SCENESETTER FOR FEBRUARY 21-23 VISIT OF ENERGY

UNCLAS RIYADH 000204

SENSITIVE
SIPDIS

DOE FOR SECRETARY CHU, DAVID SANDALOW, JON ELKIND
DEPARTMENT FOR NEA/ARP
DEPARTMENT FOR S/CIEA DAVID GOLDWYN

E.O. 12958: N/A
TAGS: EPET ENRG KGHG EINV ECON PREL SA
SUBJECT: SCENESETTER FOR FEBRUARY 21-23 VISIT OF ENERGY
SECRETARY CHU TO SAUDI ARABIA


1. (SBU) Summary and introduction: Saudi officials are very
excited about your visit, which they expect will build on the
successful December visit of Deputy Secretary Poneman to
write a new chapter in our bilateral dialogue on energy and
Science & Technology Cooperation. You will arrive at a time
when the Kingdom of Saudi Arabia is going through multiple
transitions, from the geopolitical, where its trade and
energy relations are shifting from west to east, to economic,
where Saudi leaders feel enormous pressure to diversify the
economy quickly. While many of these changes present
opportunities for engagement to advance U.S. interests, some
are deeply unsettling to a conservative society. Saudi
leaders will be keenly interested in your views of what role
the U.S. sees Saudi Arabia's playing in the U.S. and
international energy markets in 20 years. They are concerned
that the drive to promote non-traditional and green forms of
energy is likely to restrict the available share of what has
historically been Saudi Arabia's most politically important
market. Saudi Officials, for example, have noted that the
U.S. consumed more domestically produced ethanol in 2009 than
it imported Saudi oil. At the same time, Saudi leaders are
interested in pursuing cooperation on renewable energy,
particularly solar, in part to meet booming domestic energy
demand. Saudi officials will also encourage greater U.S.
investment, particularly in key industries in their national
industrialization strategy, which aims to make better use of
Saudi Arabia's natural resources to create the 200,000 jobs
per year over the next decade they need to keep unemployment
steady. Saudi officials are also keen to expand our Science
& Technology dialogue, which they see as a critical driver of
diversification. They are very excited to show you the two
leading S&T facilities, the King Abdullah University for
Science and Technology (KAUST) in Jeddah, and the King
Abdulaziz City for Science and Technology (KACST),which is
the main S&T policy body in Saudi Arabia.


2. (SBU) Your visit offers the opportunity to put these
issues into a coherent framework that underscores the
strategic importance we place in seeing Saudi Arabia succeed
in the King's economic vision, particularly in diversifying
its economy, which will bring with it important social
changes. We need their help, however, in better channeling
our dialogue and establishing clear links between our
interest in promoting greater U.S. trade and investment,
science and technology partnerships and broader energy
policy. Specifically, it is important to find ways to turn
our mutual interest in promoting solar and biomass projects
into a constructive relationship to advance the Copenhagen
process. We are hoping that your discussions will alter the
tone of the dialogue and get us beyond the obstructionist
positions held by Saudi negotiators in the UNFCCC process.
End Summary and Introduction.

Schedule:
- - - - - -


3. (SBU) In Riyadh, you will first meet with your host,
Petroleum Minister Ali Al-Naimi, and his staff, who are
particularly interested in using your visit to advance our
bilateral energy dialogue. You will also meet with the
Minister of Electricity and the President of the King
Abdulaziz City for Science and Technology (KACST),before a
meeting with the King at his desert encampment. Minister
Al-Naimi will also host a dinner for you, giving you a chance
to meet a number of other important government officials and
businessmen. We have arranged a public address at the
International Energy Forum (IEF). Minister Al-Naimi will
accompany you and your delegation to Jeddah to visit the King
Abdullah University for Science and Technology (KAUST),where
he will arrange for you to meet with the university's top
scientists pursuing solar and biomass energy projects.

Need for Economic Transformation:
- - - - - - - - - - - - - - - - - -


4. (SBU) Saudi leaders are concerned about the ability to
provide productive employment for the fifty percent of the
population that is under 20 years old. Saudi Arabia is
convinced that the only sustainable way to do that is to
develop its human capital, such that Saudis become as
economically valuable as their oil exports. This will
require trillions of dollars in investments to build the
necessary infrastructure over the next two decades. Saudi
leaders are concerned the world will turn away from oil just
as it embarks on this program. The King has sketched out an


ambitious plan to transform Saudi Arabia's economy away from
excessive reliance on hydrocarbons and towards a knowledge
based economy that can provide sustainable development for
the long-term. This requires significant changes in the
education system and several aspects of Saudi society. Saudi
leaders are already alarmed by the relative decline in per
capita income standards, as an increasing population lowers
average income. They also are very aware of a long-term
shift in the international oil market away from the OECD
towards Asia, which implies political shifts as well. They
also are very sensitive to any perceived bias against oil
versus other forms of energy, such as coal. Approximately
45% of GDP is derived from oil, and more than 80% of
government revenue. Past Saudi efforts to diversify have
largely revolved around using cheap natural gas feedstocks to
support petrochemicals such as plastics and packaging
materials. Saudi Arabian officials now regard those
approaches as insufficient, as they have not created
significant numbers of jobs for Saudis. They believe moving
up the value chain by using feedstocks to foster industry
here will better assist Saudi Arabia's development.

