SAUDI PLANS FOR UPSTREAM AND DOWNSTREAM EXPANSION

C O N F I D E N T I A L SECTION 01 OF 05 RIYADH 000525

SIPDIS

SIPDIS

DOE PASS TO AHEGBURG AND GPERSON
CIA PASS TO TCOYNE

E.O. 12958: DECL: 03/14/2017
TAGS: EPET ENRG SENV SA
SUBJECT: SAUDI PLANS FOR UPSTREAM AND DOWNSTREAM EXPANSION

REF: RIYADH 313

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

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Summary
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1. (U) This cable reviews Saudi plans for upstream and
downstream expansion, discussed during the February US-Saudi
Energy Working Group meeting in Riyadh. The Saudi presenters
confirmed Saudi Aramco's plans to reach 12 million barrels
per day (mbpd) production capacity by 2010-2011, including
bringing on-line the 1.2 mbpd Khurais and 900,000 bpd Manifa
fields (in addition to production in the Saudi Arabia-Kuwait
Partitioned Neutral Zone, the PNZ). They highlighted
production gains through technologies such as improved
seismic imaging, geo-steering, and powers simulation
technology. Meanwhile, Saudi Aramco is also planning
significant growth in the downstream sector, expanding and
installing more efficient and environmentally-friendly
equipment in existing refineries, and also building at least
four greenfield refineries. In line with current trends in
the refining sector, Saudi Aramco has focused its new
capacity on processing heavier sour crude, producing cleaner
gasoline and diesel, and making energy conservation gains.
The Saudi interlocutors indicated stringent product quality
standards, particularly multiple and tighter environmental
standards around the world, pose a great challenge to Saudi
Aramco. Saudi Arabia's OPEC Governor left open the option of
future joint ventures (JVs) in the gas arena, depending on
the performance of existing JVs.

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Review of Current Reserves and Production
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2. (U) During the EWG discussions, Saudi Aramco's Dr.
Mohammed Al-Qahtani, Manager, Reservoir Description and
Simulation Department, conducted a presentation on behalf of
the Ministry of Petroleum and Mineral Resources (MOPMR) on
"Exploration and Development Activities and Technologies."
By way of background, Al-Qahtani noted Saudi Aramco has 96
oil and gas fields, 260 billion barrels of proven oil
reserves, and 239 trillion standard cubic feet (scf) of gas.
Al-Qahtani placed current sustainable oil production at 10.8
mbpd, and 9.5 billion standard cubic feet (scf) of gas
production. Note: These references do not include production
activities in the PNZ). End note.)

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Aramco Plans to Grow Exploration, Development,
and Production by Field to 2011
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3. (SBU) Al-Qahtani fleshed out Saudi Aramco's
much-publicized plans to reach 12 mbpd of production capacity
within the next five years, pegging production growth to the
following targets:

2007 10.8 mbpd
by 2008 to 11.0 mbpd
by 2009 to 11.3 mbpd
by 2010-2011 to 12.0 mbpd

(Again, production targets do not include PNZ production.
End note.) Al-Qahtani reiterated Saudi Aramco's intention to
increase spare capacity to 2 mbpd, noting the company's
commitment to maintaining spare capacity distinguishes it
from its competitors. Yasser Mufti, Saudi Aramco, Corporate
Advisor on Energy Outlook, noted a third of the drilling rigs
employed in OPEC are located in Saudi Arabia.

Al-Qahtani offered a limited break-down by field of recent
and planned production growth as follows:

by 2006 300,000 bpd Haradh-3 field
by 2007-2008 500,000 bpd Abu Hadriya, Fadhili,

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and Khursaniya fields
by 2008 100,000 bpd Nuayyim field
by 2008 250,000 bpd Shaybah field
By 2009 1.2 mbpd Khurais field
by 2011 900,000 BPD Manifa field

Al-Qahtani remarked some of the additional production would
replace natural production declines, while some would
represent actual production increases.


