Identifier
Created
Classification
Origin
09RIYADH903
2009-07-10 13:52:00
CONFIDENTIAL
Embassy Riyadh
Cable title:  

SAUDI OPEC GOVERNOR PROVIDES CODEL TOUR D'HORIZON

Tags:  EPET ENRG PREL OVIP OPEC SA 
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VZCZCXRO4341
PP RUEHDE RUEHDH RUEHDIR
DE RUEHRH #0903/01 1911352
ZNY CCCCC ZZH
P 101352Z JUL 09
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 1141
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 04 RIYADH 000903 

SIPDIS

DEPT FOR NEA/ARP, EEB/ESC/IEC(SULLIVAN),AND INR/EC(WOOD)

E.O. 12958: DECL: 07/08/2019
TAGS: EPET ENRG PREL OVIP OPEC SA
SUBJECT: SAUDI OPEC GOVERNOR PROVIDES CODEL TOUR D'HORIZON

Classified By: DCM David Rundell, reasons 1.4 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 04 RIYADH 000903

SIPDIS

DEPT FOR NEA/ARP, EEB/ESC/IEC(SULLIVAN),AND INR/EC(WOOD)

E.O. 12958: DECL: 07/08/2019
TAGS: EPET ENRG PREL OVIP OPEC SA
SUBJECT: SAUDI OPEC GOVERNOR PROVIDES CODEL TOUR D'HORIZON

Classified By: DCM David Rundell, reasons 1.4 (b) and (d).


1. (SBU) Summary and comment: Congressman Alan Grayson
(D-FL) met OPEC governor for Saudi Arabia Dr. Majid Al-Moneef
with DCM June 29. Moneef provided an unusually detailed tour
d'horizon of his views on the oil business and OPEC. He
expressed satisfaction that the price of oil was moving back
up towards the $70 - $80 range Saudi leaders say they
consider fair, although he noted with mild amazement that the
Kingdom's excess production capacity has risen from its
longtime target of 1.5 - 2 million barrels of oil per day to
around 4 million. Overall the U.S.-educated OPEC governor
seemed confident but not complacent about the health of his
country's most important economic sector. End summary and
comment.

OPEC GOVERNOR BRIEFS CONGRESSMAN
--------------


2. (SBU) Congressman Alan Grayson introduced himself to Saudi
OPEC governor Dr Majid Al-Moneef as a member of the House
Financial Services Committee, saying he long had been
interested in Saudi Arabia and energy and was pleased to
visit the country as part of his first official visit abroad.

SAUDI ENERGY POLICY: MAINTAIN
EXCESS PRODUCTION CAPACITY
--------------


3. (SBU) Moneef said that the Kingdom was "important" not
just because of its vast oil reserves and huge production but
because of the ability it had demonstrated over many years to
increase production capacity while international demand has
grown. The Kingdom, he said, has been able to avoid
political and technical problems that have hampered
production in other oil producing countries, allowing it to
provide needed increments when others could not.


4. (C) Moneef explained that the fundamental tenet of Saudi
Arabia's energy policy for decades has been to maintain a 1.5
to 2 million barrels of oil per day (mbpd) excess production
capacity. He said the Kingdom's excess production capacity
today is approximately 4 mbpd, with current production around
8 mbpd. Comparing this large surplus to the country's

average daily production in the 1980s, which he described as
"around 5" mbpd revealed just how large this idle capacity
is, and how expensive it is to maintain. Nevertheless, he
explained, "We were able to use our spare capacity during the
Iranian revolution, the Iran-Iraq war, the Iraq-Kuwait war,
and the turmoil in Venezuela in 2003" to stabilize oil
markets. He said the secret of Saudi success was to continue
building and maintaining additional production capacity even
when demand has fallen. He emphasized, "We don't mothball,"
and to the contrary, he said, Saudi Arabia is the "Federal
Reserve of oil."


5. (C) Financial Services Committee Professional Staff Member
Dennis Shaul asked how much of the current 4 mbpd excess
production capacity was heavier grades of crude. Moneef
replied that overall 65% of Saudi crude produced was Arab
Light, and the country sought to maintain this ratio, even
last year when it cut production relatively deeply. Only if
it attempted to produce at levels approaching its maximum
sustained production capacity would that ratio begin to shift
significantly in the direction of heavier grades of crude,
Moneef said. He concluded that although current Saudi policy
means the Kingdom is stuck with 4 mbpd excess production
capacity "slack,... at least we have it."

