DIVERSIFYING THE SAUDI ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 001302

SIPDIS

DEPT FOR ARP

E.O. 12958: DECL: 08/25/2018
TAGS: ECON EPET EMIN EINV ENRG SA
SUBJECT: DIVERSIFYING THE SAUDI ECONOMY

REF: A. 08 RIYADH 867

B. 08 RIYADH 1151

C. 08 RIYADH 1174

Classified By: CG JOHN KINCANNON FOR REASONS 1.4 (B) AND (D)


1. (C) SUMMARY: SAG efforts to economically diversify beyond
oil have drawn much attention during the current energy boom.
Projects such as the King Abdullah Economic City in Rabigh
and the Knowledge Economic City in Medina, with soaring goals
and price tags, spark debate as to whether the Kingdom can
succeed in becoming a twenty-first century economic leader
while navigating the challenges of the country's conservative
character. But while these idealistic ventures garner media
hype, work in the Eastern Province on more blue-collar
economic diversification projects shows great promise.
Jubail Industrial City, harnessing the power of the Saudi
petrochemical industry, is in the midst of significant
growth; Jubail II, estimated to attract more than 66 billion
USD in investment, is now in the second of four phases of
development. Meanwhile, only 90 kilometers up the Gulf from
Jubail, the Saudi Arabian Mining Company (Maaden) has begun
construction of facilities for the Minerals Industrial City
at Ras al-Zour. With fertilizer and aluminum smelting plants
as well as the Kingdom's ninth port already underway, Ras
al-Zour will play an integral role in the development the
Saudi mining industry, described by the Saudi Arabia General
Investment Authority (SAGIA) as a "third pillar" of the Saudi
economy. While petrochemicals and mining may help fulfill a
vision of economic diversification, the success of both
industries will rely on continued access to cheap gas
feedstock. END SUMMARY.

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Jubail Expansion: A Success Continues Growing
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2. (SBU) Founded in 1975 and managed since its inception by
Bechtel Corporation, the Jubail Industrial City has been one
of the greatest success stories in Saudi Arabia's economic
history and is today billed as the largest civil engineering
project in the history of the world. The SAG has invested
approximately 12.8 billion USD into Jubail's civil
infrastructure since its inception, a number easily eclipsed
by the nearly 60 billion USD in private industrial
investment, in addition to nearly 6 billion USD in private
investment in residential and commercial facilities. Jubail
I, as it is now known, accounts for seven percent of the
world's petrochemical production, over 11 percent of the
Kingdom's non-oil GDP, and over half of the Kingdom's total
foreign investment. And though Jubail II is now the
development focus, Jubail I continues growing, with some 123
new industries under either construction or design, in
addition to the 195 already in existence.


3. (C) When King Abdullah visited Jubail Industrial City in
June 2006 he inaugurated 20 new projects valued at some 22
billion USD, the opening salvo in the first phase of Jubail
II, a four phase project with a timeline of approximately 22
years and a goal of attracting more than 66 billion USD in
investment and creating 55,000 new direct and 330,000 new
indirect jobs. In a May 2008 visit to the Eastern Province
(EP),the King continued with Jubail inaugurations, launching
29 more industrial and development projects worth over 18
billion USD. From setting up the Middle East's first plant
for basic acrylic monomers - a 700 million USD project
involving U.S.-based Rohm and Haas Company - to continuing
production of ethylene and isopropanol, petrochemical
products make up the foundation of the Jubail II expansion.
Not all is the same as it was, however, as Mohammad al-Madi,
Royal Commission for Jubail and Yanbu (RCJY) Director of
Investment Agreements told EconOff in a June 23 meeting that
the SAG has heightened its focus on developing more complex,
higher value-added petrochemical products in an effort to
realize the greatest benefit from its resources.


4. (SBU) The petrochemical second pillar is not the only
effort putting Jubail at the forefront of the Kingdom's
growth, as the city will also be the site of the Saudi
Aramco/Total joint venture refinery planned to begin
operation in 2012. The refinery has a price tag that seems
to grow with every new report, current estimates putting it
over 12 billion USD, and will process 400,000 bpd of Arabian
Heavy crude as well as a new grade of crude from the offshore
Manifa field (Ref A). Additionally, Jubail will be the site
of a joint project between the Saudi Arabian Fertilizer
Company and SABIC - through Hadeed, the Saudi Iron and Steel
Company - to build a 1.7 million metric ton iron sheet plant
to meet growing regional steel demand (Ref B). This project

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is also expected to be completed in 2012. The success of
Jubail seems to know no limit, as when asked by EconOff about
a possible Jubail III, RCJY Director al-Madi confirmed that
preliminary conversations have begun on the topic.

