WHAT CONCERNS SAUDI ARABIA ABOUT THE FUTURE OF

C O N F I D E N T I A L RIYADH 000213 SIPDIS DEPARTMENT FOR NEA/ARP, EEB/ESC/IEC (MONOSSON),S/CIEA (GOLDWYN, SULLIVAN),S/SECC (STERN, PERSHING, ROCHBERG) DEPT PASS TO DOE FOR JONATHAN ELKIND, JAMES HART E.O. 12958: DECL: 03/01/2020 TAGS: EPET ECON ENRG KGHG PGOV PREL SA SUBJECT: WHAT CONCERNS SAUDI ARABIA ABOUT THE FUTURE OF ENERGY AND CLIMATE CHANGE REF: A. 09 RIYADH 1302 ¶B. 09 RIYADH 1492 ¶C. RIYADH 178 ¶D. RIYADH 184 Classified By: Ambassador James B. Smith, reasons 1.4 (b and d). ¶1. (C) Summary: The Assistant Petroleum Minister, and senior Royal Family Member in MinPet, recently summarized Saudi concerns about the long-term outlook for international energy markets. Saudi Arabia is concerned by the lack of clarity for the outlook, as forecasts have ranged from many prognosticating a year or two ago that oil production had peaked, to a growing consensus that perhaps demand has peaked, at least in developed countries. Uncertainties over what policies will be adopted to address issues like climate change play a big role in that uncertainty. Saudi leaders are particularly concerned what role the U.S. envisions Saudi Arabia playing in our domestic energy market over the next twenty years, based in part on concerns raised by calls to end dependence on all imported oil. The current generation of Saudi leaders still values maintaining a significant share of the U.S. oil market, although they are aware that China has become a larger importer of Saudi crude, which will bring with it changes in Saudi Arabia's international interests. Our increased engagement with Saudi Arabia on energy issues offers us an important opportunity to help shape their thinking on what we would like them to see as a common future. End Summary. ¶2. (C) On February 6, Assistant Petroleum Minister Prince Abdulaziz Bin Salman provided a snapshot of Saudi Arabia's concerns about energy issues and climate change. He explained that Saudi Arabia is concerned about the lack of clarity in the direction of energy markets. Supply and demand scenarios have rarely been less clear, as evidenced from the continued debate about whether the world's oil production capacity, or demand, has peaked. Saudi officials complain that international energy forecasts have varied wildly over the last decade so much that it has undermined the Kingdom's ability to make logical investment decisions to develop further its production and refining capacity. The track record of international agencies on forecasting raises questions in their minds whether the current forecasts of future demand will be seen as just as far off as oil demand forecasts a decade ago. In that regard, they wonder if today's concern about climate change and how to address it will prove to be more reliable than previous predictions. As Prince Abdulaziz made clear, this is not an idle intellectual discussion, but one that will impact the ability of the Saudi government to put in place the right policies to meet its pressing development goals. ¶3. (C) Saudi Arabia has just completed a $100 billion investment program to expand its oil production from 8 million barrels a day (MBD) to 12.5 MBD, and is concerned that the world may not need this production (as shut in capacity does not last forever). Saudi officials are keenly aware that they got stuck with a similar situation in the 1980's, in which a smaller increase in production capacity ended up largely going to waste, at considerable cost to Aramco. Saudi Arabia is also watching other producers, like Iraq, announce significant expansion programs, which raises questions about what the effect will be on worldwide prices. Saudi Arabia has also invested significant sums in refining capacity, and plans another $120 billion over the next five years to meet forecast demand. U.S. Market Shape - - - - - - - - - ¶4. (C) Saudi Arabia is trying to puzzle through what international markets will look like over the next twenty years. The size of the total market is important, but equally important is its composition. Saudi Arabia places enormous importance politically on maintaining a share of the U.S. market. Saudi Arabia is aware that the U.S. probably passed its peak demand for gasoline in 2007, prompting Prince Abdulaziz to question the wisdom of Aramco's recent expansion of the Motiva refinery in Texas. Prince Abdulaziz said it is important for Saudi Arabia to think through whether the United States is becoming a mature market, like Europe ("which has been dead for years" as an energy market). It is also unclear what role the USG will create for biofuels; Prince Abdulaziz noted that in 2009, the U.S. for the first time consumed more ethanol domestically than Saudi oil. Saudi officials watched the ethanol debate with great interest, and are not surprised that the original enthusiasm has faded into a more balanced understanding of the larger, more nuanced economics. They wonder how other biofuel programs will be treated in the coming years, and what effect that will have on the overall U.S. market. ¶5. (C) Prince Abdulaziz said that Saudi Arabia needs to know what role the U.S. will be willing to have Saudi Arabia play. He asked, in effect, if we will "green" Saudi Arabia out of the U.S. market. Abdulaziz asked if there is any chance to refit Saudi production to make Saudi oil more welcome, or more green for the U.S. market, or will the U.S. decide it must replace all imported oil? What Role for Asia? - - - - - - - - - - ¶6. (C) Depending on the answer to that question, and the scope for international demand, Saudi Arabia will have to think what kind of shift will be required in terms of finding other markets, namely in Asia. Prince Abdulaziz made clear that, as the oil markets shift, so do the politics. 