OPEC DECISIONMAKING
--------------


6. (SBU) Asked if it was harder for OPEC to agree on
production increases or decreases, Moneef explained that most
OPEC members were producing at or near their marginal
capacity, and Saudi Arabia was one of the few countries that
still had flexibility on production decisions. Consequently,
the Kingdom had increased production from 2002 to 2008 while
other countries had been unable to do so. Nevertheless,
decreasing production was hard for most other OPEC members,
since they did not have the Kingdom's fiscal discipline or
financial freedom to reduce oil sales voluntarily. Moneef
said most OPEC members were willing to increase production,
"even Angola and Libya," but in general terms, investment in
these countries has been insufficient.


7. (C) Asked which countries were hardliners within OPEC (in
terms of opposing production increases),Moneef replied that
this had changed over time; however, in addition to Iran and
Venezuela, which he said both were "happy to see oil at
$100," Libya increasingly was joining the hardliners' camp as
a vocal opponent of proposals to increase production. Saudi
Arabia, he claimed, frequently had to remind other members
that the agreement that founded OPEC set an objective to keep
the oil market balanced, and not to maximize prices.


8. (C) When asked about quotas, Moneef replied that OPEC
meetings result in decisions on production levels but do not
impose quotas. He told the Congressman that OPEC identified
production targets for its members by studying world demand
and production among non-OPEC members and then allocating
production for members at levels that in theory would fulfill
the residual demand. Asked if therefore OPEC production
deliberations occurred "automatically," Moneef replied, "In
practice, yes, but coordination and meetings remain
necessary." He continued, "The market does not work on its
own. When we want to increase production, we talk to our
customers and call an OPEC meeting... There's a decision
element to it." Asked which member countries had outlooks
similar to the Saudis within OPEC. Moneef cited the GCC, as
well as "Nigeria, sort of."

GOVERNOR SAYS INTERNATIONAL DEMAND
SHAPES SAUDI PRODUCTION AND PRICING
--------------


9. (C) Moneef said that in early 2008 when oil prices were
soaring to record levels, demand was falling, and although
current demand for oil has recovered somewhat from when it
"tanked" later in 2008, it still remains "below 2008 levels."
The OPEC Governor estimated that overall there had been a
3.2 mbpd decrease in demand. Chinese demand for oil was up
significantly, with U.S. demand up somewhat less. Moneef
said that U.S. requests had declined from mid-2008 to May
2009 but now were picking up. He said incremental demand was
expected to mainly be from China, and to a lesser extent the
U.S. but that European demand for Saudi crude was expected to
drop.


10. (C) Moneef said the price formula that Saudi Aramco sent
its customers had resulted in fewer requests (in Aramco
parlance, "nominations") for Saudi oil. As a result, the
OPEC governor said, the Saudis cut production 1.7 mbpd and
the rest of the reduced demand had been absorbed by
production cuts in other countries. Moneef asserted that
Saudi Arabia does not typically "cut production" but instead
raises prices to reduce demand. Aramco customers, he said,
mainly want Arab Light oil, and often they are reluctant to
buy the medium/heavy oil that the Saudis sell in addition to
higher grade product. However, he said over the past two
months, nominations had gotten "better, much better."


11. (C) Moneef predicted that the current 2.5 mbpd reduction
in international demand would not persist, since it was due
to the international financial crisis, which he said would be
over in a few years. Chinese demand in particular would pick
up soon. Nevertheless, in 10 or 15 years oil prices would
return to record levels set last year. European production
was declining. Maybe Abu Dhabi could increase somewhat, and
the Iraqis even more. Russia would not increase production.
Brazil would be able to increase production further by
exploiting unconventional and deep-sea reserves.