Concerns about Future Energy Demand:
- - - - - - - - - - - - - - - - - - -


5. (SBU) Saudi Arabia was caught off guard by the strength of
the Administration's initial statements about its desire to
move to a post-hydrocarbon economy, and end dependence on
imported oil, especially from the Persian Gulf. This comes
just as Saudi Arabia is completing a $100 billion expansion
of its production capacity to 12.5 million barrels a day.
Saudi leaders are concerned that this oil may never be needed
(the capacity does not last long if shut off),as demand
falls in the West and countries like Iraq plan to increase
production by 6 - 7 million barrels over the next five to ten
years. Effectively, peak oil arguments have been replaced by
peak demand. Saudi Arabia will be interested in your view of
the energy future, both globally and in the U.S. They are
less concerned about price forecasts than our expectations of
the scope and pace of changes globally They are also very
keen to hear what role the U.S. foresees Saudi Arabia playing
in our domestic market, answering the question whether Saudi
Arabia will be welcome. Al-Naimi will present you with their
future oil outlook and invite a presentation on how the U.S.
sees the development of energy efficiency, renewables and
electric cars in the U.S. energy mix.

Portfolio without Minister:
- - - - - - - - - - -


6. (SBU) Your Saudi interlocutors will describe various
activities to support solar energy, including advanced
research into materials at KAUST and advanced solar cells in
KACST. The Ministry of Electricity will explain their
pressing need to meet 8-10% annual increases in domestic
electricity demand, which, if left unchecked, will require it
to double its electricity generation capacity from 34,000 MW
to 68,000 MW by 2018. While there is broad agreement within
the Saudi Government of the need to develop Saudi Arabia's
significant potential for solar and other renewable forms of
energy, no one ministry has yet been placed in charge of this
portfolio. Al-Naimi is clearly pushing research into solar,
but so is KACST, which signed an agreement in 2008 with IBM
to develop solar nanotechnology and desalination projects
that are now in the pilot stage. Both must work with the
Ministry of Electricity and the Electricity Regulator (ECRA)
to make it commercially feasible. You will want to draw them
out on how they plan to address this issue. It is also
worthwhile asking about nuclear energy, as Saudi Arabia is
considering issuing a request for proposal to advise on how
to set up a civilian nuclear program. We understand from a
number of sources that the Saudi Government believes it needs
to develop such a program as the only way to get ahead of the
relentless increases in demand for electricity, and that it
is beginning careful preparations to create the capacity to
manage a nuclear program. Several potential suppliers, like
Canada, France and Korea, are already pressing their case to
help design Saudi Arabia's program and supply the plants.

Climate Change:
- - - - - - - -


7. (SBU) CLIMATE CHANGE: Your visit offers an important
opportunity to head off a serious clash over climate change.
Saudi officials are very concerned that a climate change


treaty would significantly reduce their income just as they
face significant costs to diversify their economy. We want
to get beyond the obstructionism that Saudi negotiators have
often shown during the UNFCCC negotiations and persuade
senior leaders to work with us in a partnership to meet their
strategic concerns. We are still analyzing where we think
the Saudis are, but believe that they are pursuing this
tactic to stall as a temporary measure until they get a
better sense of where the negotiations are going and where
their interests lie. While being obstructionist in some
aspects of the UNFCCC, the SAG is keenly interested in
developing Carbon Capture and Storage projects. Al-Naimi
will brief you on Aramco's plans to develop a pilot project.
He will also brief you on Saudi Arabia's involvement in the
Carbon Sequestration Leadership Forum, and the 4 Kingdom's
project (with Netherlands, UK and Norway),which is
negotiating a framework to support projects to reduce
emissions. Saudi Arabia would like to see this framework
concluded more quickly, and is interested in inviting
countries like the United States to join as a means of
accelerating the development of real projects. To the extent
that we are willing to work with Saudi Arabia on these kinds
of projects, we can demonstrate that we understand their
concerns and our interest in helping meet their long-term
development goals.


8. (SBU) The King is particularly sensitive to avoid Saudi
Arabia being singled out as the bad actor, particularly on
environmental issues. Your conveying the importance the
President places on working as partners with Saudi Arabia on
the Copenhagen process will be very important in making this
dialogue more constructive.

