AGGRESSIVE INDUSTRIAL EXPANSION GOING FORWARD IN JUBAIL

C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000017

SIPDIS

PASS TO NEA/APR FOR JOSHUA HARRIS

E.O. 12958: DECL: 3/8/2019
TAGS: ENRG EPET ECON EINV SA PGOV
SUBJECT: AGGRESSIVE INDUSTRIAL EXPANSION GOING FORWARD IN JUBAIL

REF: A. 09 JEDDAH 62

B. 09 RIYADH 216

C. 08 RIYADH 1302

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CLASSIFIED BY: Joseph Kenny, Consul General, EXEC, DOS.
REASON: 1.4 (b),(d)


1. (C) Key Points:

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-- The massive industrial expansion plan for Jubail, known as
Jubail II, is going forward despite the economic crisis and is
currently nine years ahead of its original schedule.



-- Concessions for cheap ethane and methane feedstock for
petrochemical plants have not come as quickly as some investors
would like, which could jeopardize the rapid growth expected for
Jubail II.



-- Business opportunities for American companies remain
plentiful in primary and secondary petrochemical industries, as
well as infrastructure projects and support businesses.




2. (C) Comment:

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-- Post continues to hear complaints from business leaders, both
Saudi and foreign, about the increasing difficulty securing
concessions of cheap gas (ethane and methane) feedstock critical
to the petrochemical industry. The Kingdom has the world's
fourth largest proven gas reserves (4% of total) but exports
none of it; in part because of the heavy subsidies it provides
local users, there is a domestic shortage.



-- The so-called second and third pillars of the Saudi
development strategy to diversify beyond oil, petrochemicals and
mining, rely heavily on this cheap natural gas to maintain their
competitive advantage. Without significant new discoveries of
non-associated ethane and methane gases (in our view, unlikely),
it appears that further Saudi development in these sectors may
be cut short. We think the Saudi government has not yet thought
about, much less grappled with, this major obstacle to its
diversification strategy.



End key points and comment.




3. (U) THE ROYAL COMMISSION. On February 3, Consul General
Kenny, EconOff and CommOff were hosted at the headquarters for
the Royal Commission for Jubail and Yanbu (RC). The RC's
mandate is to provide the physical, educational, and social
infrastructure needed for companies to invest in the industrial
city (ref A). The RC is an autonomous agency with a board of
directors that reports to the Council of Ministers (cabinet) and
provides a single point of contact for investors in lieu of
interacting with a half dozen ministries separately. According
to the RC and confirmed in a January 2009 MEED article, Jubail
is the source of an incredible 70 per cent of all non-petroleum
Saudi exports and represents 7 per cent of worldwide
petrochemical production.




4. (U) LOCATION. LOCATION. LOCATION. Jubail's strategic
location on the Persian Gulf approximately 100 kilometers north
of the Dammam metropolitan area gives it two major advantages:
proximity to sources of energy and raw materials for refining
and petrochemical production, as well as access to Asian markets
via international sea lanes through the Gulf.




5. (U) JUBAIL II MOVING FORWARD. Jubail II, the colossal 60
square kilometer expansion of Jubail Industrial City, has

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received more applications from potential investors than
available land. The originally scheduled project completion has
been moved up nine years from 2024 to 2015. The RC claims that
the major effect of the economic crisis so far has been positive
with reduced project costs due to falling labor and material
prices. In fact, one RC official said that some projects may
see savings of up to 30% by re-bidding contracts. The RC's
Industrial Development Manager said that most investors in
Jubail see a return on investment within five years. The RC
anticipates that Jubail II will attract a total private sector
investment of US $56 billion, providing direct employment for
55,000 people.




6. (C) FISHING FOR MORE JOBS FURTHER DOWNSTREAM. In an effort
to create more value-adding jobs in Kingdom, the Ministry of
Petroleum and Mineral Resources (MPMR) is pushing investors to
produce more downstream products on site at Jubail. However,
one well-placed source at the RC said in private that many
foreign investors are "hesitating to go too far downstream" as
those industries are not within their core competencies and
normal scope of operations. He also said that the MPMR is
threatening to withhold the all-important cheap gas feedstock
concessions unless companies push further downstream in their
activities. (Note: Prospective companies are often required to
meet certain "social responsibilities," such as providing job
training or building recreational facilities, before rights to
the feedstock are granted. End note.) In Jubail, the primary
competitive advantage -- and primary reason why investors flock
there -- is access to cheap ethane and methane concessions at a
fixed price of $0.75 per million BTU, a fraction of the
international market price of around $4.00 per million BTU.




7. (U) BUILDING ON PAST FOUNDATIONS. The RC invested nearly US
$13 billion of public funds in developing Jubail since it was
established by royal decree in 1975. Many of those initial
investments -- seawater cooling channels, roads, the port,
housing, and educational facilities -- will benefit the Jubail
II expansion at hardly any additional cost. The Bechtel
Corporation was instrumental in planning Jubail and is currently
contracted by the RC to run the city's overall day-to-day
operations.




8. (U) A PLEA FOR AMERICAN INVESTORS. Echoing calls from nearly
all major Saudi industrialists in the region, RC officials
communicated their preference to work with U.S. companies. They
cited their college experience in the United States, strong ties
with Aramco, and similar corporate cultures as all reasons why
they prefer to work with American businesses. They also
highlighted the opportunity for companies not directly
associated with petrochemicals to do business in Jubail. For
example, RC officials are traveling to the U.S. later this year
to sign a contract with an American company to provide traffic
signal technology for the entire industrial city.




9. (U) HIGH ENVIRONMENTAL STANDARDS FOR A DIRTY INDUSTRY. Just
before seeing the immense steel industrial structures dominating
Jubail's skyline, one first notices the hazy, brown smog
trailing off to the southwest of the city. The residential
community is situated to the northeast of the industrial areas,
upwind from these emissions. Nevertheless, the RC officials say
that the industrial city meets or exceeds California air and
water pollution standards and has won several regional awards
for its environmental record. Sewage and waste water is treated
before being released into the Gulf or used for irrigation in
the well-planned public gardens and road median plots. The RC
constantly monitors pollution levels in the air, ground water,
and along the coast.




10. (U) VOCATIONAL KNOWLEDGE IN DEMAND. The all-male Jubail
Industrial College awards three-year associate degrees in fields
related to chemical technology, mechanical and manufacturing
engineering, electrical and electronic studies, and information
systems. Though graduates have the option to pursue a final two
years of a bachelor degree at a Saudi university, many enter the
labor force directly. In fact, one RC official said that local
businesses have a higher demand for vocational graduates than
university graduates. There is also a Jubail Technical
Institute (JTI) that trains high school graduates for a period
of one and one-half years (or the equivalent of three academic
terms and awards recognized certificates for this training).

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For women, the Jubail College of Education for Girls was
established. Currently the school confers bachelor degrees in
Physics, Mathematics, Computers, English Language and
KENNY