Identifier
Created
Classification
Origin
07RIYADH2057
2007-10-07 13:06:00
CONFIDENTIAL
Embassy Riyadh
Cable title:  

SHELL ON GAS EXPLORATION AND MOTIVA EXPANSION

Tags:  EPET ENRG ECON SA 
pdf how-to read a cable
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PP RUEHDE RUEHDIR
DE RUEHRH #2057/01 2801306
ZNY CCCCC ZZH
P 071306Z OCT 07
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 6696
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHHH/OPEC COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHRMAKS/COMUSNAVCENT PRIORITY
RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
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RUEKJCS/SECDEF WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 002057 

SIPDIS

SIPDIS

EEB/ESC FOR SGALLOGLY AND MMCMANUS
DEPT OF ENERGY PASS TO MWILLIAMSON, AHEGBURG, GPERSON, AND
JHART

E.O. 12958: DECL: 10/07/2017
TAGS: EPET ENRG ECON SA
SUBJECT: SHELL ON GAS EXPLORATION AND MOTIVA EXPANSION

REF: RIYADH 422

Classified By: ECONOMIC COUNSELOR ROBERT BARRY
MURPHY FOR REASONS 1.4 B, D, AND E

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

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 002057

SIPDIS

SIPDIS

EEB/ESC FOR SGALLOGLY AND MMCMANUS
DEPT OF ENERGY PASS TO MWILLIAMSON, AHEGBURG, GPERSON, AND
JHART

E.O. 12958: DECL: 10/07/2017
TAGS: EPET ENRG ECON SA
SUBJECT: SHELL ON GAS EXPLORATION AND MOTIVA EXPANSION

REF: RIYADH 422

Classified By: ECONOMIC COUNSELOR ROBERT BARRY
MURPHY FOR REASONS 1.4 B, D, AND E

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


1. (C) In an October 1 conversation, Chairman of Shell
Companies in Saudi Arabia, Robet Weener, provided updates on
the status of Shell's gas exploration efforts in the Rhub al
Khali (RAK) region, as well as the late September final
investment decision (FID) to move ahead on the expansion of
the Motiva refinery in Port Arthur, Texas. On gas
exploration, Weener emphasized the challenges ahead in
prospecting such large concession. While Weener appears sure
there is natural gas in the RAK, he appears far less
confident that Shell will succeed in locating it during the
remaining two years of its concession. He deplored the waste
of natural gas taking place in the KSA because of
artificially low gas prices. Weener emphasized that Shell
was confident in the project economics of the Motiva
expansion, as most of the construction contracts were already
locked in. The Motiva expansion will allow Saudi Aramco to
ship increasingly heaver crude to the US for refining. The
FID is one step in beginning to redress the world's shortfall
in heavy crude refining capacity.

--------------
SRAK Struggles to Cope with Vast Concession
--------------


2. (C) Weener reiterated that the Shell carries out its RAK
gas exploration work through its interests in the South Rhub
Al-Khali Company (SRAK),a joint venture in which Shell holds
40 percent equity, and Saudi Aramco and Total hold 30 percent
each. He stated SRAK had a 200,000 square kilometer
concession, remarking, "it's a huge area, the size of the UK,
and ten times the size of the three other Rhub Al-Khali gas
concessions." Weener noted the difficulty of starting with
so little data in such a vast exploration tract, saying when
they first began work, SRAK "pretty much had a white sheet
of paper, Aramco had hardly any usable data. We've done a
lot of seismic, run a lot of technical data."



3. (C) However, in such a vast region, the challenge for
SRAK is to determine whether their models are correct.
"We're pretty sure there is oil and gas in the RAK, there is
oil and gas on the borders there with Yemen, Oman, and Abu
Dhabi. If we're not correct, I wouldn't write off the area,
it is just likely that our models may be wrong." For the
first exploratory period, which will wrap up in about two
years, SRAK has a commitment with Saudi Aramco to drill seven
wells, and run 60,000 square kilometers of seismic data, of
which about 20,000 are already completed. Weener emphasized,
"We'll do our commitments and a bit more." SRAK could and
likely will negotiate an extension of the concession.
However, Ministry of Petroleum (MinPet) sources have
explained that in line with standard international practice,
SRAK would have to relinquish half of the acreage at the
renegotiation.

-------------- --------------
"Your Biggest Gas Field in Saudi Arabia is in the Price"
-------------- --------------


4. (C) Moving on the issue of gas pricing in Saudi Arabia,
Weener noted that Shell had a radical change of perspective
when it expanded upstream from the KSA's petrochemical
sector, where it was a gas buyer, into upstream gas
development, where it will be a gas seller - assuming SRAK
makes a gas discovery. Weener remarked, "When we were just
on the petrochemical end of the business, we were always very
pleased by the cheap price of gas." Laughing at the turn of
events, Weener noted, "now that we're in the upstream, we
think the price of 75 cents (per million Btu) is ridiculous!

