Identifier
Created
Classification
Origin
09DHAHRAN228
2009-08-31 14:38:00
CONFIDENTIAL//NOFORN
Consulate Dhahran
Cable title:  

SAUDI ARAMCO-DOW CHEMICAL $24 BILLION PETROCHEMICAL PROJECT

Tags:  ECON ENRG EPET PGOV SA CH 
pdf how-to read a cable
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ZNY CCCCC ZZH
P 311438Z AUG 09
FM AMCONSUL DHAHRAN
TO RUEHC/SECSTATE WASHDC PRIORITY 0267
INFO RUEHZM/GCC C COLLECTIVE
RUCPDOC/USDOC WASHDC PRIORITY 0004
RUEHRH/AMEMBASSY RIYADH PRIORITY 0244
RUEHJI/AMCONSUL JEDDAH PRIORITY 0049
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0004
RUEHDH/AMCONSUL DHAHRAN 0349
C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000228 

NOFORN
SIPDIS

DEPT FOR NEA/ARP JOSHUA HARRIS AND JEREMY BERNDT

E.O. 12958: DECL: 8/31/2019
TAGS: ECON ENRG EPET PGOV SA CH
SUBJECT: SAUDI ARAMCO-DOW CHEMICAL $24 BILLION PETROCHEMICAL PROJECT
MOVING FORWARD

REF: A. A. 07 RIYADH 1006

B. B. DHAHRAN 74

DHAHRAN 00000228 001.2 OF 003


CLASSIFIED BY: Kevin Kreutner, Acting Consul General, EXEC, DOS.

REASON: 1.4 (b),(d)
SUMMARY

-------



C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000228

NOFORN
SIPDIS

DEPT FOR NEA/ARP JOSHUA HARRIS AND JEREMY BERNDT

E.O. 12958: DECL: 8/31/2019
TAGS: ECON ENRG EPET PGOV SA CH
SUBJECT: SAUDI ARAMCO-DOW CHEMICAL $24 BILLION PETROCHEMICAL PROJECT
MOVING FORWARD

REF: A. A. 07 RIYADH 1006

B. B. DHAHRAN 74

DHAHRAN 00000228 001.2 OF 003


CLASSIFIED BY: Kevin Kreutner, Acting Consul General, EXEC, DOS.

REASON: 1.4 (b),(d)
SUMMARY

--------------




1. (SBU) Saudi Aramco project finance managers confirmed that
the $24 billion joint venture (JV) with Dow Chemical is moving
forward, despite the economic crisis. In return for access to
cheap, discounted feedstock (primarily ethane and naphtha),Dow
is sharing with Aramco a number of the "crown jewels" of the
chemical company's most advanced technology. Although many of
the Dow-Aramco chemical products will not directly compete with
those of the national petrochemical giant SABIC, both companies
will be vying for scarce feedstock allocations from the Ministry
of Petroleum and Minerals (MinPet). The large integrated
refinery and petrochemical complex's products will be marketed
towards the GCC and Asia. END SUMMARY.



DOW-ARAMCO PROJECT MOVING FORWARD

--------------



2.(SBU) Saudi Aramco's $24 billion dollar JV with U.S.-based Dow
Chemical will reportedly result in one of the largest single
phase petrochemical complexes in the world, at Ras Tanura on the
Persian Gulf coast a few dozen miles north of Dhahran. (NOTE:
Ref A provides detailed information on the specifics of the
Dow-Aramco project. Cost estimates of the JV have not been
finalized, but range from $20 to $27 billion. END NOTE.)
However, the global economic crisis has hit the petrochemical
industry hard. According to a recent Saudi bank report,
approximately $27 billion worth of petrochemical projects were
put on hold in Saudi Arabia this year alone. In addition, in
December 2008, a $17 billion joint venture between Dow and
Kuwait's state-owned Petrochemicals Industries Company
unexpectedly collapsed. The proceeds from the Kuwaiti deal were
slated to pay down debt resulting from Dow's recent acquisition

of Rohm & Haas, a petrochemical firm. This perfect storm has
raised industry speculation about Dow's ability to raise its
share of the substantial up-front capital investment required
for the Saudi venture.




3. (C/NF) In an August 24 meeting with EconOff, a Saudi Aramco
project finance manager said that both Aramco and Dow had
already "sunk $500 million that I can tell you about [into the
project]." "The project will get done, there is too much on the
line for both [Dow and Saudi Aramco]," he said, adding that both
Aramco and Dow are fast approaching the point where too much
money has been invested to "walk away" from the deal. In an
August 26 teleconference, Lisa Schroeter (strictly protect),Dow
Chemical's Director for International Policy, told EconOff that
approximately 900 Dow employees are already working on the JV,
indicating Dow's seriousness to carry out the project.



DOW GETS CHEAP FEEDSTOCK, ARAMCO GETS HIGH-END TECHNOLOGY

-------------- --------------




4. (C/NF) Saudi Arabia is a significant player in the
petrochemical industry; it currently accounts for 7% of the
global supply of basic petrochemicals, and its share is growing.
The key to the Kingdom's success has been access to heavily
discounted gas feedstock, primarily ethane, which sells at $0.75
per million British thermal units (Btu). The consistent flow of
feedstock at a cheap fixed price is particularly attractive to
an industry with huge capital outlays that often require several
decades to see a return on the initial investment. Schroeter
confirmed this when she said, "Ras Tanura is key because the
fixed price [of feedstock] is reliable."




