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C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 000408
SIPDIS
DEPARTMENT FOR M U/S PKENNEDY, DOE FOR DAS WBRYAN, CENTCOM
FOR POLAD
E.O. 12958: DECL: 03/11/2014
TAGS: ECON ENRG EPET IR IZ MARR MCAP MOPS OVP PGOV
PK, PREL, PTER, SA, YM
SUBJECT: SAG-USG COUNTER-TERRORISM PARTNERSHIP
REF: A. A:07 RIYADH 1778
¶B. B: RIYADH 272
¶C. C: RIYADH 268
¶D. D: RIYADH 326
Classified By: Deputy Chief of Mission David Rundell
for reasons 1.4 (B) and (D)
¶1. (C) SUMMARY. The SAG’s MOI-hosted Security Conference in
Riyadh and the meeting between CENTCOM DCOM LtGen John Allen
with Asst. Minister for National Security Affairs Prince
Mohammed bin Naif (MbN) highlight the SAG’s commitment to
counter-terrorist activity in the Kingdom by partnering with
the USG in protecting its critical infrastructure, especially
its energy production sites. MbN reconfirmed the SAG’s
commitment to pay all critical infrastructure protection
costs of the Office of Program Management-Ministry of
Interior (OPM-MOI), including USG employee salaries. He
concurred any changes necessary in the Technical Cooperation
Agreement (TCA) be made to allow such payments, but remarked
hopefully the lawyers would not be problematic. Regarding
the Saudi deradicalization program, he considered it a
success in generating Saudi public anger at radical
extremists and was unconcerned by those who escaped the
program to rejoin Al Qaeda (AQ), noting they actually serve
the SAG’s purpose because they delegitimize extremism by
rebuffing the chance for rehabilitation and a new life,
further alienating violent radicals from the populace. MbN
did express concern that some ARAMCO employees posed a threat
of internal sabotage to oil facilities due to extremist
sympathies. END SUMMARY.
OPM-MOI NOW OPERATIONAL
———————-
¶2. (SBU) OPM-MOI, a DOS-led interagency security assistance
organization including DOE and DOD, established by the formal
TCA signed by the Secretary and Minister of Interior HRH
Prince Naif bin Abdulaziz Al Saud in May 2008 to partner with
the Saudi MOI in protecting the Kingdom’s critical
infrastructure with full SAG funding (Reftel A), is now
operational in Saudi Arabia. In the March 9 meeting between
LtGen Allen and MbN, LtGen Allen introduced the senior U.S.
military officer assigned to assist the MOI in training its
Facilities Security Force (FSF). Likewise, we informed MbN
of the arrival of the senior DOS officer in Riyadh on March
10 to serve as OPM-MOI’s Program Manager and overall leader.
These officers, along with the senior DOE Liaison and
associated CENTCOM and Embassy Riyadh personnel, now serve as
the core of OPM-MOI who will begin assisting the Saudis in
enhancing the protection of their critical infrastructure,
with initial focus on Saudi oil facilities.
¶3. (C) LtGen Allen reaffirmed to MbN the USG’s full
commitment to the protection of Saudi critical
infrastructure, emphasizing that CENTCOM Commander GEN David
Petraeus guarantees CENTCOM’s full support to this program.
Both concurred on the importance to the global economy of
preventing terrorists from attacking Saudi oil facilities.
MbN asserted the goal is to prevent attacks from ever being
carried out, recommending OPM-MOI include intelligence links
in its operational plans. LtGen Allen commended MOI’s
success in dealing with internal terrorist threats in the
Kingdom, and its successful rehabilitation program with Saudi
Guantanamo returnees and extremists captured in Saudi Arabia.
RIYADH 00000408 002 OF 003
¶4. (SBU) MbN was informed that the initial OPM-MOI work
contracts, consisting of the DOE Project Specific Agreement
(PSA) to conduct vulnerability assessments of oil sites and
the DOD Letter of Offer and Acceptance (LOA) to implement
urgent needs training of FSF troops, have been submitted to
MOI staff for approval and signature. MbN was grateful for
USG efforts and assured us full funding would soon follow the
signing of these documents, and reconfirmed the SAG’s
commitment to pay all OPM-MOI costs. He also agreed to fund
all USG employee costs, concurring with any necessary TCA
changes to allow such payments, commenting that “hopefully
the lawyers will not cause us any problems.”
¶5. (SBU) MbN had previously acknowledged to the Ambassador
the MOI’s lack of technical capacity in effectively working
with OPM-MOI. To rectify this problem, OPM-MOI has begun
coordination with the Saudis for SAG-funded English language
and management training in the U.S. for mid-level MOI
officers who will be our future interlocutors. In the
interim, OPM-MOI is drafting a plan for MOI to contract and
fund bilingual Americans experienced in USG contracting and
Foreign Military Sales to work in MOI assisting in PSA, LOA,
and related OPM-MOI projects.
DEFUSING THE INTERNAL SAUDI THREAT
———————————-
¶6. (SBU) MOI sponsored the second annual Riyadh Security
Conference from March 2-5, which included such notables as
FBI Director Robert Mueller and former Attorney General Edwin
Meese. Other participants were U.S., British and Saudi
security officials, academics, and the U.S. and U.K
Ambassadors to the Kingdom. The theme of this well-received
conference was how to deradicalize extremists. This topic
was noteworthy as several Saudi Guantanamo returnees had
recently disappeared, with two resurfacing in Yemen as AQ
members (Reftels B, C and D).
¶7. (C) In private discussions with us, MbN observed it was
unfortunate these individuals had escaped and some had
rejoined AQ, but stated the Saudi deradicalization
rehabilitation program was nonetheless a success and was
unconcerned by these individuals. He explained while these
Guantanamo returnees rejoining AQ in Yemen was embarrassing
to the SAG, the program itself was achieving the true goal of
turning the Saudi populace against extremist radicals. These
individuals were being denounced by the Saudi public, and
even by their immediate families. The SAG was offering these
individuals employment and marriage opportunities to allow
new, peaceful and productive lives. MbN shared that if the
Saudi people saw that the SAG had offered these extremists a
helping hand which they slapped away, instead of a clenched
fist used against them, then their families, tribes and the
Saudi nation as a whole would view the SAG as “the
benefactor” and these unrepentant extremists as “deviants.”
According to MbN, in Arab culture this is an extremely
powerful and advantageous position for the SAG as it cuts off
the necessary public support extremists need to operate.
THREATS - YEMEN, IRAN AND FROM WITHIN
————————————-
¶8. (C) In response to his views on the current threat, MbN
listed three:
— Yemen was “a dangerous, failed state” similar to
Afghanistan by allowing AQ to regroup and become its
RIYADH 00000408 003 OF 003
operational base. He mentioned the SAG was using its funds
to gain Yemeni tribal cooperation through public works
programs, especially as a way to curb the lawlessness along
the Saudi-Yemeni border. MbN offered that while Yemeni
President Saleh was not the best leader, after 30 years in
power, his removal, either through natural causes or
rebellion, would leave a vacuum that would further weaken
Yemen. He opined that overtures to the Taliban in
Afghanistan were useful, as it would make Al Qaeda leaders
there nervous and unsure if they would be betrayed, but this
would also make them more likely to seek “safe haven” in
Yemen. LtGen Allen informed that U.S. Special Forces and
U.S. Navy trainers were stepping cooperation with Yemeni
forces to counter border and maritime threats.
— Iran, according to MbN, was a greater threat from its
destabilizing actions than from its nuclear program. He
added Iran currently has many weaknesses due to its
deteriorating economy. USG overtures for talks with Iran
would exploit those weaknesses and further undermine the
mullahs.

