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Cable dated:2009-11-23T14:44:00UNCLAS SECTION 01 OF 04 RIYADH 001557SENSITIVE SIPDISDOE FOR S2, AL HEGBURG, AND BILL BRYAN DEPT FOR S/CIEA, EEB/ESC DAS HENGEL, AND NEA/ARPE.O. 12958: N/A TAGS: ENRG EPET PREL SA

Summary and introduction 
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¶1. (SBU) Saudi officials are eagerly awaiting your visit, which they expect will begin a new chapter in our bilateral energy dialogue. You will arrive at a time when Saudi Arabia is confronting a number of difficult challenges. While it has managed to weather the international financial crisis, Saudi officials are keenly aware of the need to foster economic development quickly to provide jobs for its rapidly growing population (more than 2% per year). They are also anxious to diversify the base of the economy away from its current predominant reliance on hydrocarbons, which directly provide close to 50% of GDP and indirectly account for much of the rest of Saudi industry. Saudi officials understand the challenges they face, including the need to make Saudi education more relevant to today’s workplace and the need to increase the role of women in the economy, both of which are controversial in the socially conservative Kingdom. Saudi officials are looking to the U.S. to help them meet these challenges, both through increased engagement at the government level, including educational exchanges, and more Foreign Direct Investment, particularly in energy, high tech, and manufacturing. Saudi officials strongly welcomed the President’s Cairo speech and its promise of greater outreach, which provides a good context for your visit.

¶2. (SBU) Saudi officials feel under the gun, as they are aware that a number of other countries are years ahead of them in pursuing the same strategy. They are very concerned by the tenor of discussion in the West about shifting away from reliance on oil and gas, and moves to develop “energy independence.” While they, too, want to develop a more sustainable economy and address environmental degradation, they are concerned that the world will turn away from their main source of livelihood before they have a chance to catch up. In that regard, your visit offers a great opportunity to reset our energy dialogue with Saudi Arabia and explore areas of energy interdependence, rather than energy independence. Your visit will also demonstrate our continued interest in helping Saudi Arabia fulfill the King’s vision of developing a knowledge-based economy, which dovetails nicely with the agenda of the President’s Cairo speech. It also offers the opportunity to encourage the Saudis to be more forthcoming in areas of concern to us, such as climate change.

Schedule 
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¶3. (SBU) We have scheduled meetings for you in Dhahran with Minister of Petroleum Ali Al-Naimi, CEO for Saudi Aramco Khalid Al-Falih, and in Riyadh with the President of the King Abdulaziz City for Science and Technology (KACST, Saudi Arabia’s Science Ministry) Abdullah Al-Suweil and the Governor of the Electricity and Co-Generation Regulatory Authority (ECRA) Fareed Zedan. We have also scheduled your participation in the quarterly review of the critical infrastructure protection initiative with the Ministry of Interior. You will also have an opportunity to meet leading members of the Eastern Province’s business community in Dhahran in a dinner at the Consulate, and informally meet Ministry of Petroleum Officials at a dinner in Riyadh.

Saudi Aramco 
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¶4. (SBU) On your first day, you will meet Minister Al-Naimi and Aramco CEO Al-Falih in Aramco’s offices in Dhahran, which will give you an opportunity to tour this fascinating facility, including Aramco’s advanced technology operations center. In the 20 years since its amicable nationalization, Aramco has developed into one of Saudi Arabia’s most efficient and modern institutions, developing several generations of world-class leaders, like Al-Falih and his predecessor once removed, Al-Naimi. It is noteworthy that, when the King wants something done quickly and right, like completion of his signature project of the King Abdullah University of Science and Technology (KAUST), he turns to Aramco. It is also noteworthy that Aramco continues to enjoy very close relations with the USG and with American companies, based in part on the fact that many top officials studied in the U.S.

