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 DHAHRAN 00000074 001.2 OF 003 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 DHAHRAN 00000074 002.2 OF 003 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. DHAHRAN 00000074 003.2 OF 003 ¶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