— Regarding the internal Saudi threat, MbN stated AQ was
beaten down in the Kingdom, but he was concerned of “insiders
in ARAMCO” and that ARAMCO employees with full access to its
facilities were extremists or extremist/Hezbollah
sympathizers, using their authorized access and/or technical
knowledge to commit sabotage. Again, he then emphasized the
importance of OPM-MOI to provide rapid training of the FSF
and detailed assessments of the vulnerabilities of Saudi oil
facilities.
¶9. (C) COMMENT. The SAG has worked to counter terrorism
within the Kingdom, achieving significant success. Both
through its kinetic operations against AQ, to its soft power
deradicalization rehabilitation program where it has turned
the Saudi public against AQ and violent extremism. Bilateral
cooperation on the protection of Saudi critical
infrastructure, as previously reported, is of immense
importance to ensure adequate energy supplies are available
to the global economy. OPM-MOI offers a tremendous venue to
strengthen the U.S.-Saudi bilateral relationship which then
allows a broadening of Saudi support on a host of issues.
END COMMENT.
FRAKER

C O N F I D E N T I A L RIYADH 000935

SIPDIS

STATE FOR NEA/ARP (HARRIS)
DEPT PASS USTR FOR JASON BUNTIN

E.O. 12958: DECL: 07/12/2010
TAGS: ETRD ECIN PREL GCC SA AS NZ JA
SUBJECT: GCC TRADE NEGOTIATIONS DOWN UNDER: STICKING POINTS
AND FRUSTRATION WITH THE GCC

Classified By: DCM David Rundell reasons 1.4 (b) and (d).

SUMMARY
——-

¶1. (C) At a diplomatic roundtable on free trade agreement
(FTA) negotiations with the Gulf Cooperation Council (GCC),
the Australian and New Zealand DCMs expressed fatigue and
frustration with their respective experiences. The New
Zealand DCM said his government is prepared to pull out after
the next round if the two sides cannot make significant
progress. Both said their governments are frustrated with
the GCC as a negotiating partner, and both agreed the GCC
consultations between negotiating sessions has proved to be a
major barrier to progress. End summary.

STICKING POINTS AND FRUSTRATION WITH THE GCC
——————————————-

¶2. (C) According to Australian DCM Roy Clogstoun, his
country’s trade agreement negotiations with the GCC are hung
up on the issue of the GCC’s current five percent tariff on
automobile imports (which Australia would like to eliminate)
and unresolved issues with the services and investment
sections of the agreement. While the current tariff is
relatively low, Australians fear another country (i.e. Japan)
could gain an advantage by negotiating a lower tariff
subsequently. New Zealand’s negotiations are stuck on the
issue of dairy products, though New Zealand DCM Peter Noble
also noted the services and investment portions of their
agreement were sub-optimal (Note: Reportedly, dairy and
sheep products account for 80 percent of New Zealand’s
exports to the GCC.). He described the dispute mechanism and
arbitration sections of the agreement as “acceptable,” but he
said his country was preparing to abandon the process after
the next round in October if negotiators did not make
substantial progress towards reaching an agreement by then.

¶3. (C) Both DCMs expressed frustration with the GCC, going so
far as to question the GCC’s motivation for negotiating the
agreements. Noble implied the Saudis may be using the
negotiations as a training exercise for future agreements
with larger trading partners, noting the Chinese had openly
done so with his country in bilateral trade negotiations.
Both emphasized repeatedly that the GCC’s lack of interim
consultations between member states seriously hampered
progress that otherwise might be easy to achieve. “They
don’t talk to each other between rounds of meetings,” one
said, “they just return to their capitals until the next
round.” The two DCMs asserted that Saudi Arabia controls the
GCC in negotiations and has used smaller GCC members as pawns
in the process — convincing other individual members to
pretend to be the lone holdout opposing a proposal, when in
fact all six member governments actually were in opposition.
Our contacts have said the members tend to act in concert to
distract attention from controversial issues like the human
rights records of individual GCC countries.

