ENERGY WORKING GROUP MEETS IN RIYADH, DISCUSSES

C O N F I D E N T I A L SECTION 01 OF 05 RIYADH 000313

SIPDIS

SIPDIS

DOE PASS TO KHARBERT, AHEGBURG, GPERSON
CIA PASS TO TCOYNE

E.O. 12958: DECL: 02/14/2017
TAGS: EPET ENRG EINV SA
SUBJECT: ENERGY WORKING GROUP MEETS IN RIYADH, DISCUSSES
INTERNATIONAL OIL MARKET


Classified By: AMBASSADOR JAMES OBERWETTER FOR
REASONS 12958 1.4 B, D, AND E

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Summary
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1. (SBU) Assistant Secretary of Energy for Policy and
International Affairs Karen Harbert and Prince Abdulaziz bin
Salman al-Saud, Assistant Minister for Petroleum Affairs,
Ministry of Petroleum and Mineral Resources (MOPMR) convened
an Energy Working Group (EWG) in Riyadh on February 3. The
Energy Working Group is part of the Secretarial-level
Strategic Dialogue. The meeting was warm and cordial, as the
senior DOE, State and MOPMR officials meet regularly. Both
parties forecast the international oil market will move into
a period of slower growth in the medium term, with non-OECD
nations continuing to drive oil market growth. The parties
agreed the non-conventional oil sources are becoming a modest
but more important part of the world's energy portfolio. The
interlocutors expressed concern with the international oil
companies (IOCs's) emphasis on enhanced oil recovery (EOR)
and other technological improvements at the apparent expense
of financing new exploration. The Saudis critiqued both
alternative fuel proponents and peak oil theorists,
cautioning against the high cost of biofuels and assumptions
that economic policy can overcome fundamental pricing
challenges. In light of supplier volatility in many regions
in the world, the U.S. delegation emphasized the value the
USG places on reliable suppliers such as Saudi Arabia.


2. (C) Assistant Secretary Harbert's meetings in Riyadh
February 3 - including with Petroleum Minister Naimi (septel)
- were well timed and responsive to Saudi policy-level
concerns with the USG's increasingly stress on alternative
fuels, and on the openness of the US investment climate to a
Saudi proposed multi-billion dollar refinery expansion in
Texas. End Summary.

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Reviewing the Energy Working Group
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3. (SBU) Technical presentations during the EWG highlighted
oil market dynamics, forthcoming projects and opportunities
in the upstream and downstream in both the U.S. and Saudi
Arabia, and new U.S. energy policies with regard to
alternative energy and fuel specifications. The parties also
discussed climate change and U.S.-Saudi energy cooperation.
This is the first of four cables reviewing the EWG
discussions, covering:

a. Forecasts and discussion of the international oil market
b. Saudi plans for upstream and downstream expansion
c. Climate change
d. Cooperation between the U.S. and Saudi Arabia, with a
focus on the Joint Oil Data Initiative (JODI)


4. The following teams participated in the EWG:

Visiting USG Delegation:
--DOE Assistant Secretary for Policy and International
Affairs Karen Harbert;
--DOE Deputy Assistant Secretary Alan Hegburg;
--DOE Director, Office of African and Middle Eastern Affairs
George Person;
--DOE, Energy Information Administration, Director of
Integrated Analysis and Forecasting Glenn Sweetnam;
--Department of State, Director International Energy and
Commodity Policy Office, Stephen Gallogly.

Economic Counselor Silverman, DOE Deputy Director for
Electricity Delivery and Energy Reliability Alvarez, Energy
Attache Ross, and Economic Officer Pacheco also participated
in the EWG for Embassy Riyadh.

The Saudi Working Group team consisted of:

--HRH Prince Abdulaziz bin Salman al-Saud, MOPMR, Assistant
Minister for Petroleum Affairs;
--Dr. Majid Al-Moneef, MOPMR, OPEC Governor for Saudi Arabia;
--Dr. Ibrahim al-Muhanna MOPMR, Advisor to the Minister and
Director of Public Relations;
--Dr. Mahmoud Al-Osaimy, MOPMR, Advisor to the Minister;
--Dr. Ahmed Al-Ghamdi, Advisor to the Minister;
--Advisor to the Minister on Climate Change Dr. Mohammed
Al-Sabban;
--Abdulelah Abdulaziz Albuniyan, MOPMR;
--Yasser Mufti, Saudi Aramco, Corporate Advisor on Energy
Outlook, Corporate Planning;
--Dr. Mohammed Yahya Al-Qahtani, Saudi Aramco, Manager,
Reservoir Description and Simulation Department;
--Salahaddin Dardeer, Saudi Aramco, Engineering
Superintendent, Riyadh Refinery.

