EX-IM SIGNS LANDMARK DEAL IN SAUDI ARABIA

UNCLAS RIYADH 000829 SIPDIS DEPT FOR NEA/ARP AND EEB/CBA E.O. 12958: N/A TAGS: ECIN ECON EFIN ENRG SA SUBJECT: EX-IM SIGNS LANDMARK DEAL IN SAUDI ARABIA ¶1. (U) On June 22, U.S. Export-Import Bank Board of Directors member Bijan R. Kian signed the final documents for the financing of $912 million for the sale of 23 General Electric (GE) turbines to the Saudi Electricity Company (SEC). SEC will use the turbines to deliver power to Riyadh and the cities of Qurrayah and Faras in the Eastern Province. Other co-signers included William Brown, Finance Group Director for Export Development Canada (EDC)--which provided roughly $200 million in direct financing--and SEC CEO Ali Saleh Al-Barrak. The GE turbines are manufactured in Schenectady, New York and Greenville, South Carolina by approximately 6,000 workers at two plants. The 23 turbines will produce nearly three gigawatts of electricity. ¶2. (U) At the signing ceremony, SEC CEO Al-Barrak told the Charge (Ambassador Erdman) that the turbines are sorely needed, since the Kingdom's electricity consumption is increasing about eight per cent per year. This heavy consumption stems in part from the fact that retail electricity prices are heavily subsidized, with 60 percent of Saudi consumers paying on average only SR 100 (USD27) per month. "Saudis never turn off their air conditioners, even when they are on travel or vacation," Al-Barrak lamented. Seasonal usage varies greatly with winter charges falling as low as SR 15 ($4) per month. ¶3. (U) Saudi electricity charges, he added, are roughly half the average among Gulf Cooperation Council (GCC) members. Some GCC states charge expats at commercial rates while a subsidized price is reserved for nationals. Such a two-tier system is impractical in the Kingdom where, unlike in other GCC states, nationals form the large majority of the population. ¶4. (U) Al-Barrak explained that electricity producers like SEC receive oil and natural gas at subsidized rates. Consequently, Saudi Aramco has little incentive to prospect for and develop environmentally friendly natural gas, which is destined exclusively for domestic uses. Al-Barrak noted wryly that given the burgeoning domestic consumption, the Kingdom would eventually have no oil left for export. ¶5. (U) The Saudi government, however, is fully aware of the gravity of the subsidies problem, which also affects water consumption, Al-Barrak said. Asked if the government planned to phase out the subsidies, he said that the Kingdom has developed a plan to gradually reduce electricity subsidies over the coming years, but gave no indication when the plan would be put into effect. ¶6. (U) Comment: The highly inefficient system of subsidized water, oil, and natural gas prices for domestic consumers and industry are among the Kingdom's most intractable structural economic problems. A reduction in the subsidies is inevitable, but will demand deft political handling. End Comment. ¶6. EX-IM Board of Directors member Bijan R. Kian has cleared this cable. ERDMAN