The Importance of Strong U.S. Economic Ties
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9. (SBU) Saudi officials have been candid in stressing the
importance they place on strong ties with the United States
to help them meet reform challenges, both through increased
engagement at the government level, including educational
exchanges and more FDI, particularly in energy, high tech,
and manufacturing. The past year has seen several large
investments by prominent U.S. firms in advanced technology
areas, and we are working to raise the profile of our trade
and investment relations, including through a major Saudi
exposition in Chicago at the end of April. The Mission has
also steadily expanded USG engagement in education, public
health, science and technology, entrepreneurship and civil
society. There are now more than 22,000 Saudi students
studying in the US, exceeding pre-9/11 levels. Saudi
officials are also very keen to expand educational ties to
the U.S., including expanding a scholarship program that has
already sent thousands of Saudi students to U.S. colleges and
universities, many in scientific and technical fields.
Al-Naimi will be interested in your thoughts on how we might
boost scientific training and educational opportunities for
Saudis in the U.S. Al-Naimi will also underscore the
importance of greater U.S. investment, particularly to
support the development of the National Industrialization
Strategy.

S&T Umbrella Agreement:
- - - - - - - - - - - -


10. (SBU) In December 2008, the U.S. and Saudi Arabia signed
an umbrella Science and Technology Agreement that outlined
seven areas of interest. In May 2009, the two sides held a
follow up meeting in Riyadh, and the first working group, on
Space, met in Washington December 3-4. Shortly after this
working group, Saudi Arabia and NASA signed a cooperative
lunar research agreement. Al-Naimi and Minister of
Electricity and Water Al-Hussayn will be interested in the
potential for cooperation on a range of issues, such as
increasing efficiency, demand management, policy and
regulatory cooperation, new technologies and renewables.
KACST is particularly interested in expanding cooperation
between research institutes in the U.S. and Saudi Arabia on
energy issues, and welcomes the opportunity to sign an MOU to
do so. KAUST will brief you on their programs, particularly
in solar and biomass.

International Energy Forum:
- - - - - - - - - - - - -


11. (SBU) The International Energy Forum (IEF) has provided



an informal forum for oil producers and consumers to talk
frankly for more than 20 years. At the December 2008 London
energy meeting, the IEF was asked to prepare a report on the
causes of oil price volatility and potential measures to deal
with them, which will be considered at the next Energy
Ministers' ministerial meeting in Cancun in March. Since
October, eleven members of a high level steering group,
including the U.S., have been reviewing that report, which
also made recommendations on how the IEF could become more
effective. On February 6-7, more than 40 participating
countries indicated support for finding ways to make IEF a
more effective arena for this informal producer-consumer
dialogue about oil issues, including developing a charter for
the organization over the next year. There was also broad
consensus that it will be important to regularize financial
support from participating countries for the IEF. Saudi
Arabia is very appreciative of U.S. willingness to play a
more active, constructive role, and welcomed Deputy Secretary
Poneman's assurances last December that we would find ways to
support the work of the experts' group that prepared these
recommendations. You will deliver a public address at the
IEF, joining a list of other international speakers such as
Australia's Energy Minister and IEA's Chief Economist. The
IEF is looking forward to your speech, which will provide a
tangible demonstration of ongoing U.S. willingness to
participate in the IEF. This will be appreciated by Minister
Al-Naimi and the King, both of whom support the IEF.

Political context:
- - - - - - -


12. (SBU) You will have arrived just after a parade of other
senior level USG visitors, including NSA General Jones,
Secretary Clinton and Treasury Deputy Secretary Wolin. This
demonstrates the breadth and importance of cooperation on a
range of issues, from confronting Iranian nuclear
proliferation to regional security issues in Yemen, Pakistan
and Afghanistan, countering terror finance and supporting
Middle East Peace. While we do not always agree, the Saudis
greatly value consultations and honest dialogue with us, as
Saudi Arabia places great value on a strong relationship with
the U.S. We have come a long way in tearing down the walls
both sides erected after 9/11 and building a new
relationship. The scope of the improvement in relations
since 2005 is remarkable, and makes incidents like the
application of new TSA airline passenger regulations for
Saudis somewhat jarring. Saudi officials will be
particularly pleased to see you, as they want to boost the
economic aspects of our strategic relationship.


13. (SBU) While a lot of attention gets paid to current
crises, Saudi Arabia is also trying to come to terms with the
shift in global energy and trade ties towards Asia, which has
both political and economic consequences. Bilateral trade
with China has more than tripled, and China will soon be
Saudi Arabia's largest importer. Saudi Arabia has also
committed significant investments in China, including the $8
billion Fujian refinery. Increased trade has also brought
increased friction, including anti-dumping complaints from
both sides. Saudi Arabia is thinking through how best to
take a leaf from the Chinese playbook and use these expanded
trade ties to achieve important political goals, including
cooperation on the issue of countering Iranian nuclear
proliferation.

A NOTE ABOUT THE KING
--------------


14. (SBU) The Custodian of the Two Holy Mosques will offer
you a traditional Saudi welcome at the desert "encampment"
outside Riyadh, where he likes to spend his winter vacations.
You will find in 86-year old King Abdullah a wry and
forthright interlocutor. Reflecting his Bedouin roots, he
judges his counterparts on the basis of character, honesty,
and trust. He expects commitments to be respected and sees
actions, not words, as the true test of commitment; and he
expects good-faith consultations, not surprises. The King's
warm relations with President Obama have helped navigate
differences and at times change policies.

SMITH