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Cablegate: Former Saudi Aramco Executive Bullish On Oil Prices

VZCZCXRO6937
PP RUEHDE
DE RUEHDH #0234/01 2451339
ZNY CCCCC ZZH
P 021339Z SEP 09
FM AMCONSUL DHAHRAN
TO RUEHC/SECSTATE WASHDC PRIORITY 0274
INFO RUEHHH/OPEC COLLECTIVE
RUEHDH/AMCONSUL DHAHRAN 0357

C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000234

NOFORN
SIPDIS

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

E.O. 12958: DECL: 9/2/2019
TAGS: ENRG EPET ECON PGOV SA
SUBJECT: FORMER SAUDI ARAMCO EXECUTIVE BULLISH ON OIL PRICES

DHAHRAN 00000234 001.2 OF 003


CLASSIFIED BY: Kevin Kreutner, Acting Consul General, EXEC, DOS.

REASON: 1.4 (b), (d)
SUMMARY

-------

1. (C/NF) Saudi Aramco's former Executive Vice President, Dr.
Sadad al-Husseini (strictly protect), recently commented on the
likelihood of oil prices rising sharply over the next couple of
years. In his view, the bearish energy analysts arguing that
the oil price shocks of last summer are not likely to be
repeated anytime soon are making inaccurate assumptions. Dr.
al-Husseini maintains that volatile political factors in
Venezuela, Nigeria, Iran, Iraq, and Libya are bound to hamper
OPEC supply over the next several years. He believes that these
political uncertainties, coupled with a rise in demand and
increasingly more expensive and difficult production, will once
again lead speculators to drive oil prices upwards. END SUMMARY.

FORMER ARAMCO EXECUTIVE: GEOLOGY AND

GEOPOLITICS WILL LEAD TO HIGHER PRICES

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

2. (C/NF) Dr. Sadad Ibrahim al-Husseini manages his own energy
consultancy, primarily serving international private equity
funds, financial institutions, and energy firms. He is a
geologist by training and holds a PhD from Brown University.
Dr. al-Husseini retired from Saudi Aramco in March 2004 as
Executive Vice President and a member of its Board of Directors.
Once appointed to the number two spot at Aramco (Executive Vice
President) in 1996, he was widely considered to be the heir
apparent for the CEO position. However, when Dr. al-Husseini
found out that he was passed over for the top spot allegedly due
to his non-Saudi roots (both of his parents are naturalized
Saudi citizens of Syrian extraction), he left the national oil
company. However, the al-Husseini family enjoys a privileged
status with the royal family due to Dr. al-Husseini's father's
role as a key advisor to King Abdullah in establishing the Saudi
Arabian National Guard.

3. (C/NF) Dr. al-Husseini is a well-established contact of
Consulate General Dhahran. He frequently offers candid views on
the importance of geopolitical factors on energy markets. In
previous conversations with EconOff, Dr. al-Husseini predicted
that another oil price shock would likely hit sometime in the
next year or two. We are forwarding his views below not just on
the merits. His access to influential circles, both in the
royal family and business sectors, means his opinions on this
topic likely both influence and reflect the views of Saudi
leaders.

4. (C/NF) The following text is Dr. al-Husseini's written
response to EconOff countering recent arguments in the press and
elsewhere by energy analysts that oil prices are unlikely to
rise again to record levels in the next few years. Bracketed
text is ours. Begin Dr. al-Husseini's text:

COMMENTS REGARDING "NOT SO BULLISH

CASE FOR ENERGY PRICES"

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

The commentary that was posted on ftalphaville.ft.com on
08/29/2009 in regards to an article by Edward Morse in Foreign
Affairs Magazine is consistent with several similar commentaries
that appear to be directed at cooling down what might become
overheated energy prices. Michael Lynch in the New York Times
of 08/25/2009 is pretty much in the same vein and so are others.

Let's take Edward Morse because Michael Lynch's write-up is
totally off the mark.

"Oil prices at $147 per barrel are the result of a convergence
of circumstances that are unlikely to be repeated soon."