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. ¶7. (C) Saudi Arabia is thinking through a lot of these issues domestically as well. It is very aware of the importance of developing solar and other renewable energy capacity in terms of meeting relentless increases in domestic energy demand (growing 8-10% per year, primarily in power generation, which is likely to double the requirement for electricity generation capacity from 34,000 MW today to 68,000 MW in 2018). Absent some change, the need to supply power generation will significantly lower Saudi oil export levels by 2035, which threatens its ability to generate the trillions of dollars necessary to diversify its economy. Lower Emissions not Necessarily Greener Pastures - - - - - - - - - - - - - - - - - - - - - - - - - ¶8. (C) Saudi Arabia wants to join the greener world, but will not be comfortable doing so until it feels it is welcome as a partner, instead of the country expected to pay the bill. It has already dedicated significant effort to a number of international clean energy initiatives, such as the Carbon Sequestration Leadership Forum, which Prince Abdulaziz said Saudi Arabia had to push its way into. The Prince is pleased that Saudi Arabia is making good progress in persuading countries that it has something to contribute to this forum. Aramco is also exploring the development of a carbon capture and sequestration project (CCS),and Saudi Arabia is actively participating in the 4 Kingdoms project to develop CCS and other projects to lower emissions. The Prince said he is very frustrated by the slow progress in getting beyond negotiating MOU's and wants to include other countries like the U.S., Australia, Canada and Japan, to impel greater progress. Saudi Arabia is interested in pursuing projects which would not only capture, but also make use of CO2, even though at this time there would be no credits under the clean development mechanism (CDM). Prince Abdulaziz hopes that Saudi Arabia can persuade countries to announce some real progress on these projects by the March Cancun IEF energy ministerial. Looking for U.S. Help - - - - - - - - - - - ¶9. (C) Saudi Arabia very much wants greater U.S. investment in its core industrialization projects, which would be yet another area to deepen and broaden our strategic cooperation. This kind of investment would help Saudi Arabia move up the value chain and end the practice of exporting feedstock only to import products made from Saudi hydrocarbons. Comment - - - - ¶10. (C) The Prince provided a clear and authoritative look into what concerns both the senior Saudi officials in charge of the economy and the Royal Family. Saudi Arabia is quite concerned that the direction of events in the world will leave it no room to sell its primary crop, which in turn will mean that the government and royal family cannot assure the future success of the large number of Saudi youth just entering school. The King has called for diversifying the economy over the next 20 years. To call the goal ambitious is an understatement, as it will take hundreds of billions in investment, and involve a veritable social revolution in work habits, education and the participation of women in the workforce. Saudi officials feel incredible pressure to make this vision succeed not so much because the King has called for it, but because they truly believe that they have a few short years to guide the diversification of the Saudi economy to avoid some of the problems countries like Yemen are experiencing. ¶11. (C) In this regard, it may be worth considering recalibrating our approach to the Saudis on energy and climate change issues. Appealing to them primarily on the basis that the science calls for urgent action does not address their core economic and social concerns. Saudi leaders fear that some people pursuing calls for a green economy would happily solve the problem by shutting down all Saudi oil exports. Engaging the Saudis in a discussion that stresses that it is in our core strategic interest to see them succeed will help, particularly if backed up by greater partnership on investments. Sharing scenarios of where we see the world's energy economy going over the next 30-50 years will also help, in part by driving the point home that the transition is both inevitable and going to take a long time. We should couple that with a clear message on our willingness to help them develop their own renewable sources of energy (what better solution than to have Saudi Arabia become the Saudi Arabia of solar energy),while also making it clear the terms on which we would welcome continued Saudi participation in the U.S. energy market. Projects like IBM's cooperation with KACST on nanotechnology applications related to solar energy offer a good example of what we can promote as a useful common road forward. Persuading the Saudis we are serious will not be easy, but there is a real desire to find a way to re-establish a partnership with the U.S. on its core economic interests. To the extent that we can calibrate our approaches on a range of energy issues (e.g., climate change, investments, fuel subsidies) with the Saudis to reach this end, we will be more successful at making the Saudis real partners for the next 20 years in new areas. SMITH