RIYADH 00002057 002 OF 003


The price is $4-$5 USD in most of the region, and the Rhub al
Khali is the most remote and hostile region on earth. The
nearest gas processing facilities are 1000 kilometers away."
(hence transport costs high)


5. (C) Weener wonders how the large number of new gas-based
integrated water and power projects the SAG hopes to build
in coming years will ever be economically viable with the
current gas pricing model, which relies on heavily subsidized
sales of gas to the industrial sector. Weener continued,
"Price Faisal (HRH Prince Faisal bin Turki bin Abdulaziz Al
Saud, Senior Advisor in the Ministry of Petroleum and Mineral
Resources),the gas regulator, says that gas prices will go
up, but only when the time is ready. He points to the social
imperatives of building out power and water supplies first."
Weener shook his head, and said, "Our response to Price
Faisal is, your cost is so artificially low you're
encouraging wastage. Your biggest gas field in Saudi Arabia
is in the gas price. Right now, people have an artificial
feeling of plenty."

-------------- --------------
Desire to Get Saudis to Engage on Climate Change
-------------- --------------


6. (C) Weener moved on to the issue of climate change,
stating he wished he could get the Saudis to engage with
industry on the issue. He has tried to make an appointment
with Dr. Al-Sabban, the Ministry of Petroleum's lead climate
change negotiator, and was told in so many words that the
appointment was not available. With a leading role in oil
production, Weener believes the Saudis could take on
leadership in carbon sequestration research and activities,
but right now, they do not appear interested in engaging with
industry in these initiatives. Weener noted that both Shell
and Chevron had strong corporate positions in favor of
engaging on climate change issues. He stated that if
industry and the Saudi government did not get out ahead of
the public on these issues, they risk "having them turn
against us."

-------------- --------------
Motiva Update: Shell Confident of Project's Economics;
Expansion Accommodates Shift Towards a Heavier Barrel
-------------- --------------


7. (SBU) As widely reported in the energy press in late
September, Weener confirmed the FID on the Motiva, Port
Arthur, Texas refinery, a joint venture between Shell and
Saudi Aramco. The expansion will add 325,000 barrels per day
(bpd) of capacity to the existing plant, for a total of
600,000 bpd capacity. Weener noted Motiva would be the
largest plant in the US after the expansion. Weener stated
that the firms had decided to move ahead "even though the
construction industry in the US is boiling over, and the
project is a cost containment challenge. Even at about $7
billion, it's still economically viable." Weener explained
that Shell was highly confident regarding cost containment,
because 85 percent of the construction contracts had been
tendered and let, locking in prices already."


8. (C) Weener explained that the Motiva expansion would
accommodate Saudi Arabia's production shift towards a heavier
barrel. Weener re-capped that much of the lack of refining
capacity in recent years was not so much an overall lack of
capacity, as a lack of capacity to process the world's
increasingly heavier basket of crude. Motiva's expansion was
designed to address this issue. Remarking on the crude
supply agreement, he noted that Shell generally lifted Saudi
crude for Motiva, but also reserved the option to bring in
other crudes. Reserving this option "keeps the Saudis
honest," and allowed Shell to bring in occasional excess
supply from other regions. Weener expects this general
arrangement would continue once the expansion was completed.
Aramco refining official Salahaddin Dardeer has indicated
that with the expansion, Motiva will be a full conversion
refinery, capable of producing products to meet the strictest

RIYADH 00002057 003 OF 003


U.S. environmental product specifications, such as those in
place in California. The primary feedstock will be Arab
Heavy crude from Saudi Arabia, but specific fields have not
yet been identified. The refinery expansion should be
completed by the end of 2010 or early 2011.

--------------
Shell Sitting Pretty in Latest Market Turns
--------------


9. (U) Weener noted that Shell was the largest downstream
supplier in the US, and was very pleased at the turnaround in
the downstream market. For many years, he noted, the
industry questioned Shell's investments in the sector, but
"now the tide has turned, and downstream is a great market."
He also remarked on Shell's investments in innovative
projects such as Canadian tar sands and Colorado oil shale,
which seem ahead of their time now, but may prove very
profitable in long run.

--------------
US Investment Climate, Political Optics,
and the Motiva Expansion
--------------


10. (C) In recent months, MinPet has repeatedly called the
expansion of Motiva into question, complaining of a
deteriorating investment climate for Saudi Aramco in the US
due to expanding ethanol production, and pending anti-OPEC
("NOPEC") legislation and lawsuits. When asked if the Motiva
FID reflected any resolution of these concerns, Weener
stated, "The US is wonderfully pluralistic, and the Saudis
are more used to an orchestrated society. We keep telling
them, you can't wish this sort of thing away (e.g., the
lawsuits),you just have to equip yourself with sufficient
lawyers to keep the other ones at bay. And then life
continues. Most of these cases get thrown out eventually
anyway. This is fundamentally a cultural problem for the
Saudis to understand." Weener, himself Dutch, continued,
"The Saudis have a love-hate relationship with the US.
Usually the love is stronger, but they will complain. Right
now, they have a real feeling of victimization. They feel
that for all they have done for the U.S over many years, they
receive too little gratitude. The backlash from 9-11 is part
of the problem, Of course, the U.S. is pluralistic,
gratitude is not expressed in the same way. And the culture
gap is so large."

FRAKER