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C O N F I D E N T I A L SECTION 01 OF 05 RIYADH 000313 
 
SIPDIS 
 
SIPDIS 
 
DOE PASS TO KHARBERT, AHEGBURG, GPERSON 
CIA PASS TO TCOYNE 
 
E.O. 12958: DECL: 02/14/2017 
TAGS: EPET ENRG EINV SA
SUBJECT: ENERGY WORKING GROUP MEETS IN RIYADH, DISCUSSES 
INTERNATIONAL OIL MARKET 
 
 
Classified By: AMBASSADOR JAMES OBERWETTER FOR 
REASONS 12958 1.4 B, D, AND E 
 
-------- 
Summary 
-------- 
 
¶1.  (SBU)  Assistant Secretary of Energy for Policy and 
International Affairs Karen Harbert and Prince Abdulaziz bin 
Salman al-Saud, Assistant Minister for Petroleum Affairs, 
Ministry of Petroleum and Mineral Resources (MOPMR) convened 
an Energy Working Group (EWG) in Riyadh on February 3.  The 
Energy Working Group is part of the Secretarial-level 
Strategic Dialogue.  The meeting was warm and cordial, as the 
senior DOE, State and MOPMR officials meet regularly.  Both 
parties forecast the international oil market will move into 
a period of slower growth in the medium term, with non-OECD 
nations continuing to drive oil market growth.  The parties 
agreed the non-conventional oil sources are becoming a modest 
but more important part of the world's energy portfolio.  The 
interlocutors expressed concern with the international oil 
companies (IOCs's) emphasis on enhanced oil recovery (EOR) 
and other technological improvements at the apparent expense 
of financing new exploration.  The Saudis critiqued both 
alternative fuel proponents and peak oil theorists, 
cautioning against the high cost of biofuels and assumptions 
that economic policy can overcome fundamental pricing 
challenges.  In light of supplier volatility in many regions 
in the world, the U.S. delegation emphasized the value the 
USG places on reliable suppliers such as Saudi Arabia. 
 
¶2.  (C) Assistant Secretary Harbert's meetings in Riyadh 
February 3 - including with Petroleum Minister Naimi (septel) 
- were well timed and responsive to Saudi policy-level 
concerns with the USG's increasingly stress on alternative 
fuels, and on the openness of the US investment climate to a 
Saudi proposed multi-billion dollar refinery expansion in 
Texas.  End Summary. 
 
----------------------------------- 
Reviewing the Energy Working Group 
----------------------------------- 
 
¶3.  (SBU) Technical presentations during the EWG highlighted 
oil market dynamics, forthcoming projects and opportunities 
in the upstream and downstream in both the U.S. and Saudi 
Arabia, and new U.S. energy policies with regard to 
alternative energy and fuel specifications.  The parties also 
discussed climate change and U.S.-Saudi energy cooperation. 
This is the first of four cables reviewing the EWG 
discussions, covering: 
 
a.  Forecasts and discussion of the international oil market 
b.  Saudi plans for upstream and downstream expansion 
c.  Climate change 
d.  Cooperation between the U.S. and Saudi Arabia, with a 
focus on the Joint Oil Data Initiative (JODI) 
 
¶4.  The following teams participated in the EWG: 
 
Visiting USG Delegation: 
--DOE Assistant Secretary for Policy and International 
Affairs Karen Harbert; 
--DOE Deputy Assistant Secretary Alan Hegburg; 
--DOE Director, Office of African and Middle Eastern Affairs 
George Person; 
--DOE, Energy Information Administration, Director of 
Integrated Analysis and Forecasting Glenn Sweetnam; 
--Department of State, Director International Energy and 
Commodity Policy Office, Stephen Gallogly. 
 
Economic Counselor Silverman, DOE Deputy Director for 
Electricity Delivery and Energy Reliability Alvarez, Energy 
Attache Ross, and Economic Officer Pacheco also participated 
in the EWG for Embassy Riyadh. 
 
