SAUDI "GAS PRINCE" CONTROLS THE KINGDOM'S INDUSTRIAL

C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000074

NOFORN
SIPDIS

PASS TO NEA/ARP JOSHUA HARRIS AND EEB/ESC MICHAEL SULLIVAN

E.O. 12958: DECL: 4/8/2019
TAGS: SA QA PGOV ECON ENRG EPET
SUBJECT: SAUDI "GAS PRINCE" CONTROLS THE KINGDOM'S INDUSTRIAL
DEVELOPMENT

REF: A. 91 RIYADH 6692

B. 09 JEDDAH 62

C. 09 DHAHRAN 17

D. 08 RIYADH 130

E. 08 RIYADH 1624

F. 09 RIYADH 271

G. 08 RIYADH 867

H. 07 RIYADH 1950

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


1. (C/NF) KEY POINTS



-- HRH Prince Faisal bin Turki bin Abdulaziz Al Saud (FbT),
Advisor to the Ministry of Petroleum and Mineral Resources,
controls the highly subsidized gas feedstock allocations for the
petrochemical and power generation industries.



-- The prince is known as being incorruptible and intelligent,
but highly demanding and a tough negotiator when granting gas
allocations.



-- He utilizes his control over these allocations to require
businesses to invest in a wide variety of "social obligations"
consistent with the Kingdom's development goal of job creation
and training for Saudis.



-- Demand for the gas feedstock from the private sector is
virtually unlimited at the very low subsidized price.



-- Approximately 60% of Saudi Arabia's gas reserves are
associated with oil recovery, and exploration efforts to find
new commercially viable non-associated gas supplies have been
largely unsuccessful to date.




2. (C/NF) COMMENT



-- At the highly subsidized rate of US $0.75 per million Btu,
demand for Saudi gas feedstock is essentially unlimited.
Therefore, the "Gas Prince" can afford to be patient and
demanding when deciding to grant a gas allocation to any
individual investor. His marching orders from King Abdullah are
to maximize the value obtained from each unit of gas allocated.
More specifically, the prince's goal is to create jobs, thereby
easing high unemployment among the youth and warding off other
social ills related to an idle and young population. Developing
the Saudi workforce is essential to the long-term stability of
the Kingdom. The relatively little known Gas Prince will remain
a very influential player in determining Saudi Arabia's ability
to diversify their economy and employ tens of thousands of Saudi
youth in the coming decades.



End key points and comment.



THE GAS PRINCE




3. (C/NF) HRH Prince Faisal bin Turki bin Abdulaziz Al Saud
(FbT) has worked as an advisor to the Ministry of Petroleum and
Mineral Resources (MinPet) for more than two decades (ref A).
He was born in 1965 and attended Saudi Arabia's premier
university, King Fahd University of Petroleum and Minerals in
Dhahran. Saudi and foreign businessmen alike (quietly) talk
about the influential role he plays in MinPet; specifically that
he has absolute control over the heavily subsidized gas
feedstock allocations made to the petrochemical and power
generation industries. (Note: FbT also controls subsidized oil
feedstock allocations (at US $2.60 per barrel),used
predominantly in electricity power plants as fuel. However, gas
is significantly more sought after, as the value-adding

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petrochemical industry places a much higher value on the natural
gas allocations. End Note.)




4. (C/NF) FbT has a reputation in the Eastern Province (EP) of
Saudi Arabia as being incorruptible and intelligent but highly
demanding and a tough negotiator. He is known to have smart and
trustworthy advisors -- mainly Western -- working in his
Riyadh-based office. Several Saudi contacts describe FbT as
having the full support of King Abdullah, which makes him strong
enough to shield off corrupting influence from other members of
the royal family.




5. (C/NF) Several prominent business contacts have described FbT
as the "obstructive Gas Prince" and hold him responsible for
their difficulties in obtaining the discounted feedstock.
Khalid al-Fuhaid (protect),the president of the Midad Holding
Company, said the prince, with whom he has worked directly on
the gas allocation issue, is "clean [i.e., not corrupt], but he
complicates things [for the private sector]." Another prominent
businessman in the mining industry, Dr. Said al-Qahtani
(protect),said that the "problem" with feedstock allocations is
FbT, not a gas shortage. However, a high-level American
executive disagrees noting it is inevitable that gas will be
scarce when it is so heavily discounted, and he points to power
generators switching from gas to oil as evidence of a gas
shortage. In the end, he asserted, "The prince is tough, but
he's fair."