¶4. (C) Japanese DCM Fumio Iwai told Econoff in a separate
meeting that the GCC postponed the July round of its free
trade negotiations with Japan. “We are in the same boat as
the Australians,” he said, in that the sticking point in
their negotiations is the five percent auto tariff. Iwai
said the Saudis had the strongest opposition to lowering the
tariff, and he noted that the issue had been raised at the
highest bilateral levels.

COMMENT
——-

¶5. (C) Given GCC officials previously have told us they also
are in FTA negotiations with China, Japan, and Turkey, it
seems likely the New Zealand DCM’s fears that the GCC is
using its separate negotiations with Australia and New
Zealand as a training round may be well-founded.
Nevertheless, that does not mean the GCC wants them to fail.
The failure of EU - GCC negotiations in late 2008
demonstrated an inflexibility which also seems underway here.
One bright spot: both DCMs noted the successful conclusion
of U.S. FTAs with Bahrain and Oman had positively influenced
the negotiating atmosphere.
ERDMAN

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001303

SIPDIS

E.O. 12958: DECL: 09/29/2009
TAGS: PREL PGOV SA SY LE TU
SUBJECT: ASAD’S VISIT: SAUDI-SYRIAN RAPPROCHEMENT BACK ON TRACK?

REF: A. BEIRUT 1079
¶B. RIYADH 1154

RIYADH 00001303 001.2 OF 002

Classified By: DCM Susan L. Ziadeh,
reasons 1.4 (B) and (D)

SUMMARY
——-

¶1. (C) Syrian President Bashar Al-Asad’s unexpected
attendance at the King Abdullah University of Science and
Technology (KAUST) opening, and his lengthy meeting with King
Abdullah on the margins, has encouraged speculation about
further Saudi-Syrian rapprochement and its potential regional
implications. Post contacts describe media reports of the
meeting as largely accurate, noting that Lebanese government
formation, Palestinian reconciliation, and Asad’s invitation
to King Abdullah to visit Damascus dominated the agenda.
They confirm that Turkish mediation played a role in bringing
about the visit, and suggest that the Saudis and Syrians now
have a clearer picture of one another’s expectations. While
the Saudi King has agreed in principle to visit Damascus, it
is still unclear how quickly this will come about or if
Lebanese government formation is a prerequisite, though
travel by a Saudi delegation to Beirut Sep 30 suggests this
may be the case. Contacts suggest the King will travel with
the newly-appointed Syrian Ambassador to Saudi Arabia, Mahdi
Dakhlallah within “the next few weeks.” END SUMMARY.

UNEXPECTED VISIT RAISES EXPECTATIONS
————————————

¶2. (U) Asad’s last-minute decision to attend the September
23 KAUST opening came as a surprise to almost everyone
involved. Press reports characterized the move as a clear
sign of continued Saudi-Syrian rapprochement and focused
heavily on its potential impact on the government formation
process in Lebanon. The official Saudi Press Agency
announced that the two leaders had discussed “major regional
and international developments,” without further specifics.
The Syrian Arab News Agency downplayed the meeting’s emphasis
on Lebanon, noting that “the relationship between Damascus
and Riyadh does not go through Beirut, and Syria and Saudi
Arabia agree that Lebanon,s affairs must be managed by the
Lebanese.”

ABDULLAH AND ASAD DISCUSS WHAT COMES NEXT
—————————————-

¶3. (C) According to contacts at the Egyptian embassy, the
media accurately reported details regarding the size and
nature of the meeting. King Abdullah, his son Prince
Abdulaziz, and Asad were the only individuals present, and
discussion of Lebanon and Palestinian reconciliation
dominated the agenda. The sides outlined specific, concrete
expectations they had for one another. With respect to
Lebanese government formation, King Abdullah asked Asad to
use his influence over his Syrian allies, and encourage Free
Patriotic Movement Leader Michel Aoun to abandon his
insistence on the Ministry of Transport and Communication
portfolio for Gebran Bassil. The King also urged Asad to
push harder on Hamas to reach an agreement on Palestinian
reconciliation in Cairo. For his part, Asad asked the King
to visit Damascus. The King reportedly agreed to the visit;
however, he did not indicate whether this visit was
contingent upon Lebanese government formation. Asad
reportedly promised the King a response to his requests,
which was delivered to Culture Minister Khoja via Syrian
information minister Mohsen Bilal on September 27. (NOTE:
The Saudi Press Agency reported that Bilal had delivered an
unspecified “invitation.” END NOTE.) While the timing of
any visit is still unclear, the Egyptians expect it will
happen “within the next few weeks,” and that he will travel
with newly-appointed Syrian Ambassador to Saudi Arabia,
former Information Minister Mahdi Dakhlallah. The Saudis
reportedly agreed to Dakhlallah’s appointment on September
26; he is expected to present his credentials at the earliest
opportunity.

¶4. (C) Meanwhile, notwithstanding protests from both sides
regarding the Lebanese angle, a Saudi delegation headed by
Mecca Governor Khalid Al Faisal travelled to Beirut for
meetings with Lebanese parliamentarians; unusually, the
delegation included Minister of State Abdulaziz bin Fahd, who
met with Sa’ad Hariri and President Michel Sleiman to convey
a message from King Abdullah. See ref A for details.
TURKISH CHARGE: WE MADE IT HAPPEN
———————————

¶5. (C) Turkish Charge Sadik Arslan told Poloff on September

RIYADH 00001303 002.2 OF 002

28 that reports of intense Turkish lobbying to convince a
reluctant Asad were true, and that the Turks had undertaken
these efforts by their own initiative. He also indicated
that Jordanian King Abdullah may have played a role, though
he did not mention any specifics. “It was during Eid, so
Asad was reluctant to come (to KAUST),” Arslan said, “but we
believed it was important and the Saudi-Syrian relationship
is essential.” Without a Saudi-Syrian agreement, he
continued, there was little hope that Lebanon could overcome
its government formation crisis. As for the rumored visit of
King Abdullah to Damascus, Arslan said, “we are hopeful that
this will happen very soon.” When pressed as to whether this
visit could be expected in days, weeks, or months, he
declined to speculate, adding only that he felt the current
atmosphere was “positive.”