The Saudi Working Group team consisted of: 
 
--HRH Prince Abdulaziz bin Salman al-Saud, MOPMR, Assistant 
Minister for Petroleum Affairs; 
--Dr. Majid Al-Moneef, MOPMR, OPEC Governor for Saudi Arabia; 
--Dr. Ibrahim al-Muhanna MOPMR, Advisor to the Minister and 
Director of Public Relations; 
--Dr. Mahmoud Al-Osaimy, MOPMR, Advisor to the Minister; 
--Dr. Ahmed Al-Ghamdi, Advisor to the Minister; 
--Advisor to the Minister on Climate Change Dr. Mohammed 
Al-Sabban; 
--Abdulelah Abdulaziz Albuniyan, MOPMR; 
--Yasser Mufti, Saudi Aramco, Corporate Advisor on Energy 
Outlook, Corporate Planning; 
--Dr. Mohammed Yahya Al-Qahtani, Saudi Aramco, Manager, 
Reservoir Description and Simulation Department; 
--Salahaddin Dardeer, Saudi Aramco, Engineering 
Superintendent, Riyadh Refinery. 
 
--------------------------------------------- ----- 
Mature Economic Cycle Creates Cyclical Slowdown; 
Demand Growth Continues in non-OECD, China 
--------------------------------------------- ----- 
 
¶5.  (SBU)  Saudi Aramco's Yasser Mufti kicked off a series of 
technical presentations with the MOPMR's analysis of the 
international oil market.  (Note: Saudi Aramco employees 
conducted all of the Saudi presentations, highlighting the 
tremendous depth and substance Saudi Aramco brings to the 
MOPMR's service.  End note.)  For 2007, the MOPMR forecasts 
the world economy's entry into a mature phase of the economic 
cycle will impact the international oil market, creating a 
cyclical slowdown for the foreseeable future.  Mufti noted 
interest rates appear to be on the upswing worldwide, which 
will dampen increased demand in the oil sector.  He stated 
the non-OECD countries, particularly China, will continue to 
be the crucial driver for increased oil consumption, with 
transport and feedstock key to their increased demand. 
Largely due to growth in the non-OECD market, the MOPMR 
forecasts increased demand for crude oil at 1.4-1.6 million 
barrels per day (mbpd) per year.  Projecting over the next 
seven years, MOPMR forecasts up to 3 mbpd in demand 
uncertainty. 
 
------------------------------------ 
China and the Middle East Continue 
Strong Demand Profile 
------------------------------------ 
 
¶6.  (SBU)  While noting China would continue to drive demand 
growth, Mufti described China's energy market as fragmented, 
with a huge urban-rural divide, and great regional variance. 
Gas oil and gasoline are the strongest growth components, 
driven by transport and the industrial sectors.  Urban areas 
could reach saturation in the foreseeable future in absorbing 
additional petroleum products, but a predominantly 
impoverished population in the interior will remain locked 
out of the growth in energy consumption enjoyed by city 
dwellers.  Due to a large population bulge at the bottom of 
the age pyramid, Mufti stated the Middle East, and Saudi 
Arabia in particular, will be among the strongest areas of 
demand growth.  Aerial views of Riyadh from 1972 to 2000 
vividly highlighted the city's dramatic growth and 
accompanying increase in energy demand. 
 
--------------------------------------------- ----- 
Non-OPEC Supply Growth Forecast at 1.2 mbpd/year; 
Industry Faces Serious Expenditure Challenges 
--------------------------------------------- ----- 
  
¶7.  (U)  Mufti then moved on to discuss supply side issues. 
In the non-OPEC states, OECD oil production declines are 
evident as fields mature.  Growth in deepwater and 
non-conventional oil production has eclipsed production in 
the former Soviet Union (FSU).  The MOPMR forecast non-OPEC 
supply growth 1.2 m/bpd per year in the medium term, with 
possible risks to supply growth including project delays, 
country risk, and normal production declines in maturing 
fields.  Mufti reiterated the constant refrain heard at every 
oil industry event: the industry is stretched by expenditure 
costs, particularly for scarce rigs and manpower.  The recent 
price environment first stimulated interest in enhanced oil 
recovery (EOR) projects.  However, he noted, we have not yet 
seen the price environment drive much new exploration. 
 
