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Cablegate: Saudi Oil Minister Reaffirms Commitment to Oil

VZCZCXRO4464
PP RUEHDE RUEHDH RUEHROV
DE RUEHRH #1068/01 2291633
ZNY SSSSS ZZH
P 171633Z AUG 09
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 1402
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0384
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

S E C R E T SECTION 01 OF 04 RIYADH 001068

SIPDIS
NOFORN

DEPT FOR NEA/ARP, EEB/ESC/IEC(SULLIVAN), INR/EC(WOOD)
DOE FOR DAS HEGBURG AND JIM HART

E.O. 12958: DECL: 08/17/2019
TAGS: EPET ENRG PREL ECON KAUST OPEC SA
SUBJECT: SAUDI OIL MINISTER REAFFIRMS COMMITMENT TO OIL
PRICE/PRODUCTION STABILITY, NO EASY WAY TO ELIMINATE
SPECULATION

REF: A. DHAHRAN 150
B. RIYADH 271

Classified By: CDA Ambassador Richard Erdman per 1.4 (b) and (d).

SUMMARY
-------

1. (C) In an August 12 meeting with Charge, Saudi Oil
Minister Ali Al-Naimi underlined the key role his government
played within OPEC moderating the positions of less
responsible members wanting to maximize the price of oil at
the expense of the international economy. He said the
Kingdom welcomed oil in the $70/barrel range, as a fair and
sustainable price for both producers and consumers. He
blamed speculation for recent record oil prices, as well as
current prices, but offered few solutions on how to bring the
market back to levels reflecting "fundamentals." Naimi said
Saudi Arabia would not move away from deep domestic discounts
on oil and gas prices anytime soon; underscored the Kingdom's
serious intention to develop solar and nuclear energy; and
estimated that the Kingdom's fossil fuels will "last 50 more
years or so." The Minister was clearly focused on KAUST, the
new Saudi university/research center set to open September
23, a legacy project of King Abdullah that Saudi Aramco and
the Energy Ministry has been tasked with realizing and which
they hope will be a world-class facility. End summary.

CONTINUED SAUDI COMMITMENT TO OIL PRICE
AND PRODUCTION STABILITY
---------------------------------------

2 (C) During an August 12 meeting with Minister of Petroleum
and Mineral Resources Ali Al-Naimi, Charge expressed U.S.
appreciation for the moderating role Saudi Arabia played
within OPEC, and more generally for the stabilizing role it
played in international energy markets. We had a mutual
interest in stable oil prices that were high enough to
sustain investment but not so high as to kill demand. Charge
asked how Naimi viewed current energy developments given that
oil prices had risen back into the $70/barrel range -- high
in historical terms -- even while the global recession has
dampened global oil demand. Naimi replied that playing a
moderating role within OPEC long had been a key part of the
Kingdom's energy policy, which he said often meant working in
and around OPEC meetings to "keep tempers down."

3. (C) Despite the recession, Naimi said, Saudi Arabia was in
a "good place" on energy. Saudi Aramco has brought online
the large Khurais field, and this has raised the Kingdom's
production capacity to 12.5 million barrels per day (mbd).
(Note: Saudi Aramco Senior Vice President for Exploration
and Producing told Post as recently as three weeks ago that
current production capacity was only at 12 mbd. End note.)
Given current production levels, he continued, this gave
Saudi Arabia an unprecedented 4 to 4.5 mbd excess production
capacity. Noting the excess capacity was equal to the
Kingdom's total production just a few years ago, Naimi said
this level was "very comfortable for us... and for the world
as well." He described the price of oil today as "fairly
good" for "us" and for the petroleum industry as a whole.

"YOU DON'T WANT OUR OIL"
------------------------

4. (C) Charge asked for Naimi's views on trends in oil sales.
The Minister joked, "You don't want our oil!," alluding to
U.S. policy statements about reducing dependence on foreign
oil. Although last year Saudi Arabia sold an average 1.5 mbd
to the United States, he explained, because of the recession,
U.S. imports from the Kingdom might not even average 1 mbd
this year. Charge responded that the United States of course
wanted Saudi oil -- evidenced by the fact that in spite of
the recession we remained the Kingdom's biggest customer and
trading partner. But just as producers wanted to diversify
their customers, consumers needed to diversify their
suppliers.

5. (S/NF) Charge asked about pressure to produce beyond
levels agreed to in OPEC meetings, pointing out that
countries with excess production capacity and revenue needs
must be especially tempted to produce more. Naimi
acknowledged this was the case with some OPEC members. But
the Kingdom had such large production to begin with, it
didn't feel that kind of pressure. In any case, he said,
suppressing a smile, production decisions were of course the
sovereign right of each country.