COMMENT: BACK ON TRACK?
———————-

¶6. (C) Asad’s visit to the Kingdom is the latest in a series
of steps towards a fuller Saudi-Syrian rapprochement.
Whether the meeting will lead to the King visiting Damascus-
and whether this visit will become before, or after Lebanese
government formation- is still unclear. Saudi Ambassador
Abdullah Al-Eifan’s arrival in Damascus on August 25 was
confirmation that the Saudi-Syrian relationship was ready to
enter a new phase. However, Khoja’s remark to former Charge
d’Affaires a.i. Ambassador Erdman that the Saudis were “not
talking to the Syrians about Lebanon” (ref a) on September 1
suggested Lebanon was becoming an irritant to the process.
Asad’s visit, and the naming of a new Syrian Ambassador soon
afterwards, indicates the relationship may be back on a more
positive track.
SMITH

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001166

SIPDIS

NSC FOR BROWN, TREASURY FOR GLASER, DHS FOR WARRICK,
CENTCOM FOR POLAD GFOELLER

E.O. 12958: DECL: 09/08/2019
TAGS: PREL PGOV PTER KTFN EFIN SA PK
SUBJECT: FORMER TERRORIST SAYS AL-QAEDA LACKS FINANCING
REF: A. RIYADH 1110 B. RIYADH 1121 C. RIYADH 1151

Classified By: CDA Ambassador Richard Erdman for reasons 1.4 (B) and (D )

SUMMARY
——-

¶1. (C) In a September 6 interview with liberal daily Al-Watan, former Al-Qaeda fighter Fawaz Al-Otaibi, whose surrender to Saudi authorities was announced on September 2, said that Al-Qaeda was in a “”catastrophic financial situation”” — thanks in part to strict measures aimed at cutting off the flow of terrorist financing — and was now directing its efforts towards recruiting Arab youths to perform suicide operations in their home countries. Commenting on Otaibi and the concept of Jihad in general, Al-Watan editor and former Osama bin Laden confidant, Jamal Kashoggi, told us the concept of jihadism is a key tenet of Islam; it will not go away, but we should work to channel the concept into a state context, where decisions concerning the duty to wage jihad must rest with the state rather than the individual. In related news, the Ministry of Social Affairs announced plans to institute quarterly reviews of charities to prevent “”financial misconduct,”” including direction of charitable fund to terrorist activities. END SUMMARY.

AL-OTAIBI’S SURRENDER MADE PUBLIC
———————————

¶2. (U) On September 2, the MOI announced that Fawaz Al-Otaibi, a Saudi on the 85 most wanted list, had surrendered to authorities. The announcement came less than a week after the failed suicide attack on Assistant Interior Minister Prince Mohammed bin Naif (reftels), and gave no indication of how long Otaibi had been in custody. The report said he had been reunited with his family and allowed to perform Umrah. Prior to his surrender, Al-Otaibi reportedly called his parents and told them he wanted to return to Saudi Arabia and hand himself in. He had left the Kingdom approximately 1 year ago for the UAE, and his last known location prior to surrendering was reportedly Iran.

¶3. (U) In a Saudi Gazette interview published September 6, Otaibi’s mother claimed her son had been dreaming of Jihad since his teens. He told his family he was being transferred to a national guard post in Tabuk, said farewell, and later called his brothers, telling them “”he was in Pakistan for Jihad,”” she added. She claimed to have noticed no change in his behavior; that he had finished secondary school and married; and that prior to his sudden departure she had assumed he led “”a normal life.”” In his final phone calls to family members prior to his surrender, he said he “”regretted leaving the Kingdom”” and “”didn’t find the jihad he had hoped for.”” Otaibi surrendered to the Saudi Embassy in Pakistan and has been held at the Al-Haier prison in Riyadh since his capture.

AL-QAEDA FRUSTRATED, LACKS FUNDS
——————————-

¶4. (U) On September 6, Otaibi spoke out about his experiences in an interview with influential daily Al-Watan. The main points of the interview follow:

¶5. (U) FINANCIAL RESOURCES DRYING UP: Measures aimed at cutting off the flow of money to Al-Qaeda, including efforts to control money channeled through suspicious charitable organizations, had forced Al-Qaeda into a “”catastrophic financial situation.”” As a result, Al-Qaeda was reducing its fighters abroad and relying on experienced local veterans. Individual cell leaders were beginning to turn interested recruits away, citing insufficient resources.

¶6. (U) REHABILITATION PROGRAMS IRK AL-QAEDA: The Al-Qaeda camp in Waziristan, which Otaibi joined in September of last year, had been populated by many frustrated young Arabs- especially Saudis, Egyptians, Libyans and Yemenis. However, many decided to return to their home countries when they endorsed policies that invited them to return and repent. Otaibi suggested Al-Qaeda was annoyed by countries that adopted these policies successfully, most notably Saudi Arabia.
RIYADH 00001166 002 OF 002

¶7. (U) TARGETED RECRUITING FOR HOME COUNTRY OPERATIONS: Otaibi said the recruitment process targeted very few people, for both psychological and moral reasons. Some Afghan fighters believe fighting beside Arabs gives them God’s blessing, but Al-Qaeda leaders preferred to limit the numbers of Arab fighters. Current efforts were focused on recruiting youths to carry out terrorist operations in their home countries. In fact, newly recruited foreign fighters were not allowed to participate on the front in Afghanistan, but were instead asked to join suicide bombing groups targeting Saudi Arabia, other GCC countries, and elsewhere.