4. (SBU) Al-Qahtani termed the Northeast of the Kingdom
Saudi Aramco's "core exploration area," stating it would
continue extensive exploration and acquisition of 3D seismic
data there. He highlighted other areas being explored for
both oil and non-associated gas (NAG),including north
Riyadh, the Rhub-al-Khali, and the Red Sea region. He
estimated the resources in these regions at 716 billion
barrels in the ground, broken down into those reserves
already recovered, proven reserves, and those which are less
certain to come to fruition - possible, probable, or
contingent.

106 billion barrels (15 percent) recovered during the past 70
years;
260 billion barrels (36 percent) proven reserves;
350 billion barrels (49 percent) classified as possible,
probable, or contingent.

Aramco intends to increase the current output and to maximize
reserves. By 2025, the company targets moving 250 billion
barrels to the "current" category. Currently, 51 percent of
the oil is recovered in this category, with 49 percent
remaining "possible." By 2025, Aramco hopes to raise the
recovered level to 70 percent, or the equivalent of 150
billion barrels.

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Technology Focus to Improve Production and Recovery
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5. (SBU) Al-Qahtani said Aramco was focusing on a range of
technologies to sustain upstream expansion, lower costs, and
increase revenue.

-- Seismic technology: This has been the primary technology
behind increasing production. The data helps Aramco find the
thickest channels in reservoirs to maximize quality of the
crude. al-Qahtani claimed Aramco's seismic technology was
based on in-house research and development, to provide a
lucid picture of the channels in reservoirs and makes
"maximum reservoir contact" (MRC) wells more efficient. He
stated in 2006 that Aramco doubled the yield at the Karin
field with this technology, increasing output from 40 to 80
million scf.

-- Geo-steering: Aramco is using geo-steering (directional
drilling) in many well-developed fields. At Abqaiq &474,8
Al-Qahtani stated that Aramco's use of geo-steering produced
a sevenfold improvement in output to 700,000 bpd, compared to
nearby wells, despite the field being 60 years old. In the
Khurais field, this technique has improved efficiency by 50
percent over the past three years.

-- Powers Simulation technology: Aramco uses these
simulations for highly accurate forecasts. The company has
perfected a resolution of 17 million cells (or the equivalent
of megapixels in a digital camera). In a few years' time,
Aramco expects the technique to reach up to 100 million cells
within a few years, and to reach 1 billion cells by 2017.

-- I-Field: Aramco is developing the capability for real time
data on wells through a system of subsurface sensors and
controls in reservoirs. This will allow for real time
reservoir management and MRC. By using MRC techniques at
Haradh, Aramco increased yields per well from 2000 bpd in
1996, to 4000 bpd in 2003, and finally to 10,000 bpd in 2006.
Al-Qahtani stated Aramco has reduced the water cut at the
Ghawar field from 50 percent to 32 percent using MRC.


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In the medium to long term, Aramco plans to develop "extreme
contact well" technologies and nano technologies at the core
levels of reservoirs. With nano technologies, the company
hopes to "destroy" heavy oil and actually change the
properties of a reservoir.

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Refining Margins Up, but Proliferating Product
Specifications Remain a Challenge
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6. (U) Salahaddin Dardeer, Superintendent of Engineering of
the Riyadh Refinery, conducted the Saudi's downstream
presentation. Aramco saw a large increase in its refining
profit margins in 2003-2004, and expects a flatter increase
in 2005-2006. Higher crude prices and refining margins have
attracted new investors and funds. The company believes
worldwide refining capacity is inadequate, since utilization
stands at 86 percent. The biggest challenge for the
downstream side will be the growth in demand from the
expected population growth over the next five years, which
could translate into an 8 percent increase in demand
worldwide.


7. (U) Dardeer laid out Saudi Aramco's goals to build new
refining capacity to process heavier sour crude, produce
cleaner gasoline and diesel, and make gains in energy
conservation. He cautioned refined product supply and demand
remain volatile. There is a wide variation in requirements
in many markets for cleaner burning fuel. He noted that
stringent product quality standards, particularly multiple an
tighter environmental standards, pose a great challenge to
Saudi Aramco. Meanwhile, the global mix of crude continues
to shift to heavier and sourer production, influencing Saudi
Aramco's refinery configuration. Department of Energy
Assistant Secretary Harbert commented on the proliferation of
boutique fuel requirements in the U.S., noting that DOE
finally took executive action to decrease the complexity of
state-mandated fuel requirements and increase margins for
refining. New policies require companies to slim down to
seven different fuels.