Direction of markets 
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¶5. (SBU) Saudi Minister of Petroleum Ali Al-Naimi is most interested in pursuing two topics with you, a discussion of current oil market issues and the potential for future cooperation. In terms of current issues, Al-Naimi and Aramco CEO Al-Falih will be very interested in your views of the long-term direction of international oil and gas markets. They will be particularly interested in your sense of what policies the Administration will introduce to improve energy efficiency and reduce overall demand, as well as your sense of the prospects for a Climate Change bill from Congress. You may wish to elicit their views on long-term prospects for Asian markets, especially China, which has become a more important destination for Saudi crude. Recognizing the long-term prospects for this market, on November 11, Aramco and Exxon opened a multibillion dollar joint venture with SINOPEC in Fujian, China, to add 8 million tons of annual refining capacity. Chinese firms are also performing significant engineering and construction work in the Saudi petroleum and petrochemical sectors. Saudi officials have recently reaffirmed to us that they continue to value being a major crude supplier to the U.S. market, although they are watching the direction of future demand carefully, and will make sure they retain a significant position in all the major Asian markets.

¶6. (SBU) Saudi officials (including Saudi Finance Minister Al-Assaf and Al-Naimi) have made it clear both publicly and privately they do not support moves to shift oil pricing away from dollars. They are concerned, however, about volatility in oil markets, which they believe are unduly influenced by speculation. Saudi officials explained to us (septel) that they will shift in January from reliance on the WTI benchmark to the Argus Sour Crude Index because they believe ASCI is less subject to speculative price swings, which in turn will help protect their revenue stream. Saudi officials are keenly interested in keeping the world economy on track for sustainable recovery, and therefore support a continuation of stimulus measures, coordinated through the G20 process. They also want to avoid any undue shocks to the international economy, and support the current price level, which the King has declared is “fair.” Saudi Arabia is committed to maintaining sufficient reserve capacity to stabilize prices. Aramco is completing its $120 billion worth of projects to increase production capacity towards 12.5 million barrels a day, an investment that Saudi officials have noted the Kingdom made at the peak of prices for engineering and construction services. The Kingdom is also exploring other projects to bring non-conventional oil on line to meet the evolving needs of the international market and expand reserves, such as Saudi Arabian Chevron’s project in the Partioned Neutral Zone with Kuwait to steam flood heavy oil in limestone cavities (septel). Thanks to this project, which Al-Naimi strongly supports, Chevron is the only International Oil Company producing oil upstream in the Kingdom.

Future cooperation on renewables and efficiency projects 
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¶7. (SBU) Al-Naimi is keen to discuss potential areas of cooperation, particularly on solar energy (ref a). He has publicly called for Saudi Arabia “to become the Saudi Arabia of solar energy.” Al-Naimi also supports biomass energy projects, including involving algae. As Chairman of the

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Board of the King Abdullah University for Science and Technology (KAUST), he will want to brief you on research projects in these areas going on at KAUST, and invite DOE participation in joint projects. Al-Naimi is very much looking forward to escorting Secretary Chu to meet the scientists involved in these projects early in the new year when the Secretary visits the Kingdom.

¶8. (SBU) Saudi officials in several ministries have explained their interest in developing renewable energy projects, which they expect to play a major role in meeting the Kingdom’s future energy needs (electricity demand is growing at 8-10% per year, ref b). Developing renewables will reduce the need to divert increasing amounts of crude from exports to fuel domestic electricity generation. It will also help the Kingdom deal with growing pollution. KACST plays a major role in researching renewable energy potential. As part of our bilateral Science and Technology dialogue, KACST and Aramco expressed interest in holding an energy working group to explore opportunities for joint projects and cooperation in a number of areas, including renewables and in oil production technology. Your visit offers an ideal opportunity to explore in greater detail their areas of interest. KACST would like to identify key players for a working group in January or February, which could schedule scientific exchanges over the next year and agree on a list of joint research projects by December 2010.

¶9. (SBU) The Electricity and Co-generation Regulatory Authority (ECRA) is working hard to maintain a difficult balancing act between meeting the rising demand for electricity, which is fueled by a heavily subsidized price, and encouraging private investment in new generating facilities. ECRA is the main driver behind the moves to unify the electricity grids of the six Gulf Cooperation Council (GCC) nations, which formally happened this year. This linkage will help national power generation authorities meet peak demands in other countries, which ECRA estimates will make the whole system more efficient and reduce the need for new generation plants in the short-term. Over the longer term, ECRA is acutely aware that it must continue to scramble to meet projected increases in demand. ECRA is very interested in any potential cooperation on efficiency projects, both for generation and for transmission. It has recently persuaded Saudi authorities to approve differentiated prices, which it hopes will begin to moderate residential demand.

