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FM AMEMBASSY RIYADH
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C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 000893 
 
SIPDIS 
 
NEA FOR DAS GGRAY 
DEPT OF ENERGY PASS DAS AHEGBURG, MWILLIAMSON, GPERSON, AND 
JHART 
CIA PASS TO TCOYNE 
 
E.O. 12958: DECL: 06/08/2018 
TAGS: EPET ENERG SA
SUBJECT: CAUTIOUS GREEN LIGHT FOR CONOCOPHILLIPS REFINERY 
 
REF: A. RIYADH 868 
     ¶B. RIYADH 867 
 
Classified By: CDA Michael Gfoeller for 
reasons 1.4 (b) (c) and (d). 
 
-------- 
Summary 
-------- 
 
¶1.  (C)  In a May 27 meeting with ConocoPhillips (COP) Abu 
Dhabi-based Regional President Nick Spencer (strictly 
protect) confidentially confirmed the planned 400,000 barrel 
per day (bpd) joint-venture Saudi Aramco/COP refinery is 
likely to move forward.   While emphasizing that COP had not 
made a formal final investment decision (FID), he summarized, 
"in effect, it's approved."  Press stories confirming a FID 
are not accurate.  COP has found financial workarounds to 
compensate for the government's decision to date not to 
allocate natural gas to the project.  COP continues to hope a 
gas allocation will be forthcoming, which would make the 
project substantially more financially attractive. 
 
--------------------------------------------- 
COP's Yanbu Refinery: The FID that Almost Is 
--------------------------------------------- 
 
¶2.  (C)  After recent press announcements that Total's 
400,000 bpd joint venture (JV) refinery with Saudi Aramco at 
Juabail would move forward, Spencer confirmed that COP has 
been under significant pressure to make an announcement 
regarding its refinery at Yanbu.  COP was clearly feeling the 
pressure to "keep up with the Jones," and make a similar 
announcement regarding its  refinery.   Unfortunately, COP's 
front end engineering design (FEED) is not yet complete, and 
so its internal procedures do not allow it to make a formal 
FID.  In the absence of a clear FID, on 16 May, COP and Saudi 
Aramco announced they had "approved continued funding for the 
Yanbu Export Refinery." 
 
¶3.  (C)  The public announcement appeared to satisfy the 
press,  many of whom jumped on the bandwagon to promptly (and 
inaccurately) announce that COP and Saudi Aramco had reached 
FID.  In particular, the Middle East Economic Digest (MEED) 
led with the story, the most recent in a string of inaccurate 
reports regarding the Yanbu refinery.  COP's press release 
was accurate and precisely worded; it did not mention 
anything about FID.  However, Spencer admitted COP did not 
wade in to correct journalists who read more into the press 
release than was there.  COP has been under pressure to 
correct factually inaccurate reports from April and May MEED 
issues detailing the delay or outright cancellation of the 
Yanbu refinery.  In reality, Spencer anticipates all bids for 
the engineering work will be received by January 2009, and 
FID will be made in Q1 2009. 
 
----------------------------- 
Gas Allocation Not Secured, 
but "Overcome" 
----------------------------- 
 
¶4.  (C)  Gas allocation has been a major sticking point for 
the project.  Spencer indicated the project still had not 
obtained a gas allocation, the key to generating more 
attractive returns on investment for COP.  However, he 
believed the gas issue largely has been surmounted through 
other financial workarounds.  Spencer cautioned that if COP 
agrees to the project without the allocation, he doubted they 
could obtain one in the future.  He questioned why, in a 
period of intense competition for gas, MinPet would allocate 
gas for a project which they believed was likely to move 
forward regardless.  Nonetheless, Spencer believes the Saudis 
will not let COP walk away from the project if gas remains 
the sole sticking point.  He noted that on top of Total's 
recent withdrawal from the South Rub' Al Khali (SRAK) gas 
 
RIYADH 00000893  002 OF 003 
 
 
exploration consortium (ref B), any withdrawal by COP based 
on gas allocation issues would be very damaging to the 
Saudis' international credibility. 
 
