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 DHAHRAN 00000017 001.2 OF 003 CLASSIFIED BY: Joseph Kenny, Consul General, EXEC, DOS. REASON: 1.4 (b),(d) ¶1. (C) Key Points: -------------- -- 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: -------------- -- 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 �00A;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 DHAHRAN 00000017 002.2 OF 003 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). DHAHRAN 00000017 003.2 OF 003 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