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Mature Economic Cycle Creates Cyclical Slowdown;
Demand Growth Continues in non-OECD, China
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5. (SBU) Saudi Aramco's Yasser Mufti kicked off a series of
technical presentations with the MOPMR's analysis of the
international oil market. (Note: Saudi Aramco employees
conducted all of the Saudi presentations, highlighting the
tremendous depth and substance Saudi Aramco brings to the
MOPMR's service. End note.) For 2007, the MOPMR forecasts
the world economy's entry into a mature phase of the economic
cycle will impact the international oil market, creating a
cyclical slowdown for the foreseeable future. Mufti noted
interest rates appear to be on the upswing worldwide, which
will dampen increased demand in the oil sector. He stated
the non-OECD countries, particularly China, will continue to
be the crucial driver for increased oil consumption, with
transport and feedstock key to their increased demand.
Largely due to growth in the non-OECD market, the MOPMR
forecasts increased demand for crude oil at 1.4-1.6 million
barrels per day (mbpd) per year. Projecting over the next
seven years, MOPMR forecasts up to 3 mbpd in demand
uncertainty.

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China and the Middle East Continue
Strong Demand Profile
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6. (SBU) While noting China would continue to drive demand
growth, Mufti described China's energy market as fragmented,
with a huge urban-rural divide, and great regional variance.
Gas oil and gasoline are the strongest growth components,
driven by transport and the industrial sectors. Urban areas
could reach saturation in the foreseeable future in absorbing
additional petroleum products, but a predominantly
impoverished population in the interior will remain locked
out of the growth in energy consumption enjoyed by city
dwellers. Due to a large population bulge at the bottom of
the age pyramid, Mufti stated the Middle East, and Saudi
Arabia in particular, will be among the strongest areas of
demand growth. Aerial views of Riyadh from 1972 to 2000
vividly highlighted the city's dramatic growth and
accompanying increase in energy demand.

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Non-OPEC Supply Growth Forecast at 1.2 mbpd/year;
Industry Faces Serious Expenditure Challenges
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7. (U) Mufti then moved on to discuss supply side issues.
In the non-OPEC states, OECD oil production declines are
evident as fields mature. Growth in deepwater and
non-conventional oil production has eclipsed production in
the former Soviet Union (FSU). The MOPMR forecast non-OPEC
supply growth 1.2 m/bpd per year in the medium term, with
possible risks to supply growth including project delays,
country risk, and normal production declines in maturing
fields. Mufti reiterated the constant refrain heard at every
oil industry event: the industry is stretched by expenditure
costs, particularly for scarce rigs and manpower. The recent
price environment first stimulated interest in enhanced oil
recovery (EOR) projects. However, he noted, we have not yet
seen the price environment drive much new exploration.

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Non-OPEC Moving Beyond Conventional Oil, but
Economics of Alternative Fuels Remains a Challenge
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8. (U) Mufti reviewed the MOPMR's analysis of alternative
fuels, noting the resources and processes employed for
alternative fuels were generally not new. He forecast output
of alternative fuels to more than double in the next ten
years, with a compounded annual growth rate of 8.8%. He
included tar sands, extra heavy oil, gas-to-liquids (GTL),
coal-to-liquids (CTL),oil shale, ethanol, and biodiesel
within his forecast. Mufti highlighted the high capital
costs of alternative fuels. He pegged the capital cost to
maintain a daily barrel of production capacity for
alternative fuel at $25,000-$60,000, stating that Saudi
Arabia crude costs only $5,000-$10,000 to maintain the same
daily capacity. Mufti stated some European biodiesel cost up
to $120,000 per daily barrel of capacity. He attributed
large capital cost variances to factors such as feedstock
prices, technological efficiency, emissions, and fiscal
incentives. Moving on to ethanol, Mufti's analysis indicated
the $60/barrel for crude oil was the breakeven point for U.S.
corn-based ethanol.

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Growth in OPEC Oil Supply: 4.5 mbpd in Three Years
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9. (SBU) Mufti said the MOPMR expects OPEC supply to
increase 4.5 mbpd in the next three years. Iraqi output will
be driven by it internal ability to supply oil, not external
market requirements. Natural gas liquids (NGL) and gas
output will also rise. There will significant upstream
development in all of the "OPEC 10" nations (all OPEC members
minus Iraq). Mufti forecast steady but moderate oil
production growth until the end of the decade. He
highlighted OPEC's spare oil production, indicating it will
continue to grow.

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Trade Increasingly Meeting Global Energy Needs
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10. (U) The global economy is witnessing increased reliance
on trade to meet its energy needs. Mufti noted ten years
ago, the global economy imported 53% of its oil, but now
imports 61%. New supply areas are geographically remote from
major demand centers, and mature oil provinces in developed
countries continue to experience production declines. These
factors, coupled with limitations on refining capacity in
major demand centers, continue to drive increased trade in
oil. Mufti indicated the MOPMR expects growth in the oil
trade will be three to four times the rate of global GDP
growth.