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The Third Pillar: Maaden and Ras al-Zour
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5. (SBU) In addition to the three decades of development at
Jubail Industrial City, a more recent focus on mining and the
processing of metals has sought to create what Saudi Arabian
General Investment Authority Governor Amr al-Dabbagh has
described as a "third pillar" of the Saudi economy. Founded
in 1997 with only one gold mine in operation, the Saudi
Arabian Mining Company's (Maaden) July 2008 50 percent
Initial Public Offering on the Saudi Arabian Tadawul market
raised some 2.5 billion USD. The company now has five gold
mines in operation, and is in the process of developing a
sixth. Despite the Kingdom's traditional core competency in
gold mining, it is phosphate and aluminum that promise to
take Maaden to a new level of commercial success. Raw
phosphate mined from the al-Jalamid site, located near the
Iraq border, and bauxite mined from the al-Zabirah site in
Qassim Province will be transported along a 1,500 kilometer
railway line to Ras al-Zour, located along the Arabian Gulf
some 90 kilometers north of Jubail. Smelters at Ras al-Zour
will then process the minerals into di-ammonium phosphate and
aluminum, respectively. Both Ras al-Zour projects are joint
ventures, Maaden and SABIC joining to form the Maaden
Phosphate Company (MPC),and Maaden and Rio Tinto Alcan
joining to form AlumCo.


6. (SBU) The Maaden Phosphate Company, employing the services
of Australian firm Worley Parsons, will develop a fertilizer
complex that includes one ammonia, three sulfuric acid, three
phosphoric acid and four di-ammonium phosphate (DAP) plants.
Upon entering into operation in 2010 the complex will produce
some three million tons per year of DAP, making it the
world's largest producer at between ten and twenty percent of
the world's production. DAP is a fertilizer used on grain
and in horticulture, and some speculate that this new wealth
in fertilizer - a 25 billion USD global market - could play a
central role in the Kingdom's proposed efforts to invest in
foreign farming in hopes of gaining food security (Reftel C).
The development of the MPC project will cost an estimated
5.52 billion USD.


7. (SBU) Meanwhile, AlumCo, in which Maaden holds a 51
percent share, will build the Kingdom's first aluminum
smelter at Ras al-Zour. Originally forecast to cost 7
billion USD and have an annual production capacity of 650,000
tons, the cost has since been twice adjusted due to inflation
and a decision to increase capacity. Per a July 29 Maaden
statement, the smelter will now have an annual production of
740,000 tons and cost approximately 40 percent more, some
10.55 billion USD. The aluminum smelter, having suffered
severe project delays, is now scheduled to begin production
in 2012, more than a year later than anticipated.


8. (SBU) The Minerals Industrial City, the name given to the
fertilizer and aluminum facilities at Ras al-Zour, is
expected to draw approximately 25 billion USD in investment
and create close to 20,000 jobs. Meanwhile, construction of
Ras al-Zour port, through which the finished fertilizer and
aluminum will be exported to the global market, has been
awarded to the Chinese firm Harbor Contracting and
Engineering Company. At a cost of 586 million USD, the port
will be the Kingdom's ninth, and is scheduled to be completed
in 2010. Additionally, powering the Ras al-Zour campus will
require 2 power plants, producing 160 MW and 2400 MW,
respectively.

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But is this Diversification?
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9. (C) Though the petrochemical and mining industries have
been called the second and third pillars of a more
diversified Saudi economy, both industries rely on cheap gas
feedstock to maintain profit margins. Saudi Arabia - neither
a net importer nor exporter of natural gas - continues to
supply natural gas to SABIC and Maaden at the rate of 0.75
USD per million British thermal units (Btu),which compares
quite favorably to between 6 and 8 USD per million Btu on the
international market. And while there has been no talk of
increasing prices for feedstock, there are signs indicating a
lack of availability of natural gas is keeping growth from
reaching full potential. According to Naser al-Wahab of the

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Economic Development Department at the Royal Commission for
Jubail and Yanbu, the Commission's talk of focusing on high
value-added industries is to some degree due to a lack of
feedstock availability for primary industries. According to
al-Wahab, there has been a slowdown in concessions given to
companies applying for resource allocations in Jubail II due
to this lack of gas. As has been previously reported by
Post, though there is no lack of associated gas in Saudi
Arabia, the inability to find reserves of unassociated gas -
particularly in the Empty Quarter - has the potential to
limit the Kingdom's ability to produce quantities needed for
the energy-intensive industries it hopes to promote (Ref A).

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Comment
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10. (C) Despite concerns about feedstock availability, and
more general project challenges such as regional inflation
and a lack of available skilled labor, industry contacts
remain quite optimistic about the future of Jubail and Ras
al-Zour. While new economic cities garner headlines, Jubail
and Ras al-Zour will build on the Kingdom's proven expertise
in natural resource exploitation and may prove the greater
economic force for the near future.

(APPROVED:JKINCANNON)
PAIGE