SAUDI OIL SALES TO CHINA INCREASING
-----------------------------------

6. (C) Charge asked about oil sales to China, noting we
wouldn't mind seeing Saudi sales replacing some of Iran's oil
exports to China. This would have the welcome side impact of
reducing Iranian leverage over China. Naimi remarked that
Saudi Arabia has been selling it approximately 700K barrels
per day. This figure trailed Angola, currently China's
largest single supplier at 770K. However, Angola's sales to
China were "a blip that will not be repeated in future
years," he said, implying that Saudi Arabia might soon be
China's largest foreign supplier of oil. The Minister said
that Saudi oil sales to China were growing in response to
increasing Chinese demand, and the Kingdom wanted to
diversify customers just as China and many other countries
wanted to diversify energy supplies and suppliers.

OIL FUNDAMENTALS GOOD BUT SPECULATION PERSISTS
--------------------------------------------- -

7. (C) With oil prices rebounding while the global economy
remained relatively weak, Charge asked what this meant for
the future. Wouldn't thre be strong upward pressure on
prices as recovery progressed? Naimi felt the current $70
price had a speculative component given the relative weakness
of the recovery to date. It did not reflect "fundamentals"
and there was thus some room for increased demand without
pushing prices up. The "fundamentals," in fact, remained
very "healthy" -- there were no supply shortages, demand was
manageable, and with oil at $70/barrel, investment in the oil
sector "will be at a good level."

NO EASY WAY TO ELIMINATE SPECULATION
------------------------------------

8. (C) Asked what could be done to eliminate speculative
activity, Naimi said he did not know. With oil as an
investment and not simply a commodity, managing "futures,
swaps, etc." was extremely difficult, he lamented. Charge
noted that Treasury Secretary Geithner, during his recent
visit, had told the Saudi leadership we ourselves had not
found a fully effective mechanism for controlling
speculation-driven price volatility. In any case, Naimi
continued, oil producers' primary responsibility was to
ensure that "market fundamentals" remained healthy. They
needed to make investments and not create artificial
shortages, he explained. Saudi Arabia was also contributing
via a moderating message on energy publicly, abroad, and to
producing countries. While it might not be easy to convince
some producing countries wedded to mercantilist energy
policies, Saudi Arabia's spare production capacity gave it a
good "club."

PLENTY OF GAS RESERVES, TOO MUCH
DEMAND, NO PLANS TO EXPORT
--------------------------------

9. (C) Charge asked about natural gas pricing. Whereas
historically gas and oil prices moved in parallel, they now
were diverging. Was this temporary or a new and more
permanent phenomenon? Naimi replied that oil and gas had
increasingly become two distinct markets, with greatly
reduced linkages. This divergence would continue, so those
prices would no longer track together. Despite the media's
tendency to link the two, each energy source had different
uses, with oil predominantly used for transportation, and gas
used for "power, heating, and petrochemicals," inter alia.
Each was shaped by supply and demand curves that differed
from other energy products. Further contributing to
diverging prices, Naimi observed, was that the downward
pressure on gas prices stemming from the increased
availability of gas from shale and other sources.

10. (C) Charge asked about gas production in the Kingdom,
noting that historically most of the gas produced was
associated gas and was consumed domestically. Saudi Arabia
now "has plenty of gas," including offshore, Naimi claimed.
"Most of the gas produced in the Kingdom has been associated
gas, but with recent discoveries, the ratio of associated to
non-associated gas has been increasing and will soon be
almost 50/50. Many fields were coming online between now and
2013, he said, citing the Karan, Hasba, Arabiya, and Rabi
fields. Charge asked how Saudi Arabia viewed efforts to
establish an OPEC-like recognition of gas suppliers. "We're
not interested," Naimi said emphatically. "Saudi Arabia is
not a gas exporter, nor will we be. Our gas, including
offshore supplies, will be for domestic use."

SAUDI GAS PRICES WILL REMAIN ARTIFICIALLY
LOW FOR SOCIAL WELFARE REASONS
-----------------------------------------

11. (C) Charge asked whether there were plans to price Saudi
gas, currently around $.75/million BTUs, closer to real
market price levels. Artificially low prices encouraged
consumption and inefficient use of resources. This, plus
energy-intensive industries such as aluminum smelters, would
put pressure on gas supplies. Naimi concurred but said
changing "feedstock" prices was a political decision. Energy
policy decisions were based on maximizing the welfare of the
Saudi people, who viewed cheap energy as their birthright.