Actually this is a very inaccurate assumption. The rising oil
prices through 2007 were due to structural factors including
population and economic growth, improved standards of living,
flattened new capacity exacerbated by severe production declines.

The reference to "disappearance of OPEC spare capacity" is a
clear sign of lack of understanding of the industry -- prices
were low and demand went up by several million barrels. There
is no way to maintain "idle" capacity in the face of low prices
and unmitigated demand. This could be the recurring situation
today.

The other factors such as "political impediments," "civil
disorder," "resource nationalism," "war on Saddam," etc. are not
exceptions, but the normal state of affairs throughout the
world. We had the Iran/Iraq war, invasion of Kuwait, and
liberation of Kuwait since the 1980's. That didn't create $147
barrels. On the other hand, we can expect the collapse of
Mexico's [oil] production, Russian resource nationalism, the
meltdown [i.e., increasing decline rates] of the North Sea and
Alaska, the drying up of West Africa, and the continued growth
of Strategic Environmental Assessments to make oil prices
steeper and steeper. Demand destruction will generate any
excess supplies in the future, not sustainable growth in
[production] capacity. >

The notion that the absence of Saudi production was a major
factor driving prices upwards is also in error. A careful look
at actual demand for North America, for example, will show that
demand was falling off from mid-2007 as prices took a steep turn
upwards. Demand destruction was working at higher prices, even
though there was some capacity available and commercial OECD
inventories to be drawn down.

In any case, Saudi Arabia does not have 12.5 million barrels per
day (mbd) in the market today and at 8 mbd, it's certainly not
flooding the market. It's the global economy that is setting
demand levels and hence oil prices, not Saudi Arabia.

The assumption that OPEC will be at 37 mbd in 2010 is a
short-term conclusion. What about incompetence in Venezuela,
civil disorder in Nigeria, embargo on Iran, paralysis in Iraq,
resource nationalism in Kuwait, freeze in Qatar, delays in UAE,
exploration and production failures in Libya and Algeria and a
cap in Saudi Arabia (after Manifa)? The question is what
happens [with OPEC production capacity] in 2011 and 2012, and
aren't people smart enough to see the writing on the wall and
follow up with speculation?

So the international oil companies will go into deep water and
look for deep water prospects. Given the steep offshore decline
rates, they will have to work very hard indeed as they get
driven off the continental shelf, into the continental slope and
then into the deep ocean basins (where fields are small,
recoveries limited and costs keep rising). Again, higher costs
lead to higher prices. Even OPEC has run out of cheap oil and
they're not even talking about the deep offshore. BP is talking
about $25 billion over 5 years to get Rumaila [oil field in
Iraq] up to 2.8 mbd. Kashagan 1 and 2 [in Kazakhstan] now stand
at over $54 billion for about 1 mbd. Costs are rising...

Morse then moves into shale [gas], which has nothing to do with
oil and, in any case, is grossly overstated as reserves. Europe
would opt to coal not gas, if it has to do something -- European
coal reserves are much more abundant than shale gas. Gas prices
are down in the U.S. because demand is down, not because there
is a sudden surge in supplies.

So the Marcellus shale [in the Northeastern U.S.] contains more
gas than the North field of Qatar?

Well that's great, but at even 3.4 million square cubic feet per
day (scfd) per well per year its going to take a long time and
many wells to replace a field with 900 trillion cubic feet of
reported reserves. In the meanwhile, the U.S. consumes 63
billion scfd of gas -- that would require something like 20,000
wells at 3 million scfd per well. Given the very rapid
declines, this translates into a requirement to drill something
like 10,000 wells per year to stay even.

Morse concludes demand will flatten or go down. Well of course
it will -- at higher prices, the only serious and near term
option is greater energy efficiency.

5. (C/NF) End Dr. al-Husseini's text.

COMMENT

-------

6. (C/NF) Dr. al-Husseini's text may indeed reflect Saudi
thinking on oil markets, particularly their sensitivity to being
blamed for high oil prices. Hence, he stressed other potential
drivers of price volatility. His skepticism on non-OPEC
supplies and on the potential for non-traditional energy
supplies is also noteworthy.
KREUTNER

© Scoop Media

 
 
 
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