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Identifier
Created
Classification
Origin
10DHAHRAN31
2010-02-22 12:56:00
CONFIDENTIAL
Consulate Dhahran
Cable title:  

SAUDI ARAMCO IS TAPPED AGAIN TO BUILD MAJOR REFINERY

Tags:   EPET  ENRG  ECON  PGOV  SA 
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VZCZCXRO9631
PP RUEHDH
DE RUEHDH #0031/01 0531256
ZNY CCCCC ZZH
P R 221256Z FEB 10
FM AMCONSUL DHAHRAN
TO RUEHC/SECSTATE WASHDC PRIORITY 0405
INFO RUEHHH/OPEC COLLECTIVE
RUEHDH/AMCONSUL DHAHRAN 0530
						C O N F I D E N T I A L SECTION 01 OF 02 DHAHRAN 000031 

SIPDIS

DEPT FOR EEB/ESC/IEC, NEA/ARP, AND S/CIEA
DOE FOR ELKIND, HEGBURG, PERSON

E.O. 12958: DECL: 2/22/2020
TAGS: EPET ENRG ECON PGOV SA
SUBJECT: SAUDI ARAMCO IS TAPPED AGAIN TO BUILD MAJOR REFINERY

CLASSIFIED BY: Joseph A. Kenny, Consul General, U.S. Department
of State.
REASON: 1.4 (b), (d)
SUMMARY

-------

C O N F I D E N T I A L SECTION 01 OF 02 DHAHRAN 000031

SIPDIS

DEPT FOR EEB/ESC/IEC, NEA/ARP, AND S/CIEA
DOE FOR ELKIND, HEGBURG, PERSON

E.O. 12958: DECL: 2/22/2020
TAGS: EPET ENRG ECON PGOV SA
SUBJECT: SAUDI ARAMCO IS TAPPED AGAIN TO BUILD MAJOR REFINERY

CLASSIFIED BY: Joseph A. Kenny, Consul General, U.S. Department
of State.
REASON: 1.4 (b), (d)
SUMMARY

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


1. (C) On January 19, the Ministry of Petroleum announced that
Saudi Aramco had been asked to build the estimated USD $10
billion Jazan refinery. This project was originally to be built
by the Saudi private sector in a move to give them valuable
experience in managing a big project. For now, it seems that
the size and scope of this project, the generally thin margins
for refining internationally, and the limited interest by
foreign and domestic firms, are leaving the Kingdom little
choice but to turn (yet again) to Saudi Aramco to manage a
large, high-profile project. End Summary.



SAUDI ARAMCO IS TRIED AND TRUE

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


2. (U) Despite expectations that KSA's private sector would have
its first opportunity to build and own a refinery in the
Kingdom, Petroleum Minister al-Naimi announced on January 19
that Saudi Aramco will build the $10 billion Jazan refinery,
which will have a capacity of 250,000 to 400,000 barrels per
day. The state oil company was not expected to be involved with
the refinery beyond offering a 30-year crude oil supply
contract--at international prices--to the winning bidder.
Press reports noted that eight Saudi companies and 42
international companies were prequalified by the Oil Ministry
for the project, but only two private groups submitted offers by
the January deadline. The bidding process for the project was
delayed several times since 2006 as the Kingdom has struggled to
attract qualified foreign investors.




3. (C) Some industry observers questioned the plant's potential
for profit, especially considering the future refinery's
significant geographical distance from Saudi oil and gas fields.
Others were doubtful that the bidding companies had the
experience to handle such a large and important project. On

February 1, a senior Ministry of Petroleum official confirmed to
EconCouns these speculations, noting that the refining business
has razor thin margins in general. He said international firms
were not interested because Jizan lacked the long-term potential
to build a significant partnership with Aramco or other Saudi
parastatal companies, in sharp contrast to ongoing large
projects in Jubail. He also confirmed that the Petroleum
Ministry had offered private companies the chance to manage this
project to meet long-standing pleas for more opportunities in
the downstream petroleum sector. In the end, however, according
to the MinPet official, one company was clearly not qualified
and the other had a bad commercial reputation, leaving the
Ministry no option but to task an unenthusiastic Aramco to take
on this project to meet domestic development goals. (Note: On
24 January POlOff met with Sami al-Khursani (protect), the
Assistant to the Chief Engineer at Saudi Aramco, who referred to
the Jazan project as a "skimming refinery," equipped to produce
fuel oil for domestic consumption. Skimming refineries are
relatively simple, comprising crude distillation, treating,
upgrading, and blending. End Note.)




4. (C) On January 25 PolOff met with Khalid Abubshait (protect),
Saudi Aramco General Manager for Government Affairs and former
Executive Assistant to Oil Minister Ali al-Naimi, and discussed
the Jazan refinery project. Abubshait was mildly critical of
the project's economic aspects, and thus the reason it failed to
attract large, well-experienced investors. Jazan's location
near the volatile Yemeni border, its distance from crude
supplies, and the lack of experienced investors were all factors
in the SAG's decision to tap Saudi Aramco to build the refinery,
said Abubshait, who was also critical of locating the refinery
in Jazan as an economic boost to the southern province. Though
it may employ a few hundred people, he noted, the SAG should be
investing to strengthen Jazan's existent fishing and agriculture
industry. Furthermore, in the event of an environmental
disaster at the refinery, he posited that Jazan's fishing and
agricultural industry would suffer immensely.




5. (C) On January 19, prior to Minister al-Naimi's announcement
of Saudi Aramco ownership, Reuters reported the possible
construction of a petrochemical plant alongside the newly
planned Jazan oil refinery. Due to the Kingdom's rapidly rising
domestic gas demand--the predominant feedstock for KSA's

DHAHRAN 00000031 002 OF 002


petrochemical industry--it is looking to new plants that will
rely on oil products, rather than gas, for feedstock in its
efforts to boost petrochemical production. Reuters' sources
suggest that naptha is the best feedstock option for the plant
and would be produced at the adjacent oil refinery. Saudi
Aramco has not announced whether it will develop the
petrochemical plant, though PolOff sources suggest the
petrochemical plant will eventually be built, in line with the
strategy noted above. MinPet sources in Riyadh have dismissed
the commerciality of developing naptha as a feedstock.



COMMENT

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


6. (C) This project was originally supposed to anchor the
private-sector led growth of a relatively underdeveloped region
of Saudi Arabia. It was also supposed to provide Saudi
companies with the chance to earn their stripes on managing a
big project in an important sector. The scale seems to have
been too large, raising a cautionary note about the Kingdom's
ability to achieve its very ambitious development strategies
over the next decade, many of which assume Saudi companies can
handle complex projects and arrange the necessary financing.
This example also illustrates the importance of continued access
to international capital markets, as Saudi firms do not
generally have sufficient capital of their own to take on such
large projects. For now, Saudi Aramco has another big project
on its docket. However, such megaprojects, with complex and
demanding timelines, could stretch Saudi Aramco's ability to
effectively carry out their tasks. Recently, the King Abdullah
University of Science and Technology (KAUST) campus was subject
to heavy storms and flooding. The effects of the rains and
subsequent flooding highlighted some of the university's
infrastructural defects. Saudi Aramco, under stringent
timelines, built the university (in a remarkable thirty-three
months). The King has increasingly turned to Saudi Aramco for
megaprojects even if they are unrelated to oil. Such projects
include the King Abdullah Center for Knowledge and Culture
("Ithra") and a Sports City in the Western Province near Jeddah.
End Comment.
JKENNY