CONOCO PHILIPS INSIDER DEBUNKS MEED ON

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001920

SIPDIS

SIPDIS

DEPT OF ENERGY PASS TO A/S KHARBERT, DAS AHEGBURG,
MWILLIAMSON, GPERSON, AND JHART
EB/ESC FOR SGALLOGLY AND MMCMANUS

E.O. 12958: DECL: 09/17/2017
TAGS: EPET ENRG ECON SA
SUBJECT: CONOCO PHILIPS INSIDER DEBUNKS MEED ON
CANCELLATION OF YANBU REFINERY

REF: RIYADH 525

Classified By: Economic Counselor Robert Murphy for reasons
1.4 (b) (c) and (d).

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Summary
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1. (C) A respected ConocoPhillips (COP) insider and
consultant has told us that press reports of the cancellation
of the planned 400,000 barrel a day joint-venture Saudi
Aramco/COP refinery are not true. While the project
economics are indeed daunting in this era of stretched
petroleum supply chains, he was emphatic that, "Saudi Aramco
and COP have not made that policy decision."

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MEED Claims COP Yanbu Refinery Being Cancelled;
COP Consultant Dis-Agrees with MEED Assesment
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2. (C) On 15 September, Saudi Aramco re-printed a Middle
East Economic Digest (MEED) article in its internal news
report, in which MEED claimed that Aramco and COP had
cancelled the planned Yanbu export refinery (Ref A),along
with the Fujairah refinery in the United Arab Emirates, due
to spiraling project costs. Brooks Buxton, a former Conoco
country manager in the KSA, now retired and a consultant for
the now-merged COP, dis-agreed, stating no such policy
decision has been made. "Saudi Aramco and COP have not made
that policy decision yet," Buxton stated emphatically.
(Note: COP regional management is traveling and has not been
reach-able for comment, but we are confident Buxton enjoys
their full confidence and speaks for them on this issue.)
Buxton also noted that MEED often had inaccuracies in their
articles.

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New Budget Underscores Yanbu Refinery
Project Economics Will be Challenging
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3. (C) Nonetheless, both Buxton and COP regional President
Nick Spencer have noted in earlier conversations with us that
in this era of spiraling project price figures, the economics
for the Yanbu refinery are challenging. It will take
considerably more negotiating to narrow the gap between COP
and Saudi Aramco management, and conclude a successful
agreement. Buxton (strictly protect) clarified the project
economics for us: previous costs for the refinery had been
estimated in the $10 USD billion range, which would have
provided COP a 8.5 to 9 percent return on investment (ROI).
Recent cost revisions indicated the new budget would likely
be in the $13-$14 USD billion range, bringing COP's ROI down
to 6.5 to 7 percent, well below what would be required for
COP's board to agree to participate. Buxton indicated COP
would typically demand an ROI of 10 percent or more to commit
to a major project. Buxton has a long history of working in
the KSA, and he indicated COP would take a soft approach to
working with Saudi Aramco to bring them on board to the new
budget realities. They would first "plant the seed," and let
both Saudi Aramco and MinPet mull over for a while both the
new budget figures and COP's need for market-rate returns.
The SAG's demand for an initial public offering of up to 30
percent of the project's value has also a significant source
of concern for COP.


4. (C) Buxton noted that, contrary to the portrayal in the
MEED article, Saudi Aramco does not hold the final
decision-making authority on the Yanbu prject. He explained
any decision to move ahead with the project would be made by
the Ministry of Petroleum, albeit with significant input from
Saudi Aramco. In turn, MinPet would not act without
appropriate authorization from the inter-ministerial Supreme
Petroleum Council and the Council of Ministers.

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Comment
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RIYADH 00001920 002 OF 002




5. (C) While no final decision has been made on the Yanbu
refinery, both the MEED article and rumblings among mid-level
Aramco management would seem to indicate a serious degree of
concern with escalating project costs endangering the
project's viability. COP appears committed to continue
working on the Yanbu for now, but will require greater
flexibility from Saudi Aramco and MinPet than hitherto
demonstrated, for all sides to meet their financial goals.
Nonetheless, COP does hold valuable cards, in the form of
proprietary technology for the refining of heavy oil,
technology which would bring unique and significant value to
the KSA's portfolio of increasingly heavy crude. Post will
continue to monitor this project closely with COP management.


FRAKER