12. (C) Asked whether it was true Saudi oil only cost $1-2
per barrel to produce (excluding indirect costs),Moneef
emphasized that Aramco's costs had increased significantly in
recent years. Operating costs were higher (labor, materials,
and technology),and it was necessary to drill more
development wells than before. The cost to bring each new
barrel of oil to market, he said, had grown much more
expensive. Development costs for the Shayba field in the
Saudi Empty Quarter had cost $5K/barrel, which he estimated
translated to $5 billion overall. In any case, Saudi
marginal production costs for petroleum differ by field. The
Khurais field brought back on stream had been producing
before and therefore production infrastructure already was in
place. In contrast, the isolated Shayba field in the
Kingdom's barren southeastern Empty Quarter had double or
even triple the operating cost. Although capital costs were
increasing, the OPEC governor acknowledged that Saudi "and
someday Iraqi" oil still had the lowest production costs of
any country.


13. (C) Asked what oil price Saudi Arabia assumed for
planning, Moneef said the Finance Ministry and MinPet used
separate numbers and for the latter the estimates varied over
time. The 2004 MinPet price plan assumed $40/barrel, he
said. Assumptions for the Manifa field were "higher," while
the price for Shayba had been based on a conservative price
of $15-18/barrel. Asked for Saudi oil's break even price,
Moneef said that last year the Saudi budget assumption was
$45/barrel, but that was based on the government running a
"small" deficit. For a balanced budget, he said the price
would need to be $55/barrel.

DECLINE RATES AND PEAK OIL
--------------


14. (C) Asked about the peak oil theory, Moneef said the
decline rate for Saudi oil fields averaged 4% for the
Kingdom, compared to 6-8% worldwide. He said "peak oil
exists since petroleum is a depletable resource but the peak
is not around the corner. Maybe 10-20 years from now. The
UK has peaked already but most OPEC members have not.
However, the important thing is it's not what's underground
that counts for this. Investment is what matters. Also
technology. Saudi assessments of their reserves are much
higher than they used to be." He said Saudi Arabia used to
think that its production would peak circa 1980-95 but this
turned out to be "totally" inaccurate. He concluded that
"the human factor" remained the most important resource in
the oil business.

SPECULATION
--------------


15. (C) Moneef was asked for his views on the role
speculation has played in "volatile" oil markets in recent
years. The Saudi OPEC governor noted that the fundamentals
currently did not support wild price swings, while the close
correlation with both falling value of the dollar against
other currencies and the international crisis affect on oil
prices was prima facie evidence of a link between these
factors. This happened along with a sharp increase in
activity on energy markets. Oil has become an investment
medium, he said. Moneef asserted that Saudi Arabia supports
increased oversight of energy markets. The Saudi government
was happy to see steps taken to study strengthening
regulations, he said, and there always were going to be
geopolitical factors as well as fears of peak oil. Now
geopolitical fears were decreasing and/or have been factored
into prices. Moneef said the Saudi view was that speculation
represented approximately $40 of the overall oil price when
it was at its height. Now that was lower. He said the Saudi
government was following this issue closely and considers
improving transparency and communication to be two of the
best actions that could be taken to reduce speculative
volatility.


16. (C) Asked what regulatory reforms the U.S. could
institute in Moneef's view, to reduce impact of speculation
on oil markets, he said transparency and cooperation amongst
exchanges would be best. Perhaps strong position limits. He
said the Saudis are watching discussion of this in the United
States with great interest.

TECHNOLOGY, RENEWABLES, AND THE FUTURE
--------------


17. (C) On Saudi use of advanced technology in the oil
sector, Moneef explained that from 1998 onwards, the Kingdom
began using horizontal drilling and now was injecting water
and in some cases gas to increase production. He described
how Saudi Arabia has been financing experiments in Canada on
carbon capture and storage (CCS) on a project with Canada,
Norway, the UK, and the Netherlands (called by others the
"Four Kingdoms" project). Moneef said the Saudi government
also was "looking for" a CCS project to undertake in Saudi
Arabia. However, "We don't need it yet," he said. (NB: A
senior International Oil Company executive posted to Riyadh
told Econoff July 7 that the Saudis expected foreign firms to
pay for any CCS projects implemented in the Kingdom.)