--------------------------------------------- ----- 
Non-OPEC Moving Beyond Conventional Oil, but 
Economics of Alternative Fuels Remains a Challenge 
--------------------------------------------- ----- 
 
¶8.  (U)  Mufti reviewed the MOPMR's analysis of alternative 
fuels, noting the resources and processes employed for 
alternative fuels were generally not new.  He forecast output 
of alternative fuels to more than double in the next ten 
years,  with a compounded annual growth rate of 8.8%.  He 
included tar sands, extra heavy oil, gas-to-liquids (GTL), 
coal-to-liquids (CTL), oil shale, ethanol, and biodiesel 
within his forecast.  Mufti highlighted the high capital 
costs of alternative fuels.  He pegged the capital cost to 
maintain a daily barrel of production capacity for 
alternative fuel at $25,000-$60,000, stating that Saudi 
Arabia crude costs only $5,000-$10,000 to maintain the same 
daily capacity.  Mufti stated some European biodiesel cost up 
to $120,000 per daily barrel of capacity.  He attributed 
large capital cost variances to factors such as  feedstock 
prices, technological efficiency, emissions, and fiscal 
incentives.  Moving on to ethanol, Mufti's analysis indicated 
the $60/barrel for crude oil was the breakeven point for U.S. 
corn-based ethanol. 
 
--------------------------------------------- ------ 
Growth in OPEC Oil Supply: 4.5 mbpd in Three Years 
--------------------------------------------- ------ 
 
¶9.  (SBU)  Mufti said the MOPMR expects OPEC supply to 
increase 4.5 mbpd in the next three years.  Iraqi output will 
be driven by it internal ability to supply oil, not external 
market requirements.  Natural gas liquids (NGL) and gas 
output will also rise.  There will significant upstream 
development in all of the "OPEC 10" nations (all OPEC members 
minus Iraq).  Mufti forecast steady but moderate oil 
production growth until the end of the decade.  He 
highlighted OPEC's spare oil production, indicating it will 
continue to grow. 
 
--------------------------------------------- -- 
Trade Increasingly Meeting Global Energy Needs 
--------------------------------------------- -- 
 
¶10.  (U)  The global economy is witnessing increased reliance 
on trade to meet its energy needs.  Mufti noted ten years 
ago, the global economy imported 53% of its oil, but now 
imports 61%.  New supply areas are geographically remote from 
major demand centers, and mature oil provinces in developed 
countries continue to experience production declines.  These 
factors, coupled with limitations on refining capacity in 
major demand centers, continue to drive increased trade in 
oil.  Mufti indicated the MOPMR expects growth in the oil 
trade will be three to four times the rate of global GDP 
growth. 
 
--------------------------------------  
Oil Increasingly Integrated into the 
Global Financial Markets 
--------------------------------------- 
 
¶11.  (SBU)  Mufti described the explosive growth in crude oil 
futures since 2003, noting about 2 billion paper barrels are 
now in trade.  The Saudi analysis indicated a link between 
higher oil prices and the influx of investor funds into the 
oil markets.  He remarked that as commodity markets become 
increasingly mature, investors tended to view oil futures as 
just another asset class, ripe for investing. He described 
the forward curve for oil futures as "weirdly shaped," 
stating "a lot of money believes prices will be higher going 
out."  As the oil futures markets play an increasingly large 
role in setting world oil prices, he remarked his team was 
now obtaining better insights into prospective oil prices 
from banks than from those working in the real oil sector, 
such as refiners. 
 
--------------------------------------------- ---- 
Saudis Cast Aspersions on Biofuel and Peak Oil 
Proponents; Policy Won't Wean the Public Off Oil 
--------------------------------------------- ---- 
 
¶12.  (SBU)  In a presentation aimed at both proponents of 
alternative and biofuels, as well as peak-oil theorists such 
as Matt Simmons, Mufti concluded by quoting from a 2002 
article, "A Half Century of Long-Range Energy Forecasting 
Errors."  The authors identified a number of common errors in 
long-range energy forecasting, such as underestimating the 
size of world energy resources, underestimating the role of 
prices and the adaptability of markets, substantial 
overestimate in primary energy consumption, strong influence 
of events and trends at the time of the forecast, overzealous 
assumptions regarding changing people's behavior, and 
assumptions that economic policy can overcome economics. 
 