12. (C) Not much will happen "today," Naimi continued, but as
the "lot of man" in the Kingdom improved, there would be
opportunities to allow market signals to penetrate more
deeply into the local economy. Meanwhile, Saudi Arabia had a
huge liquid base of petroleum that it could tap into for
domestic energy needs when/if gas stocks proved insufficient.
Unfortunately, he agreed, local price mechanisms severely
undercut attempts to improve energy efficiency. (Comment:
Naimi's cautious tone on the sensitive subject of raising
discounted gas prices contrasts with recent comments made by
senior Aramco executives, who believed a price increase was
imminent. In addition, some well-placed observers, including
in the energy and power sectors, are not convinced that the
gas sector is not in trouble since, they argue, the Saudis
already cannot keep up with existing demand for methane gas
feedstock, not to mention the fact that the non-associated
gas Naimi was talking about is ethane-poor, which makes it
largely useless to the petrochemical industry. End comment.)

FOCUS NOW SHOULD BE ON WATER AND
CREATING EXPANDED "ENERGY MIX"
--------------------------------

13. (C) Although foreigners focused on Saudi Arabia's oil and
gas, Naimi argued, the Kingdom's own attention should be on
water since the supply of the latter is much more acute. The
King Abdullah University of Science and Technology (KAUST,
intended to be a world class research center and scheduled to
open September 23 north of Jeddah) was researching water
conservation technologies and desalination. Current
technology in this area was not sufficient for the Kingdom's
needs, he emphasized, "We really need a breakthrough." (Note:
For more on Saudi water issues, see ref A. End note.)

14. (C) Naimi dismissed the widespread idea that Saudi Arabia
was "worried" about energy alternatives as a threat to the
predominance of oil and gas. Demand for oil was not going to
go away anytime soon, and KAUST would be involved in a wide
range of alternative energy technologies and research
projects -- e.g., energy efficiency, biofuels, wind, solar,
and nuclear. There was room -- and a real need -- for all of
these in the energy mix because worldwide energy demand was
increasing significantly. "Maybe not in some countries in
Western Europe, but certainly in China, India, etc."

15. (C) Charge asked about Saudi plans for nuclear energy.
Naimi said the Saudi government was focused on both solar and
nuclear power, but his ministry was focusing on solar since
the de facto science ministry KACST (King Abdulaziz City of
Science and Technology) holds the nuclear portfolio. Saudi
Arabia was particularly committed to getting involved in
solar, Naimi said, noting that a University of Arizona expert
on solar energy would be heading up KAUST's solar research
department. (Note: King Fahd University of Petroleum and
Minerals, the Kingdom's flagship engineering school, recently
signed a $50 million agreement with MIT to collaborate on
water conservation and solar technology research (ref B).
End note.) He estimated that the Kingdom's fossil fuels
"will last 50 more years or so." Saudi Arabia is beginning
to look at what our alternatives are, he said, and was even
interested in biofuels.

16. (C) Naimi said he had given three main challenges to
KAUST researchers:

A. SOLAR ENERGY: Naimi said he had set the goal of creating
solar power production capacity in 10 years equivalent to
Kingdom's domestic power consumption. This would in turn
give the country enough electricity capacity to export power.

B. AGRICULTURE: A Stanford University researcher and expert
on genomics who will be working for KAUST has been tasked
with growing wheat in seawater. The researcher had been
aiming at producing crops in brackish water with 7-10k parts
per million (ppm) of salt. However, Naimi challenged him to
come up with wheat that could be grown using water taken
directly from the Red Sea, which is 35k ppm.

C. BIOFUELS: Naimi said KAUST had hired a French researcher
in chemistry who is working on ways to transform algae into
ethanol. The Minister said he wanted this project located
right next to KAUST. The French academic said he needed
outside expertise/partners, so KAUST has invited DOW to do a
joint venture on this.

STANDING INVITATION TO ENERGY SECRETARY CHU
-------------------------------------------

17. (C) Naimi said he hoped Energy Secretary Chu would be
able to visit the Kingdom, noting he had a standing
invitation including for the September 23 inauguration of
KAUST. In addition, he said he hoped DOE would be interested
in spending research money at KAUST. Emphasizing the
importance of KAUST to Saudi leaders, Naimi himself a
graduate of Lehigh and Stanford, said there would be students
and faculty from 58 countries, including many from the United
States. KAUST had been modeled after U.S. educational
institutions with the help of two prominent American
researchers -- Frank Press from the National Science
Foundation and Frank Rhodes from Cornell. Though both were
in their late 80s, they had the minds and energy of
20-yearolds, he enthused.

ERDMAN

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