6. (C/NF) Several contacts described the long and arduous
process for obtaining an allocation from the Gas Prince. First,
just to meet with FbT, you must be affiliated with a large,
international oil or petrochemical firm or an influential Saudi
partner. Next, you must present a detailed business plan laying
out how you will meet your "social obligations" to the Saudi
people, specifying the number of jobs that will be created. FbT
also demands that you outline training programs that you will
establish for Saudis, possibly including building a new college
or training center. (Note: FbT demanded and Exxon Mobil agreed
to build a technical college from scratch. End Note.) Then,
FbT demands that you establish downstream operations, even if
they are not within your business's competency. Finally, only
after you have met all of the demands, he will direct MinPet to
order Saudi Aramco to grant you the gas feedstock allocation.
(Note: One contact said that the actual letter granting the
allocation is on Aramco letterhead, though they play no role in
the decision-making process. End Note.)




7. (C/NF) With the gas allocation in hand, you can request that
the Royal Commission of Jubail and Yanbu grant you a land
allocation in the industrial areas, but not before. The entire
process often takes years and each time you go back for a new or
increased allocation, FbT raises the social programs and job
creation requirements. Though several Saudi businessmen have
complained about the difficulty of obtaining an allocation,
several experienced executives in the petrochemical industry
noted that FbT is only looking out for the best interest of his
country - i.e., maximizing job creation, training opportunities
and economic prosperity from the Kingdom's natural resources.



PETROCHEMICALS AND ELECTRICITY DEMAND SUBSIDIZED GAS




8. (U) Saudi Arabia hosts two substantial petrochemical
production areas: The Royal Commission Cities of Yanbu in the
west (ref B) and the much larger Jubail in the east (refs C,
D). Current plans to expand the already massive industrial
cities have no shortage of interested investors. Saudi Arabia's
key to success in the petrochemical industry is the allocation
of cheap gas feedstock (predominantly ethane, but also methane
and other molecules). Fixed at US $0.75 per million British
thermal units (Btu),Saudi Arabia offers stable and cheap gas
prices for the petrochemical industry's most significant basic
input. In contrast, the much more expensive and volatile
internationally accepted benchmark for natural gas prices, the
Henry Hub spot price, has gyrated from more than US $13.00 per
million Btu in July 2008 to less than US $4.00 in March 2009.



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9. (U) The SAG's emphasis on diversifying the Saudi economy, as
well as its booming population growth, has substantially
increased the country's demand for electricity production. In
particular, new desalination, aluminum smelting, and other
industrial ventures consume increasingly large amounts of
electricity. Fuel oil and natural gas (primarily methane)
provide the bulk of electrical power generation, with a
preference for the cleaner burning gas. However, the insatiable
demand for gas has led the SAG to switch the fuel for many
electric power plants from scarce gas to plentiful oil and to
begin considering alternative sources of energy, such as nuclear
power (ref E) and solar technologies (ref F).




10. (C/NF) On March 31, Saudi Aramco's Senior Vice President for
Exploration and Production, Amin Nasser (protect),told the CG
and EconOff, "We can never keep up with demand for gas from the
private sector." In reference to the discounted rate of gas
Nasser added, "Seventy-five cents [per million Btu] is
attracting everybody, even Qataris!" (Note: The tiny Gulf
nation of Qatar has the third largest gas reserves in the world
and substantially more than Saudi Arabia. End Note.) Industry
analysts estimate that Saudi Arabia's demand for gas will
increase from 5.5 billion standard cubic feet per day (scfd) to
14.5 billion scfd (1 cubic foot of natural gas equals 1,028 Btu)
over the next twenty-five years.



THE NATURE OF SAUDI GAS




11. (U) Though Saudi Arabia is estimated to have the fourth
largest gas reserves in the world, about 60% are associated with
oil. Therefore, the amount of gas produced in Saudi Arabia is
closely linked to the amount of oil produced. Since Saudi oil
production topped out at approximately 9.7 million barrels per
day (mbpd) in July 2008, Saudi Aramco has cut production by
roughly 20% to a reported 7.8 mbpd in February 2009, thereby
significantly reducing associated gas production. In order to
make up for this decline in gas, the country has increased its
use of fuel oil as an alternative to natural gas in its power
plants. As a result, Saudi Arabia halted fuel oil exports three
months earlier than it usually needs to in order to cover the
annual spike in summer electricity demand. In fact, Saudi
Aramco announced earlier this year that it would import more
than 10 million barrels of fuel oil from Japan and India for the
power generation and transportation industries.




12. (U) Recent efforts to find new large, commercially viable
non-associated gas reserves have been unsuccessful (ref F).
(Note: "Non-associated gas" is found in reservoirs that contain
only gas and insignificant quantities of oil. End Note.) The
originally high expectation of finding non-associated gas in the
Empty Quarter of southeastern Saudi Arabia (Rub al-Khali) looks
bleaker with each passing day. Also, to date, most
non-associated gas reserves are ethane-poor, which is fine for
power generation (high methane content),but bad for the
petrochemical industry, which primarily relies on the ethane
molecule. Saudi Aramco's largest non-associated offshore gas
field, Karan, is scheduled to come on stream sometime in 2011,
ramping up to eventually produce 1.8 billion scfd (1.84 trillion
KENNY