Cablegate: What Concerns Saudi Arabia About the Future Of


DE RUEHRH #0213/01 0521341
P 211341Z FEB 10

C O N F I D E N T I A L RIYADH 000213



E.O. 12958: DECL: 03/01/2020

REF: A. 09 RIYADH 1302
B. 09 RIYADH 1492

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

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.


- - - -

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

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.


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