SAUDI ARAMCO IS TAPPED AGAIN TO BUILD MAJOR REFINERY

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