CHEVRON LIKELY TO WIN RENEWAL OF PNZ CONCESSION

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000704

SIPDIS

SIPDIS

NEA FOR DAS GGRAY
DEPT OF ENERGY PASS TO MWILLIAMSON
TREASURY PASS TO A/S CLOWERY
CIA PASS TO TCOYNE

E.O. 12958: DECL: 04/30/2018
TAGS: EPET ENERG SA
SUBJECT: CHEVRON LIKELY TO WIN RENEWAL OF PNZ CONCESSION

REF: 2007 RIYADH 1624

Classified By: DCM MICHAEL GFOELLER FOR
12958 1.4 B, D, AND E

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Summary
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1. (C) After almost two years of protracted negotiations,
offers, and counteroffers, Chevron finally sees light at the
end of the tunnel in its quest to renew its joint venture
Partitioned Neutral Zone (PNZ) concession. Arabian Chevron
Business Manager Mohammed Ayaz has confirmed to the Embassy
that the firm is likely to win renewal of its operations for
a 30-year term. Resolution of the Kuwait National Petroleum
Company (KNPC) refinery siting issue seems to have cleared
the way for the final extension of the Chevron concession.
While the timeline for a signing ceremony remains under
development, Ayaz indicated Chevron hopes to bring CEO
O'Reily to the region to finalize the deal by late May or
early June. Chevron has asked us to maintain this
information as confidential until it is announced publicly.
End summary.

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Renewal Agreement Caps Two Years
of Negotiation
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2. (C) While Chevron does not yet have a written
agreement with the SAG, Ayaz has indicated they have a
"gentlemen's agreement" with the Ministry of Petroleum and
Mineral Resources which they hope to tee up for signing by
June. Chevron's 40-year concession for the last foreign
upstream oil operations in the KSA was due to expire in 2009.
As of last fall, Ayaz was not optimistic about the firm's
chances of success (ref A). Since then, resolution of the
siting issue for the Kuwait National Petroleum Company (KNPC)
refinery, and sustained high level attention from senior
Chevron executives appear to have turned the tide.

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Kuwait Refinery Dispute Clouded Extension
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3. (C) KNPC had proposed a 600,00 barrel per day (bpd)
refinery on the site of existing and future Chevron
operations in the PNZ. Chevron Arabia has continually
maintained the refinery would place at risk their ability to
operate their PNZ oil concession. Over the last six months,
Assistant Petroleum Minister Prince Abdulaziz and Chevron
proposed three alternate sites. The Kuwaitis finally appear
to have settled on one site, clearing the way for the final
extension of the Chevron concession.

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Steam Flood Technology Helped
Chevron Clinch the Deal
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4. (SBU) Throughout the negotiation, Chevron has emphasized
the importance of their proprietary steam flood technology to
re-securing the concession. The PNZ's Wafra Main Area and
South Umm Gudair reservoirs (Ratawi, Wara, and Burgan fields)
provide nearly 70 percent of the PNZ's approximately 500,000
barrel per day production, and produce predominantly light
crude. However, much of the heavy crude in reservoirs such
as Eocene currently lies inaccessible. Chevron has
successfully concluded a Small Scale Test for steamflood
technology in the PNZ. It has now embarked on the Large
Scale Pilot, in which it is carrying out detailed design,
engineering, and equipment procurement. Chevron has
successfully utilized steam-flood technology in California in
sandstone, but testing in the PNZ is its first use of the
technology in limestone carbonate. If successful,
utilization of steam flood technology in carbonate reservoirs
offers the opportunity for enhanced extraction of heavy oil
not only throughout the PNZ, but throughout similar
formations in Saudi Arabia, Kuwait, and the region.

RIYADH 00000704 002 OF 002



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Comment
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5. (C) Chevron's extension of its concession is an
important win for U.S. business. Chevron operations are the
last foreign operations in the upstream oil in Saudi Arabia.
They provide at least a toehold for re-entry if and when
Saudi Arabia ever decides to open its upstream to foreign
investment. While we don't view such an event as likely
under Minister Naimi or this generation of leadership, a new
generation of leadership could see the advantages in opening
the sector to competition.


6. (C) More significantly for the present, Chevron's
steam-flood technology offers the application of proprietary
American systems which neither Saudi Aramco or Kuwait
National Petroleum Company could bring to the table.
Chevron's technology will prove a catalyst to access new
reservoirs and higher rates of production in the PNZ than
otherwise possible. Steam flood offers a win-win as energy
markets push to identify new sources of supply, and the
Saudis appear to be straining to maintain production. Energy
Intelligence estimates that international oil companies now
control a scant 7 percent of the world's oil reserves. For
U.S. firms, the lesson seems clear. Despite Chevron's long
history in the Kingdom - it discovered oil here in the 1930s
as Standard Oil of California - access to proprietary,
cutting-edge technology proved key to maintaining its
position in Saudi Arabia.

FRAKER