Civilian nuclear program 
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¶10. (SBU) KACST also supervises Saudi Arabia’s civilian nuclear energy program. Saudi Arabia is actively considering the development of a civilian nuclear program, which a number of analysts believe is the only possibility the Kingdom has to generate sufficient electricity to meet projected demand from economic and population growth and increasing affluence without wastefully burning large quantities of fuel oil. In May 2008, the United States signed an MOU with Saudi Arabia on the Peaceful Uses of Nuclear Energy and offered to exchange technical experts to discuss areas for potential cooperation. Since that time, the French and other potential suppliers have actively talked about supplying Saudi Arabia with a nuclear power plant. Regional energy experts believe that only two plants are likely to be needed to meet the needs of the entire GCC, and expect that the UAE is likely to be the first country to announce a contract to build a plant, perhaps as early as January 2010. It would be useful to ask your interlocutors about their plans to develop nuclear power, noting our willingness to exchange technical experts.

The importance of the IEF 
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¶11. (SBU) The International Energy Forum (IEF) has provided a forum for producers and consumers to talk frankly for more than 20 years. Al-Naimi and his senior officials strongly support this organization. At the December 2008 London energy meeting, later referenced in the G-20 Pittsburgh Summit leader’s statement, the IEF was asked to prepare a report on the causes of oil price volatility and potential measures to deal with them, which would be considered at the next IEF energy minister’s meeting in Cancun in March 2010. The IEF selected a group of experts who prepared a report in October that suggested the formalization of the IEF

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secretariat. Saudi officials made it quite clear that they consider it critical that the U.S. remain involved in the IEF. They offered the U.S. a blank sheet of paper to suggest what the organization’s goals should be. We strongly recommend that we take the Saudis up on this offer and provide specific suggestions reflecting our key priorities. Our constructive participation in this organization would demonstrate that we take seriously Saudi Arabia’s long-term economic and political concerns, set a precedent for engagement on other USG priorities, and steer the IEF in a direction that better supports U.S. interests.

Climate change 
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¶12. (SBU) Despite sharing similar interests in developing renewable energy and viable technological solutions to mitigate carbon emissions, such as Carbon Capture and Sequestration (CCS), the Saudi delegation has been very unhelpful in technical talks leading up to the Copenhagen summit. The delegation has insisted that no changes be made to the structure of the UNFCCC (UN framework convention on climate change) agreement, despite the fact that the underlying economic condition of a number of developing countries has changed since the agreement was drafted. Saudi delegates have insisted that any such change would represent a diminution of developed countries’ commitment to help developing countries cope with the requirements of new technology. They also have pushed for some form of compensation for energy producers. Privately, Saudi officials have stressed their interest in capturing investment credits for clean development mechanisms in the Kingdom. They believe that no agreement can be reached without a U.S. commitment to cut emissions. Your visit offers an important opportunity to engage one of the leading Saudi decision-makers, Al-Naimi, on what the U.S. will be looking for in Copenhagen and beyond.

Eastern Province merchants 
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¶13. (SBU) Several of the powerful business family groups that dominate the EP trace their origins to modest but industrious Saudi employees of Aramco, encouraged by their American managers to become private contractors in the late 1940s and 1950s. Many of the younger generations of these families have been educated in the U.S. These families often have informed and insightful views on a host of issues. The Consulate in Dhahran has arranged a dinner in your honor that will include several notable merchant families, which will give you a flavor of the commercial operating environment in this important part of the Kingdom.

OPM-MOI 
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¶14. (SBU) In May 2008, the Secretary of State and the Saudi Interior Minister signed an agreement creating the Office of Program Management - Ministry of Interior (OPM-MOI). OPM-MOI is a State-led interagency effort to assist the Saudi MOI with protection of critical infrastructure, including Aramco’s petroleum production and transport facilities, which were the subject of a terrorist attack on the Abqaiq production facilities in Dhahran in 2004. OPM-MOI is developing projects in a number of areas, which will improve the security of Saudi Arabia’s critical ports, electricity transmission lines and oil pipelines. OMP-MOI is also training a new 35,000-man Facilities Security Force, largely trained and equipped by DOD elements, which will protect key critical infrastructure sites throughout the Kingdom. The Ministry of Interior has invited you and your delegation to participate in the quarterly review, which will give you an up-to-date understanding of the project. MOI officials are very appreciative of DOE’s very constructive role in this important, high-profile initiative. SMITH