AL-WATAN’S EDITOR ON AL-OTAIBI, EXTREMISM
—————————————-

¶8. (C) Jamal Kashoggi, editor of the influential daily Al-Watan, told Charge at a September 3 Iftar dinner that he had had an opportunity to interview Al-Otaibi in his home before the arranged time for turning himself in. The interview, he said, had been relatively short and he was hoping to have another opportunity to meet with Otaibi for a longer interview. Kashoggi, self-described as coming from a very fundamentalist family once but no longer associated with the Muslim Brotherhood, was a friend of Osama bin Laden in his younger days, as he was beginning his ideological journey into violent jihadism. (Kashoggi is frequently quoted in “”The Looming Tower”” as a source on Osama bin Laden, his character, and personality.) At the September 3 dinner, Kashoggi said we needed to come to grips with the fact that jihadism IS part and parcel of Islam. Pretending that it isn’t is a delusion. The way to reconcile this reality with the need for a peaceful social order and stability was to make clear to the Muslim community that the decision to wage jihad resided not with individuals, but with the leader of the State- in this case, the Custodian of the Two Holy Mosques.

NEW QUARTERLY REVIEWS OF SAUDI CHARITIES
—————————————-

¶9. (U) In related news, Deputy Minister of Social Affairs Abdullah Al-Yousef announced on September 4 plans to conduct quarterly reviews of the financial accounts of charities across the Kingdom. Auditors will be expected to inform the ministry of any financial misconduct, and “”the ministry will act according to the violation of charity regulations.”” These new measures indicate, in part, continuing Saudi efforts to stem the flow of terrorist financing.

ERDMAN “

S E C R E T RIYADH 000159

NOFORN

SIPDIS

FOR NEA/ARP: JHARRIS

E.O. 12958: DECL: 02/17/2025 U

TAGS: PREL, PINR, SA, YM

SUBJECT: (S) SAUDI ARABIA: RENEWED ASSURANCES ON SATELLITE

IMAGERY

REF: SECSTATE 8892

Classified By: Amb. James B. Smith for reasons 1.4 (b, c and d)

SUMMARY

——-

1. (S/NF) Ambassador met with Assistant Minister of Defense and Aviation Prince Khaled bin Sultan to relay U.S. concerns about sharing USG imagery with Saudi Arabia in light of evidence that Saudi aircraft may have struck civilian targets during its fighting with the Houthis in northern Yemen.

Prince Khaled described the targeting decision-making process and while not denying that civilian targets might have been hit, gave unequivocal assurances that Saudi Arabia considered it a priority to avoid strikes against civilian targets. Based on the assurances received from Prince Khaled, the Ambassador has approved, as authorized in reftel, the provision of USG imagery of the Yemeni border area to the Saudi Government. End summary.

USG CONCERNS ABOUT POSSIBLE STRIKES ON CIVILIAN TARGETS

——————————————— ———-

2. (S/NF) Ambassador Smith delivered points in reftel to Prince Khaled on February 6, 2010. The Ambassador highlighted USG concerns about providing Saudi Arabia with satellite imagery of the Yemen border area absent greater certainty that Saudi Arabia was and would remain fully in compliance with the laws of armed conflict during the conduct of military operations, particularly regarding attacks on civilian targets. The Ambassador noted the USG’s specific concern about an apparent Saudi air strike on a building that the U.S. believed to be a Yemeni medical clinic. The Ambassador showed Prince Khaled a satellite image of the bomb-damaged building in question.

IF WE HAD THE PREDATOR, THIS MIGHT NOT HAVE HAPPENED

——————————————— ——-

3. (S/NF) Upon seeing the photograph, Prince Khalid remarked, “This looks familiar,” and added, “if we had the Predator, maybe we would not have this problem.” He noted that Saudi Air Force operations were necessarily being conducted without the desired degree of precision, and recalled that a clinic had been struck, based on information received from Yemen that it was being used as an operational base by the Houthis. Prince Khalid explained the Saudi approach to its fight with the Houthis, emphasizing that the Saudis had to hit the Houthis very hard in order to “bring them to their knees” and compel them to come to terms with the Yemeni government. “However,” he said, “we tried very hard not to hit civilian targets.” The Saudis had 130 deaths and the Yemenis lost as many as one thousand. “Obviously,” Prince Khaled observed, “some civilians died, though we wish that this did not happen.”

HOW THE TARGETS WERE SELECTED

—————————-

4. (S/NF) Prince Khaled gave the Ambassador further background, explaining that the targets given to the Saudi Air Force were studied and recommended by a Saudi-Yemeni joint committee headed by Saudi and Yemeni general officers. That joint committee reported to him, and no targets were struck unless they had clearance from this joint committee. “Did they make mistakes? Possibly.” Prince Khaled also reported that the Saudis had problems with some of the targeting recommendations received from the Yemeni side. For instance, there was one occasion when Saudi pilots aborted a strike, when they sensed something was wrong about the information they received from the Yemenis. It turned out that the site recommended to be hit was the headquarters of General Ali Mohsen Al-Ahmar, the Yemeni northern area military commander, who is regarded as a political opponent to President Saleh. This incident prompted the Saudis to be more cautious about targeting recommendations from the Yemeni government.

CEASEFIRE COMING SOON

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5. (S/NF) The Ambassador told Prince Khaled that the USG is looking to Saudi Arabia to help bring an end to the Houthi fighting soon. Prince Khaled responded that Saudi Arabia is “looking for ways to end this conflict in a way that fosters good relations.” He said that he met with President Saleh last Wednesday to discuss Houthi ceasefire terms, and they agreed that, so long as the Houthis deliver on the terms they offered, there should be news about a ceasefire “within a week.” As part of the ceasefire arrangements the Yemeni military will be deployed on the Yemeni side of the border to prevent future Houthi incursions into Saudi Arabia. “Then,” Prince Khaled noted, “we can concentrate on Al-Qaida.”