--------------------------------------------- - 
EOR: Making the Most of What you Have; but 
Declines in Exploration Worry EWG Participants 
--------------------------------------------- - 
 
¶13.  (SBU)  Both U.S. and Saudi EWG interlocutors expressed 
concern with a precipitous fall in new exploration.  Mufti 
stated oil service company Schlumberger has sold off its 
seismic unit, and is no longer engaged in exploration work. 
Instead, Schlumberger contacts have told him all of their 
clients have now contracted with Schlumberger for EOR 
activities.  Assistant Secretary Harbert noted the percentage 
of IOC budgets devoted to exploration fell from 30% to 10% 
from 2000 to 2005.  DAS Hegburg remarked the key to 
exploration was, "access, access, access," and, with the 
closure of Russia, Venezuela, and other nations to the IOCs, 
there were simply fewer opportunities to access new fields. 
 
----------------------------------------- 
EIA Market Forecast: Non-OECD Outstrips 
OECD Oil Consumption by 2015 
----------------------------------------- 
 
¶14.  (U)  EIA Director Sweetnam presented the EIA forecast on 
oil market growth.  He projected OECD oil consumption to grow 
at 1 percent, with non-OECD consumption growing at 3 percent. 
 By 2015, the non-OECD nations will surpass OECD nations in 
total oil consumption.  Sweetnam noted the EIA modeled oil 
demand forecasts for three economic growth scenarios: a 
reference case at 3.8% global economic growth, a high growth 
scenario at 4.6% annual global growth, and a low growth 
scenario at 3.1% growth.  Underscoring the difficulty of 
planning for oil consumption growth over the long term, 
Sweetnan told us the difference in projected demand between 
the high and low growth scenarios was 50 million barrels of 
oil equivalent. 
 
--------------------------------------------- -- 
Growth in Coal Creates Environmental Challenge 
--------------------------------------------- -- 
 
¶15.  (SBU)  Sweetnam noted the EIA expects less oil in the 
world energy mix as coal, gas, and alternative fuel 
consumption increases.  The rise in natural gas prices in 
tandem with oil prices during recent years will lead more of 
the developing world, especially India and China, to turn to 
coal.  Assistant Secretary Harbert remarked that 80% of the 
world's new coal plants were being built in India and China, 
a significant environmental challenge, given their failure to 
date to adopt clean coal technology.  China, she noted, was 
firing up one new coal power plant every week.  She added 
that China currently had 9 million passenger cars on the 
road, a figure expected to grow to 100 million by 2030, "a 
figure we think is too low," she remarked. 
--------------------------------------------- ------ 
Deliverability of Oil is Focus for U.S. Delegation 
--------------------------------------------- ------- 
 
¶16.  (C)  Moving onto non-OPEC oil growth, Assistant 
Secretary Harbert remarked, "the question in Russia is, will 
 
SIPDIS 
investment occur?"  She stated the conditions for energy 
investment there have taken a dramatic turn for the worse. 
She indicated in Venezuela, the government of Hugo Chavez was 
increasing social spending by 100% per year, while decreasing 
petroleum investment by 8% a year - a trend with inevitable 
results for Venezuelan production.  The USG delegation 
conveyed the value the USG placed on Saudi Arabia's 
reliability as a supplier.  In discussing suppliers such as 
Nigeria which experienced difficulty in meeting their 
contract terms, or Venezuela, which may experience such 
problems in the future,  Sweetnam highlighted the market 
impact on reliable suppliers.  He concluded, "reliable 
suppliers such a Canada and Saudi Arabia will have a bigger 
call on their oil." 
 
-------- 
Comment 
-------- 
 
¶17.  (C)  The relationship between DOE, State and the MOPMR 
is long-standing and very solid.  However, the Saudis have 
been frustrated with recently-announced U.S. programs and 
public statements designed to accelerate research into 
alternative fuels.  Mufti countered by emphasizing that 
consumers won't be weaned off of oil unless other options are 
price competitive, and appraising that USG policy won't alter 
market fundamentals.  The technocrats who run Saudi Aramco 
understand there is room for biofuels and other alternatives 
in a growing U.S. and world energy portfolio.  Nonetheless, 
the political leadership within MOPMR kicks back against the 
USG saying so in too public a fashion. 
 
¶18.  (U)  DAS Hegburg has cleared this message. 
 
OBERWETTER