRON UPDATE ON CONCESSION EXTENSION, KUWAIT
REFINERY DISPUTE

REF: 2006 SECSTATE 8253

Classified By: Acting Principal Officer Robert Murphy
for reasons 1.4 (b) (c) and (d).

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

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001624

SIPDIS

SIPDIS

DEPT OF ENERGY PASS TO MWILLIAMSON, AHEGBURG, GPERSON, AND
JHART

E.O. 12958: DECL: 08/01/2017
TAGS: EPET ENRG EINV ECON SA
SUBJECT: CHEVRON UPDATE ON CONCESSION EXTENSION, KUWAIT
REFINERY DISPUTE

REF: 2006 SECSTATE 8253

Classified By: Acting Principal Officer Robert Murphy
for reasons 1.4 (b) (c) and (d).

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


1. (C) In a July 31 meeting, Arabian Chevron Business
Manager Mohammed Ayaz updated Embassy officers regarding
on-going negotiations between Chevron and the Ministry of
Petroleum and Mineral Resources (MinPet) for the renewal of
the firm's concession in the partitioned neutral zone (PNZ)
shared by Saudi Arabia and Kuwait. Chevron recently
submitted its response to MinPet's counteroffer, and is
awaiting feedback. Privately, Ayaz admitted to a "bad
feeling" about Chevron's offer, but said Chevron continues to
receive encouraging feedback from its MinPet interlocutors.
Concerning the dispute with the Kuwait National Petroleum
Company (KNPC) and its planned construction of a refinery in
the PNZ, Ayaz told us there had been some progress in getting
the SAG to put pressure on the Kuwaiti government to consider
alternate sites for the proposed facility. Finally, Ayaz
provided some insight into the planned Jizan refinery,
telling us Chevron has been approached by several parties to
participate in the project, but has declined, doubting the
project's economics.

--------------
Concession Negotiation Update:
Waiting for Feedback on Second Offer
--------------


2. (C) In a July 31 meeting, Arabian Chevron Business
Manager Mohammed Ayaz updated the Economic Counselor and
Energy Attache regarding on-going negotiations between
Chevron and the Ministry of Petroleum and Mineral Resources
(MinPet) for the renewal of the firm's concession in the PNZ.
Per ref A, Chevron initially had submitted a request to the
SAG to extend its concession, due to expire in 2009, in
October of 2006. Since then, MinPet has made a counteroffer.
Chevron recently submitted its response to this
counteroffer, and is awaiting feedback. Ayaz told us,
"Chevron's offer was not final, but we've done our best." He

explained that if the offer were to be substantially improved
at this point, it would need to go well above the negotiating
authority of the Saudi Arabian office, likely up to Chevron
CEO Reilly. (Note: Chevron CEO Reilly has already visited
the KSA to underscore the seriousness with which the firm
views this negotiation. End note.) Ayaz reflected that
although Chevron continues to receive very positive feedback
from interlocutors within the MinPet regarding wanting
Chevron to stay in the PNZ, he personally "had a bad feeling"
about this second offer. Ayaz still expects the concession
would be competitively bid if their negotiations fail.


3. (C) Ayaz also indicated he had heard "unconfirmed"
rumors the Japanese were interested in re-entering the KSA,
and asked us to inform him if we became aware of potential
Japanese interest in the PNZ. (Note: As per ref A,
Japanese-owned Arabian Oil Company (AOC) AOC lost a 40-year
concession in the KSA in 2000. End note.) While Chevron
believes their proprietary steam technology will likely be
the technological key to winning the concession renewal, Ayaz
worries there could be Japanese technology which Saudi Arabia
might also consider investigating for heavy crude extraction.


-------------- --------------
Kuwait Refinery Update: SAG Finally Putting
Pressure on Kuwaitis to Re-Consider Refinery Site
-------------- --------------


4. (SBU) Ayaz also provided an update on Kuwait National
Petroleum Company's (KNPC) proposed 600,00 barrel per day
(bpd) refinery on the site of existing and future Chevron
operations in the PNZ. Chevron Arabia maintains the refinery
would place at risk their ability to operate their PNZ oil
concession. The refinery dispute has been in abeyance since

RIYADH 00001624 002 OF 002


February, when bids for the proposed refinery came in at
nearly twice the amount KNPC had budgeted, leading the firm
to cancel the February bidding round. Since then, July press
reports indicate KNPC set a new July 3 bidding deadline, and
doubled the project budget to approximately $13.94 billion
USD.


5. (C) Chevron remains concerned with the possible
construction of the KNPC refinery, and Ayaz told us that as
recently as 10 days ago, he was meeting daily with HRH Deputy
Minister Prince Abdulaziz bin on the issue. However, despite
the impetus given to the refinery project during the last few
weeks, Ayaz seemed less concerned about the refinery than he
was last fall. Ayaz stated the SAG had finally put
sufficient pressure on the Kuwaiti government to have them
re-consider the location of the refinery. Ayaz indicated
Chevron has suggested three alternate sites for the proposed
refinery, and he believes they may be finally getting serious
consideration by the Kuwaiti government. While the issue is
far from resolved, it appears to be progressing
satisfactorily from Ayaz's perspective.

--------------
Jizan: Thanks but No Thanks
--------------


6. (C) Ayaz indicated that Chevron has come under pressure
from various quarters to become involved in the proposed
domestic refinery project at Jizan, a greenfield 400,000 bpd
facility. He stated that Chevron has been approached by both
its current joint venture partners and those hoping to
partner with Chevron to become involved in the Jizan project.
Minister Naimi had told Chevron to "take a look," as well.
Ayaz was clear Chevron has no intention of doing so, citing a
list of problems with the Jizan project, including the
internal rate of return, pressure for an early initial public
offering (IPO),and the lack of infrastructure in this
under-developed region near the Yemen border. Ayaz told us
that Chevron had been keenly interested in the Jubail export
refinery, but had lost out on that project to Total. He
seemed to imply Chevron did not regard a domestic refinery on
the Yemeni border as an interesting substitute.

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


7. (C) The Jizan refinery was originally envisioned and
pitched by MinPet as a project for a local Saudi companies
clamoring for access to their "own" refinery (i.e., one not
dominated by Saudi Aramco). MinPet finally seems to be
smacking up against the reality that local companies which
have never had the opportunity to operate a refinery also do
not have the technical expertise to do so, and a 400,000 bpd
refinery is not the sort of facility which one drives with a
learner's permit. MinPet now appears to be courting both
Saudi Aramco and other international firms to partner in the
Jizan project, or at the very least, play a technical
consulting role. Saudi Aramco was notably included in a
recently-released list of bidders for the Jizan refinery, an
about-face from MinPet's fall 2006 announcement of a "private
refinery" with no Aramco involvement. MinPet now appears to
be on a quest to armtwist an international firm to set up
shop on the Yemeni border.

GFOELLER