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Oil Increasingly Integrated into the
Global Financial Markets
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11. (SBU) Mufti described the explosive growth in crude oil
futures since 2003, noting about 2 billion paper barrels are
now in trade. The Saudi analysis indicated a link between
higher oil prices and the influx of investor funds into the
oil markets. He remarked that as commodity markets become
increasingly mature, investors tended to view oil futures as
just another asset class, ripe for investing. He described
the forward curve for oil futures as "weirdly shaped,"
stating "a lot of money believes prices will be higher going
out." As the oil futures markets play an increasingly large
role in setting world oil prices, he remarked his team was
now obtaining better insights into prospective oil prices
from banks than from those working in the real oil sector,
such as refiners.

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Saudis Cast Aspersions on Biofuel and Peak Oil
Proponents; Policy Won't Wean the Public Off Oil
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12. (SBU) In a presentation aimed at both proponents of
alternative and biofuels, as well as peak-oil theorists such
as Matt Simmons, Mufti concluded by quoting from a 2002
article, "A Half Century of Long-Range Energy Forecasting
Errors." The authors identified a number of common errors in
long-range energy forecasting, such as underestimating the
size of world energy resources, underestimating the role of
prices and the adaptability of markets, substantial
overestimate in primary energy consumption, strong influence
of events and trends at the time of the forecast, overzealous
assumptions regarding changing people's behavior, and
assumptions that economic policy can overcome economics.

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EOR: Making the Most of What you Have; but
Declines in Exploration Worry EWG Participants
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13. (SBU) Both U.S. and Saudi EWG interlocutors expressed
concern with a precipitous fall in new exploration. Mufti
stated oil service company Schlumberger has sold off its
seismic unit, and is no longer engaged in exploration work.
Instead, Schlumberger contacts have told him all of their
clients have now contracted with Schlumberger for EOR
activities. Assistant Secretary Harbert noted the percentage
of IOC budgets devoted to exploration fell from 30% to 10%
from 2000 to 2005. DAS Hegburg remarked the key to
exploration was, "access, access, access," and, with the
closure of Russia, Venezuela, and other nations to the IOCs,
there were simply fewer opportunities to access new fields.

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EIA Market Forecast: Non-OECD Outstrips
OECD Oil Consumption by 2015
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14. (U) EIA Director Sweetnam presented the EIA forecast on
oil market growth. He projected OECD oil consumption to grow
at 1 percent, with non-OECD consumption growing at 3 percent.
By 2015, the non-OECD nations will surpass OECD nations in
total oil consumption. Sweetnam noted the EIA modeled oil
demand forecasts for three economic growth scenarios: a
reference case at 3.8% global economic growth, a high growth
scenario at 4.6% annual global growth, and a low growth
scenario at 3.1% growth. Underscoring the difficulty of
planning for oil consumption growth over the long term,
Sweetnan told us the difference in projected demand between
the high and low growth scenarios was 50 million barrels of
oil equivalent.

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Growth in Coal Creates Environmental Challenge
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15. (SBU) Sweetnam noted the EIA expects less oil in the
world energy mix as coal, gas, and alternative fuel
consumption increases. The rise in natural gas prices in
tandem with oil prices during recent years will lead more of
the developing world, especially India and China, to turn to
coal. Assistant Secretary Harbert remarked that 80% of the
world's new coal plants were being built in India and China,
a significant environmental challenge, given their failure to
date to adopt clean coal technology. China, she noted, was
firing up one new coal power plant every week. She added
that China currently had 9 million passenger cars on the
road, a figure expected to grow to 100 million by 2030, "a
figure we think is too low," she remarked.
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Deliverability of Oil is Focus for U.S. Delegation
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16. (C) Moving onto non-OPEC oil growth, Assistant
Secretary Harbert remarked, "the question in Russia is, will

SIPDIS
investment occur?" She stated the conditions for energy
investment there have taken a dramatic turn for the worse.
She indicated in Venezuela, the government of Hugo Chavez was
increasing social spending by 100% per year, while decreasing
petroleum investment by 8% a year - a trend with inevitable
results for Venezuelan production. The USG delegation
conveyed the value the USG placed on Saudi Arabia's
reliability as a supplier. In discussing suppliers such as
Nigeria which experienced difficulty in meeting their
contract terms, or Venezuela, which may experience such
problems in the future, Sweetnam highlighted the market
impact on reliable suppliers. He concluded, "reliable
suppliers such a Canada and Saudi Arabia will have a bigger
call on their oil."

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Comment
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17. (C) The relationship between DOE, State and the MOPMR
is long-standing and very solid. However, the Saudis have
been frustrated with recently-announced U.S. programs and
public statements designed to accelerate research into
alternative fuels. Mufti countered by emphasizing that
consumers won't be weaned off of oil unless other options are
price competitive, and appraising that USG policy won't alter
market fundamentals. The technocrats who run Saudi Aramco
understand there is room for biofuels and other alternatives
in a growing U.S. and world energy portfolio. Nonetheless,
the political leadership within MOPMR kicks back against the
USG saying so in too public a fashion.


18. (U) DAS Hegburg has cleared this message.

OBERWETTER