COMMENT

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6. (S/NF) Prince Khaled, in addressing the Ambassador’s concerns about possible targeting of civilian sites appeared neither defensive nor evasive. He was unequivocal in his assurance that Saudi military operations had been and would continue to be conducted with priority to avoiding civilian casualties. The Ambassador found this assurance credible, all the more so in light of Prince Khaled’s acknowledgment that mistakes likely happened during the strikes against Houthi targets, of the inability of the Saudi Air Force to operate with adequate precision, and the unreliability of Yemeni targeting recommendations. Based on these assurances, the Ambassador has approved, as authorized in reftel, the provision of USG imagery of the Yemeni border area to the Saudi Government. While the fighting with the Houthis appears to be drawing to a close, the imagery will be of continuing value to the Saudi military to monitor and prevent Houthi incursions across the border as well as enhancing Saudi capabilities against Al-Qaeda activities in this area.

SMITH

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
————-

¶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
……………..
Reference ID: 09RIYADH1557
Created: 2009-11-23 14:02

Cable dated:2008-06-03T15:39:00C O N F I D E N T I A L SECTION 01 OF 04 RIYADH 000868SIPDISNEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, DAS AHEGBERG, AND MWILLIAMSON TREASURY PASS TO A/S CLOWERY, DAS BAUKOL AND CMORAVEC DHS PASS TO TWARRICK AND DGRANT CIA PASS TO TCOYNEE.O. 12958: DECL: 06/03/2018 TAGS: EPET ENERG EFIN SA

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Summary
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¶1. (C) Minister Naimi’s offer of an additional 300,000 barrels per day (bpd) in the wake of President Bush’s visit had minimal impact on crude prices; some analysts stated 500,000 bpd-plus would be needed to impact crude prices near $128/barrel. Market analysts in Riyadh point out widespread petrol subsidies in China, India, and the Middle East ensure price feedback mechanisms are broken; they therefore predict crude demand will continue to rise there. Governments are abandoning plans to roll back petrol subsidies in the face of escalating food inflation. Our contacts are concerned languishing refining margins are driving down refinery utilization. Recession may be the one brake on crude prices in the near term, but our contacts are divided on its impact. Their crude price forecasts range between $90 and $150/barrel.

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Saudis Resist Continued Requests for Significantly More Production ——————————————-

¶2. (C) The oil industry newsletter “Foreign Reports” summed up the industry’s take-way from the President’s recent visit: “Responding to demand, not demands - The message from Riyadh this afternoon may be summed up: Saudi Arabia can and will respond to increased demand from its refining customers by increasing its production, but it will not respond to politically-motivated calls for more oil.” Minister Naimi was careful to point to customer requests to justify his announcement of a increase in production of 300,000 bpd. The increase should bring Saudi Arabia’s June production to 9.45 million bpd. By Monday, OPEC price hawks, Libyan oil official Shukri Ghanem among them, jumped in to criticize Minister Naimi’s decision “to cave in to requests from the U.S.”

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Is this Market Broken?
———————-

¶3. (C) Here in Riyadh, our banking sector contacts are focused more on long-term market disequilibirium. Like energy economists worldwide, they are scratching their heads, asking how we can slow this spiral of escalating crude prices. Brad Bourland, Chief Economist, and Paul Gamble, Head of Research from Jadwa Investments, one of the newly-established Saudi investment banking houses, are concerned the price feedback loop between crude and finished petroleum products is increasingly tenuous globally. Bourland points to analysis by Deutschebank’s Adam Siminsky, who posits a growing disconnect between the crude and finished product markets.

¶4. (C) Bourland explains while crude has increased by nearly 6 times in the last four years, gasoline prices in the U.S. have at most tripled. While consumers complain vociferously about rising pump prices, nonetheless they are not absorbing the full brunt of rising input prices. The refining sector is absorbing the growing pricing differentials between crude and finished products, leading to plummeting refining utilization rates in the U.S. For example, refining utilization rates fell to 84 percent in the U.S. recently. Bourland noted the U.S. majors would continue to operate their vertically-integrated refineries - as they have little choice but to move their crude through the

RIYADH 00000868 002 OF 004

system. However, under these price conditions, independent refiners operate in the red, and many are simply idling their capacity. The Petroleum Economist confirmed that in March, many refiners ran at a loss.

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Poor Price Elasticity in China, India, ME: Food Price Inflation is a New Complication
——————————————-

¶5. (C) Bourland noted that given the widespread public subsidies in China, India, and the rapidly growing markets of the Middle East, there is no pass-through of these higher crude prices to the consumer in much of the world’s market. Essentially there is no price signaling, “go slow” sign in the form of higher prices for consumers as crude rises. As a result, he expects we will continue to see unrestrained demand growth, especially in the Middle East and China.

¶6. (C) Bourland was not optimistic about prospects for encouraging greater price elasticity in the world energy markets. Inflation, particularly food inflation, recently has become a front-burner issue for many nations. Pressed consumers in many nations have recently found themselves on a knife’s edge regarding food security, and are not likely to peacefully accept the rolling back of petrol subsidies which have become effectively institutionalized. Bourland also cautioned that Saudi Arabia’s domestic consumption of crude continues to grow by about 100,00 bpd annually, ensuring a tight global market for the foreseeable future.

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U.S. Market Demonstrates Elasticity, but Price Responses in Europe also Limited
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¶7. (C) Bourland believes the U.S. market is demonstrating some price elasticity in the downstream market, and this is beginning to curb consumption. In the U.S., pump prices are rising sharply. He noted gasoline in Connecticut, for example, had hit $4.50/ gallon. Gamble, a British citizen, noted that in Europe, the pump price is heavily weighted towards the government’s tax take, so the impact of rising crude prices is felt much more slowly. Consumer response in Europe is also correspondingly slower. Europe’s ability to respond with transport measures that might have a near-term impact on per capita fuel consumption is also limited, as most people already take public transportation or drive fuel efficient cars.