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Downstream Expansion Plans Focus
on Heavy Crude, Growing Export Capacity
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8. (U) Saudi Aramco plans to boost Saudi Arabia's overall
refining capacity from 3 mbpd to 6 mbpd, and is currently
meeting domestic needs with 1 million bpd of crude devoted to
processing fuel oil, gas, and diesel. New environmental
laws coming into effect in mid-2007 will require the use of
scrubbers in Saudi refineries.


9. (U) Refinery Expansion Plans: Dardeer explained Saudi
Aramco's wide-ranging plans to expand and modernize existing
refineries. It plans to increase the capacity at Yanbu
Refinery from 230,000 bpd to 360,000 bpd, and install a
continuous catalytic reformer (CCR) to maximize liquid
petroleum gas (LPG) recovery. It will install cogeneration
facilities to produce desalinated water and power at both the
Ras Tanura and Rabigh refineries. (Note: In May 2005, Saudi
Aramco already commissioned cogeneration equipment at Riyadh
Refinery. End note.) Diesel hydro treaters (DHT) will be
installed at Riyadh, Yanbu, and Ras Tanura refineries to
produce low-sulfur diesel to meet local air quality
standards. At Riyadh Refinery, a sulfur recovery unit will
capture acid gas, with the aim of reducing sulfur emissions.
Saudi Aramco has also reviewed plans to expand Rabigh
Refinery into a major petrochemical complex with partner
Sumitomo Chemical.


10. (U) Greenfield Refineries: Dardeer stated Saudi Aramco
would construct two new joint venture export refineries of
400,000 bpd each, with Total (at Jubail) and ConocoPhillips
(at Yanbu) to meet demand for processing facilities for heavy
crude; final investment decision (FID) is expected by the end
of 2007. (Note: Press reports indicate the full conversion
refineries are slated for completion in 2011, and designed to

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process Arab Heavy crude (AHC). Aramco plans to build a
topping (distillation) refinery, also designed to process
400,000 bpd of AHC. Dr. Majid Al-Moneef, OPEC Governor for
Saudi Arabia, stated the topping refinery was designed for
domestic use, to meet the huge demand for fuel oil for power
generation and desalinated water production, but will also be
integrated into the planned Dow petrochemical project at Ras
Tanura to provide intermediate products for further
processing. Depending on pricing, in the future, he
indicated the SAG will encourage utilities to use fuel oil
instead of crude. Dardeer also noted the MOPMR had announced
a tender for a private refinery to be built at Jizan. (Note:
The November 2006 announcement at the Saudi Energy Forum that
the SAG would allow the construction of a fully private
refinery created significant buzz among Saudi firms, and
answered their demand they be allowed to compete in the
sector without a parastatal partner. However, there has been
little information to date on the terms of the tender. End
note.) Finally, the SAG is continuing to construct the
"mineral city," Ras Azur, devoted to mineral exploration,
particularly bauxite and phosphate inputs for the petroleum
industry

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International Expansion Plans
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11. (SBU) On the international front, Dardeer laid out
Saudi Aramco's plans to increase the capacity of the Motiva
refinery at Port Arthur, Texas, to 600,000 bpd, and construct
a new 480,000 bpd refinery with S-Oil in South Korea. In
partnership with ExxonMobil, Saudi Aramco plans to expand the
Fuijin Refinery in China from 80,000 to 240,000 bpd, but they
are waiting for final pricing structure details from the
Chinese Government. Dardeer noted the refinery upgrade will
allow it to process heavier Saudi crude. Dr. Al-Moneef
stated Saudi Aramco is now taking medium and light crude into
Fuijin for processing, but will also bring in Brazilian Heavy
in the future.