DHAHRAN 00000228 002.2 OF 003



5. (C/NF) According to the Aramco project finance manager, in
return for the cheap ethane and naphtha feedstock allocations,
Dow will share the "crown jewels" of the chemical giant's
technological know-how. These downstream technologies were
specifically chosen because they will maximize job creation in
the Kingdom. However, the final set of technologies agreed upon
had to be approved by MinPet before the JV would be granted a
feedstock allocation. The gate keeper to the gas allocations at
MinPet is Prince Faisal bin Turki Al-Saud (Ref B). In the end,
the prince granted the initial ethane allocation, though this
process must be renewed annually until a final investment
decision is made and construction of the complex begins.



ARAMCO STEPPING SQUARELY ON SABIC'S TURF

--------------




6. (C/NF) Notwithstanding Aramco's $10 billion Petro Rabigh JV
with Japanese powerhouse Sumitomo Chemical on the Red Sea coast,
the Dow project is Aramco's biggest and boldest move into the
petrochemical market -- a domain largely dominated by the
Kingdom's other major national company, Saudi Basic Industries
Corporation (SABIC). In a meeting earlier this year, Aramco CEO
Khalid al-Faleh said that in most cases the Dow-Aramco JV would
not be going "head-to-head" with SABIC, but that a "little
competition" is always good. SABIC executives have made similar
comments. Hamad al-Madi, General Manager for SABIC Eastern
Province, said that they view the Dow JV as a "challenge, not an
obstacle" and that a "monopoly kills the economy."




7. (SBU) However, despite the polite commentaries from Saudi
Arabia's two largest state-owned companies, the petrochemical
industry is competing for the same precious feedstock: gas
(ethane and methane) and liquids (naphtha, butane, and propane).
In Saudi Arabia, this competition is fierce due to the heavily
discounted price of the feedstock, particularly the increasingly
scarce ethane gas. Whereas SABIC has historically invested
heavily in ethane-based chemicals, the Dow-Aramco JV will use a
more balanced feedstock mix of ethane, methane, naphtha and
natural gas liquids. Nevertheless, the Dow-Aramco JV will
certainly increase the demand for the Kingdom's scarce
hydrocarbon resources.



DOW EYES THE CHINESE MARKET, WARY OF POLITICAL FALLOUT

-------------- --------------




8. (SBU) With Saudi Arabia's rapid ascent as a major
petrochemical producing nation, the Kingdom is increasingly in
competition with China, which is also a major petrochemical
player. Whereas Saudi Arabia's comparative advantage lies with
cheap feedstock, China has cheap (and skilled) labor and is
closer than Saudi Arabia to their shared destination market,
Asia. Recently, tensions have surfaced with Chinese officials
accusing SABIC of "dumping" chemicals on the Chinese
marketplace.




9. (C/NF) Dow's Schroeter told EconOff that the Aramco JV will
have two primary target markets: the GCC and Asia. (NOTE:
Schroeter made this point to highlight that the Aramco JV would
not compete directly with the domestic U.S. petrochemical
marketplace. END NOTE.) She also voiced some concern about the
ramifications of China's anti-dumping accusations in the
Sino-Saudi commercial relationship. However, as Saudi Arabia's
share of foreign oil sales to China continues to increase (it
reportedly was the country's largest supplier of oil in July,
overtaking Angola),we expect commercial ties between the
countries remain strong.



DOW AND ARAMCO VOICE VISA CONCERNS


DHAHRAN 00000228 003.2 OF 003


--------------




10. (SBU) Reflecting similar concern raised by Dow employees in
Ref A, both Schroeter and Aramco officials were apprehensive
about difficulties in securing U.S. business visas for Saudi
nationals needing to travel to the United States. Due to long
visa appointment wait times and Security Advisory Opinion
processing times, EconOff recommended that Aramco and Dow work
early to identify the Saudi nationals who will need to travel to
the U.S. for the JV. Operating within the consular section's
guidelines, the Consulate will remain flexible to help
facilitate this strategically important multi-billion dollar
U.S.-Saudi joint venture.



COMMENT

--------------




11. (C) Competition between Aramco and SABIC will intensify as
the Saudi national oil company giant intensifies its presence in
the petrochemical sector. The decision for Aramco to move into
petrochemicals was a profit-driven business decision. Unlike
the refining sector, which requires large, risky investments
with thin profit margins, integrating a refinery with a
petrochemical complex allows for more value-added products,
thereby spreading the initial capital costs over a broader
product line with higher margins. Although this move makes
economic sense, an important strategic decision such as this
must also receive the blessing from the highest levels of the
Saudi government. Therefore, the decision for Aramco to compete
with SABIC in the petrochemical industry is just as much a
political decision as it is an economic one. Nevertheless, Post
believes that the two giant government-controlled firms (the SAG
owns 100 percent of Aramco and 70 percent of SABIC) will
co-exist and prosper in the Kingdom, as the SAG would not let
either firm fail or squander profits fighting the other over the
spoils of the Kingdom's patrimony. END COMMENT.
KREUTNER