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IEA Pessimistic on Prospects for Greater Price Elasticity ———————————-

¶8. (C) Energy Attache queried Dr. Nobuo Tanaka, the Executive Director of the International Energy Agency, during a recent presentation at the International Energy Forum in Riyadh about the prospects for introducing greater price elasticity in the global market. Specifically, in November 2007, China had announced it would begin rolling back subsidies. Dr. Tanaka indicated that the harsh winter weather and the associated transportation problems at the Chinese New Year had largely halted roll-out of China’s program. He was not optimistic about other large developing nations following suit with new roll-backs. In light of the recent tragic earthquake in Sichuan, it is likely China will be in no position to force a politically unpopular subsidy roll-back on the population now.

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Jadwa Forecasts $90 Barrel Oil for 2008; SABB Forecasts $150 —————————————-

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¶9. (SBU) Looking forward, Jadwa Investments forecasts an average price of $90/barrel for oil 2008, with a drop to $70/barrel by the end of 2008. Jadwa forsees a constant monthly downward trend in demand, due to the U.S. economic recession and its impact on the global economy. Bourland noted Jadwa’s analyses departed from DeutscheBank’s forecast of an average barrel of $105 for 2008. On the other hand, Dr. John Sfakiankis, from the Saudi British Bank, an HSBC subsidiary, remarks that the U.S. is already in recession, and crude prices nonetheless continue to rise. He predicts crude prices topping $150/barrel “are not unlikely” by the end of the summer.

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$15 Billion/Month into Official Reserves
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¶10. (C) Bourland estimates the Saudi state is earning roughly $1 billion/day now in oil revenues, of which it expends roughly half, and adds the other half to its official reserves. He noted SAMA added $15 billion to its reserves in March, the seventh month running that reserve additions totaled more than $10 billion. “The amounts are overwhelming,” Bourland summarized. He also explained that although the Saudi Arabian Monetary Authority (SAMA), the central bank, continued to hold U.S. Treasury bills, it was also diversifying. SAMA’s Investment Department “prides themselves on being diversified,” he related.

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Dollars: The Unloved Currency as Saudis Wait for a Possible Re-Valuation —————————————-

¶11. (C) This enormous influx of petro-dollars is largely held by SAMA. Bourland explained that Saudi investors, however, are currently hoarding riyals. They continue to be afraid of being caught out by a possible re-valuation in the USD-pegged currency. He noted investors continue to anticipate an eventual re-valuation, but “the pressure is not like it was last fall” when the fixed exchange rate came under heavy speculative attack in November. Instead, Bourland sees Saudis hoarding riyals because the “U.S. markets would go on sale” if the Saudi government re-values. Bourland pointed out it was difficult for Saudi investors to even find large quantities of U.S. dollars, saying “it’s hard to get $500 million or $1 billion in USD, the banks don’t want to hold that much.” Bourland stated he does not see much Saudi money involved in hedge funds or other speculative instruments allegedly running up crude prices.

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“The Money is Safer in the Ground”
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¶12. (C) Bourland noted that the confluence of demands to manage this enormous cash flow, and the challenges to managing growth in the oil sector were beginning to worry the Saudi leadership. He referenced recent comments from an informed source in the oil sector who explained that Saudi Aramco was scaling back proposed future expansion plans. Quoting King Abdullah’s recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and “leave crude in the ground for its children”, Bourland remarked, “There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn’t want to see it squandered.”

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Saudi MinPet: “Blame it on the Weak Dollar”
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¶13. (C) The Saudi Ministry of Petroleum has noted to us in

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consultations throughout 2007 and in January 2008 that much of the run-up of the price of crude could be blamed on the gradual decline in the USD, as crude contracts are priced in dollars. We concur to a certain extent, but as crude has surged beyond $110/barrel, and the dollar seems to have found a bit of a floor in recent weeks, we find this argument less compelling. As well, crude priced in euros and yen has also surged to new record highs in recent weeks. Taking inflation into account is another issue. The Economist noted in April that crude would have to hit $134/barrel to equal in inflation-adjusted terms 1981’s record crude prices. Two weeks ago, the NYMEX market did just that.

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Comment
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¶14. (C) Our Mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period. The May announcement of a 300,000 bpd increase in production barely dented price escalation. It appears unlikely Saudi Aramco could muster the million or more barrels which appear to be needed to make a dent in the normally upwards price trajectory. Saudi Aramco’s ability to sustain such a production increase for a year or more raises serious questions. A series of major project delays and accidents XXXXXXXXXXXX over the last couple of years is evidence that Saudi Aramco is having to run harder to stay in place - to replace the decline in existing production. Additional production would likely come from increasingly heavy crude which the world lacks sufficient capacity to easily refine. The Saudis appear dis-inclined to discount its heavy crude sufficiently, so the market is dis-inclined to purchase it. In neighboring Iran, the regime is now purchasing floating storage for heavy crude which has no takers. While this Mission is far from embracing doomsday “Peak Oil” theorists, Saudi Aramco’s challenges are significant.