18. (C) Moneef said that Saudi Arabia remains interested in
solar energy and the King Abdullah University of Science and
Technology (KAUST) opening in September was being built with
solar panels for "heating and other" purposes. However, the
OPEC governor expressed skepticism about solar energy as a
technology in general. Although Saudi Arabia was working
hard to develop its use of the technology further, he said,
the technology remains uneconomical for the Kingdom while
fossil energy remains so plentiful and cheap domestically.
Asked about the break-even point for renewable energy
sources, Moneef said U.S. biofuel began to make sense only
with oil costing $80-90/barrel. He estimated that oil
costing $70 would make developing "some" tar sands and
Brazil's deepwater oil reserves economical, "but not with oil
at $40-50."


19. (SBU) Asked whether the Saudi oil business would be
fundamentally the same 50 years from now, Moneef said in 20
years oil's share in the international energy mix will have
declined. He said he saw unconventional oil production
increasing significantly around the world by 10-15 years from
today. Tar sands, heavy oil, and deep water production off
the coasts of Brazil and West Africa will have begun to have
a significant effect on the overall petroleum market, he
said. In Saudi Arabia, gas liquids likely would play a much
more significant role in the future. He estimated that 70%
of future increments would be unconventional.

FINANCE
--------------


20. (C) Asked how Saudi Arabia financed energy projects,
Moneef explained that upstream projects all were internally
financed out of Aramco's budget. In contrast, downstream
projects were 60% borrowed and 40% equity, with joint
ventures organized differently. For example, he said,
refinery construction projects typically were planned to have
an internal rate of return of 14-15%. When the financial
crisis hit, Saudi Aramco and MinPet had reexamined pending
refinery investments, including the Total refinery project
(in the Eastern Province) aimed at sending refined products
to Asia, and the Conoco refinery project (along the Red Sea)
that was to supply product to the Mediterranean and other
points West. Luckily, he said, the previous $12 billion
Conoco project's cost had dropped $2.4 billion. This mainly
was due to reducing material costs as many regional projects
had been cancelled. While the 2007 price of oil had averaged
$70, he said, MinPet had assumed $50 for these projects. On
the Fujian refinery project in China, he said, Saudi
investment had led to a doubling of capacity at the refinery,
and there eventually would be a tripling of capacity.

FUTURE OF SAUDI OIL SALES
--------------


21. (C) Asked if the Saudis would consider participating in
commodity markets directly (instead of dealing with
established customers via nominations),Moneef said this
would not happen. Saudis view themselves as physical
producers and sellers of petroleum, and if they sell directly
into commodity markets, they will unduly affect prices and be
blamed even more for high prices. He emphasized, "We don't
want to get involved in that." Asked what was the "right
price" of oil, Moneef said oil's price needs to provide
sufficient revenue for producers and encourage investment,
including in alternative energy sources. Therefore the Saudi
view was that it would be good for oil to be around $70.
However, he reiterated that the Kingdom's main energy policy
hinged not on price but on maintaining a 1.5 - 2 mbpd spare
capacity, which he described as a mandate by the Kingdom's
most senior policymakers for the past 30 years.

NOPEC
--------------


22. (C) Moneef mentioned the recurring U.S. draft NOPEC
legislation as an example of an issue that would be
considered by the Saudi economic deputies committee of the
Saudi Supreme Economic Council (described septel). In
addition to MinPet Assistant Minister for Petroleum Affairs
HRH Prince Abdulaziz bin Salman, who is a regular Post
interlocutor on this issue, Moneef said MFA Under Secretary
for Economic and Cultural Affairs Yousef Saadon and Deputy
Minister of Finance for Economic Affairs Hamad Al-Baz'y were
key players. He also mentioned Abdulrahman Abdulkarim
(counselor to Oil Minister Naimi, with rank equivalent to
Deputy Minister) as a key player in NOPEC discussions.


23. (C) Moneef was asked how Saudis set compensation for
energy sector personnel. Why not sharply increase salaries,
and how were they set? Moneef said Aramco had faced
significant employee attrition a few years ago, mainly to the
financial sector. It updated its survey of "similar
employers," looking at (among others) banks and the country's
petrochemical giant SABIC. Aramco updated the survey,
adjusted salaries, and now tries to "stay a little ahead" of
other firms in terms of salaries. He joked that the
financial sector no longer was luring away candidates (thanks
to the financial crisis).


24. (U) Congressman Grayson did not have the opportunity to
clear this telegram.
ERDMAN