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Additional Gas Development JVs Possible;
Aramco Content with Pace of Gas Discoveries
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12. (SBU) Department of Energy Deputy Assistant Secretary
Hegburg queried about the likelihood of additional gas joint
ventures. Dr. Al-Moneef responded it would depend on the
performance of the existing JVs. (Note: Saudi Aramco has
existing joint ventures for gas exploration in the Rhub-al
Khali with the Chinese National Oil Company (CNOC),Lukoil,
and Shell. End note.) Once they get good results, we may
offer others, he continued. Remarking on the first entry of
foreign firms into the Saudi upstream in more than thirty
years, albeit in gas rather than oil, Al-Moneef remarked,
"the principle is established." Asked about the prospects of
importing gas, MOPMR's al-Muhanna added Saudi Aramco is
actively seeking and finding new NAG every year, and did not
foresee the need to import gas. Dr. Al-Moneef added Saudi
Aramco has added 5 trillion scf of gas reserves every year
since 1999. Al-Qahtani indicated associated gas (AG) and
non-associated gas (NAG) capacity totaled 9.5 billion scf of
raw gas, and the Karan gas field, with 1 billion scf of gas,
would be under development by 2012. He stated Saudi Aramco
produces about 4 billion scf of AG, and up to 4.8 to 5
billion scf of NAG in the summer, but less in the winter.

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MOPMR Discounts Impact of Increased
Refining Capacity Saudi Crude Exports
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13. (SBU) DAS Hegburg queried about the future availability
of crude (versus refined product) for export, given the large
refinery capacity coming on-line in Saudi Arabia within the
next few years, and the impact on Saudi Arabia's position as
the market maker in the international crude oil market.
Al-Moneef disagreed with the conclusion that increased
downstream capacity would significantly diminish Saudi

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Arabia's role as a market maker, or its ability to meet
customer demand for crude. He pointed out Saudi Arabia's
crude production capacity was increasing in tandem with its
refining capacity. At today's production of about 8.7 mbpd,
Saudi Aramco keeps about 3 mbpd for its domestic refineries,
and exports another 5 million-plus bpd. By 2012, the company
will produce about 10.5 mbpd of its 12 mpd installed
capacity, keeping about 6 mbpd for domestic refineries,
leaving 4.5 mbpd for export as crude.

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Saudi Aramco in Step with Global Refining Trends
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14. (U) Saudi Arabia is in step with a number of global
refining trends in planning new projects for its downstream
sector. Periodic tight demand for refined products is
encouraging continued investment in new capacity, even as
Saudi Aramco has acknowledged it must expands in a more
efficient and environmentally friendly manner. Upgrades will
improve refinery margins, and the company also plans to
retire poorly performing assets. Saudi Aramco intends to
move more heavily into the export of refined products, while
continuing what is views as its primary obligation, ensuring
self-sufficiency in meeting domestic demand. Aramco is
moving to accommodate increasingly heavy global crude
feedstocks and the demand for increased refining capacity for
heavy fuels. Tighter fuel specifications in the U.S. and
Europe, propelled by environmental concerns are driving new
refining configurations and equipment purchases, even as
Saudi Arabia's own environmental laws are also forcing
greater attention to such concerns in the Kingdom.

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Comment:
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15. (C) However, beyond the usual commercial pressures and
new trends in refining, Saudi Arabia faces over the coming
decades a serious demographic challenge to provide basic
services, particularly water and power, to an exploding
population. Saudi Arabia is projected to grow from about 25
million to more than 40 million by 2025, even as the average
woman continues to bear 5.7 children in her life; 43% of the
current population is under the age of 15. The country
already relies on desalination for more than 70% of its
drinking water, but the life span of most of its
desalination plants, constructed in the oil boom of the
1970s, is coming to an end. Cities such as Jeddah have seen
unrest due to insufficient water during the last year, and
the SAG acknowledges the country is still depleting its
limited aquifers at an unsustainable rate. These population
pressures are profoundly shaping the future of Saudi Arabia's
downstream sector. Incorporating technological advances in
areas such as co-generation of power and water has become a
necessity for Saudi Arabia to meet surging demand for utility
services. The SAG also hopes to drive new employment for its
young population by increased investment and diversification
beyond upstream oil and gas production into more complex
petrochemicals and manufacturing. Fortunately for the SAG,
the oil price boom of recent years, prudently invested,
should allow it to build the infrastructure to provide for
its growing population.

OBERWETTER