¶15. (C) King Abdullah’s recent comments on “leaving some oil in the ground” did not set new oil production policy, but hewed to the previous Saudi commitments to build a capacity of 12.5 million bpd. Nonetheless, his remarks may hint at an emerging conservationist ethic in Saudi Arabia — extending beyond energy to encompass how the Kingdom will more broadly husband its resources for future generations. Bourland highlights the King’s concerns with energy issues, but also his growing worries with how his successors will manage and secure the Kingdom’s financial patrimony as well.
GFOELLER
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Reference ID: 08RIYADH868
Created: 2008-06-03 15:03

Cable dated:2008-05-07T17:53:00C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000732SENSITIVE SIPDISNEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, MWILLIAMSON, AND DASAHEGBURG TREASURY PASS TO A/S CLOWERY CIA PASS TO TCOYNEE.O. 12958: DECL: 05/07/2018TAGS: EPET ENERG ECON NI SA

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Summary
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¶1. (C) In a May 6 meeting with Assistant Minister of Petroleum (MinPet) Prince Abdulaziz bin Salman bin Abdulaziz Al-Saud, he outlined the Ministry’s latest thinking on record-high crude prices, and OPEC’s general refusal to budge on possible production increases. Contrary a few months ago, Prince Abdulaziz promised no relief on production or pricing. He told the Energy Attache that the Ministry was “extremely worried about demand destruction” in the U.S. as a result of the latest financial crisis indicators. However, he also fretted about squeezed refining margins in the U.S. and globally, noting the grave impact on U.S. refining utilization, currently running a scant 84 percent. He asked if the USG could assist the current political situation in Nigeria, where the production has collapsed to about a million barrels per day (mbpd) during the last week as a result of militant attacks and strikes. On the anti-OPEC lawsuits, he explained Saudi Arabia continued to gather amicus briefs for the now-consolidated cases in Texas. He generally dismissed the further threat of NOPEC legislation, saying if Congress could have passed the legislation, they would have done so already.

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“Refining Margins Shocked,” Refining Utilization Falling
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¶2. (C) Queried about Monday’s record surge in crude prices to above $120/barrel, Prince Abdulaziz noted, “We are extremely worried about demand destruction, like in the early 1980s. Aramco is trying to sell more, but frankly there are no buyers. We are discounting crudes, now we’re at a $10 differential between West Texas Intermediate (WTI) and Dubai Light, sometimes as much as a $12-$13 differential. Our buyers still bought less in April than they did in March.” Prince Abdulaziz attributed the lack of willing buyers to the current low refining margins. He indicated that that current high crude prices were squeezing refining margins, as refiners were unable to pass on the full brunt of crude prices to the end consumer. “There are no refining margins, refining margins have been shocked. It’s purely technical, not policy-induced. There are commercial impediments.” The consequence of poor refining margins was a declining refining utilization rate. Prince Abdulaziz fretted, “the U.S. refining utilization is 84 percent now, it’s usually above 90 percent. The quickest relief would be if crude prices would come down from these highs, if some of these political crises would resolve.” He queried if the USG could do anything to assist current political situation in Nigeria.

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“Grey Area of Demand Destruction, We Must Hold Our Guard” ——————————————— ————-

¶3. (C) Prince Abdulaziz dis-missed speculation that King Abdullah’s press statements last week on Saudi Arabia planning to cap production capacity at 12.5 million barrels per day and leave oil in the ground for future generations represented a new policy. He stated, “It’s a statement of fact, we need to be credible. We’re pumping more than 9 million bpd, and right now, there is a grey area of demand destruction. We must hold our guard, and wait and see what happens with potential demand. Vice President Cheney was very complimentary about our maintaining spare capacity. We are honest with our commitments, we’ve been credible with our program. The other producing countries should do it the way

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we do. If we announce new capacity, we budget for it, we allocate for it, we acquire rigs, we have timelines. We don’t have pipedreams, if we make an announcement, we are certain to supply it.

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Anti-OPEC Lawsuits and NOPEC Updates
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¶4. (C) On the issue of pending lawsuits against Saudi Aramco and the national oil companies of other OPEC member and oil producing nations, Prince Abdulaziz indicated:
-the lawsuits had been successfully consolidated into one court in Texas;
-Saudi Arabia had worked with most other OPEC nations to file amicus briefs with the court.
-To Iran’s offer to file an amicus brief, Saudi Arabia had said, “thanks, but no thanks,” recognizing it probably would not be helpful in a U.S. court;
-The Mexicans and Russians would also file amicus briefs.
-The Norwegians also now have a case filed against them in Florida, so are reluctant to file an amicus brief.
Prince Abdulaziz believes the Departments of State and Justice seem to be coming around to filing a Statement of Interest (SOI) on behalf of the Saudi government in the lawsuits, but noted the White House was still concerned about the political optics of such a move. He felt such concerns were mis-placed now, particularly with respect to possibly fueling NOPEC legislation.

¶5. (C) Prince Abdulaziz indicated that if NOPEC had the strength to pass it would have done so already, but it hasn’t, in large part he felt due to the Administration’s clear opposition. He argued the lawsuits and NOPEC had much in common: “The Adminstration needs to be consistent in its policy. The effects of the lawsuits are very similar to that of NOPEC, but the plaintiffs are individual companies, rather than the Attorney General.” Prince Abdulaziz added, “Frankly our Embassy feels that once people are aware of the ramifications of such legislation, they’ll be reluctant to abuse it. The Minister has been very candid to explain the ramifications, which would be far more serious for the U.S. economy and energy markets than the Saudi markets.”

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Comment
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¶6. (C) Prince Abdulaziz seemed more comfortable with the state of play in the anti-OPEC lawsuits, his considerable earlier anxiety much diminished. He appears to have largely dis-missed NOPEC legislation as a credible threat for now. We are concerned that the Saudi energy leadership does not seem sufficiently well-advised on how the current high oil price environment is fueling U.S. election year “resource nationalism,” and how this might impact our bilateral relationship in future years. In this vein, King Abdullah’s recent comments that Saudi Arabia would cap its production capacity at 12.5 million bpd and leave crude in the ground for its children — while representing no new initiative or substance — seemed ill-timed at a moment when the market is looking for calming words from the world’s energy market leader. GFOELLER
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Reference ID: 08RIYADH732
Created: 2008-05-07