---------------------------- 
Financial "Safety Net" 
In Place of Gas Allocation 
---------------------------- 
 
¶5.  (C)  While we do not know the exact terms of the 
agreement between COP and Saudi Aramco to move the Yanbu 
refinery forward, it appears Saudi Aramco has put in place a 
financial "safety net" to ensure COP will not walk away from 
Saudi Arabia with single-digit returns.  COP told us earlier 
this year it was fighting to keep the double-digit returns it 
needed to stay in the project.  With no gas allocation, and 
skyrocketing construction costs in the energy industry, 
returns for the project were hovering in the 6-7 percent 
range.  COP's board would not countenance moving ahead with 
Yanbu with returns in this range, instead looking for a 
minimum of a 13 to 15 percent return.  At the time, COP 
viewed a gas allocation, in effect a subsidized feedstock 
arrangement, as the only means making the project 
sufficiently profitable.  COP appears to have turned a corner 
and is now willing to move ahead with this project, despite 
the lack of a gas allocation.  In the interim, Saudi Aramco 
has introduced an additional financial sweetener, although we 
do not know its precise nature. 
 
------------------------------- 
CEO Visit Helps to Clinch Deal 
------------------------------- 
 
¶6.  (C)  As part of COP's drive to demonstrate continued 
commitment to the project, in February 2008, COP CEO Jim 
Mulva visited Riyadh to meet with Minister of Petroleum Naimi 
and senior Saudi Aramco officials.  The meetings appear to 
have gone some way to showing the firm's seriousness of 
purpose.  Spencer and other senior COP officials have engaged 
in sustained shuttle diplomacy over the last year to keep up 
the project's momentum.  Spencer anticipates COP will open an 
office in Riyadh within a month or two, as well as a project 
office in Al-Khobar.  They hope to open an office in Yanbu 
within a year to oversee construction of the plant. 
 
----------------- 
Aramco Stretched 
----------------- 
 
¶7.  (C)  Spencer also has commented on the state of affairs 
at Saudi Aramco, telling us that Saudi Aramco project 
personnel seconded into the Yanbu refinery project to date 
are far less experienced than they might have anticipated. 
COP has had to compensate by placing very senior personnel on 
the Yanbu project.  He assesses that the Saudi Aramco joint 
venture project office is over-committed.  Contacts from 
Saudi investment bank Jadwa Investments concur (ref A). 
Jadwa recently purchased ExxonMobil's stake in Luberef, a 
lubricating oil firm.  As the only Saudi firm to operate a JV 
with Saudi Aramco, Jadwa has a front row seat to better 
understand Aramco's competencies.  Brad Bourland, Jadwa's 
Economist and Proprietary Investment Manager, independently 
also has told us that the JV development department at Saudi 
Aramco is "very stretched." 
 
-------- 
Comment 
-------- 
 
¶8.  (C)  In clinching the financial deal needed to move the 
Yanbu refinery forward, COP is reaping the rewards of its 
disciplined behavior in the early 2000's non-associated gas 
("core ventures") negotiations (ref B).  Both Conoco and 
Phillips Petroleum, then separate firms, took part in these 
contentious negotiations.  Along with the other U.S. majors 
 
RIYADH 00000893  003 OF 003 
 
 
Chevron and ExxonMobil, they walked away from the Saudi offer 
of low guaranteed returns.  Even today, executives from these 
firms have no regret with their decisions.  When these 
discussions failed, Saudi Aramco and the Ministry of 
Petroleum turned to Shell, as well as Chinese, Russian, and 
Spanish firms (ref B).  After several years of exploration, 
even the flagship Shell-led SRAK consortium has come up with 
a series of dry wells.  Industry watchers  say that MinPet 
and Saudi Aramco remain very dissatisfied with the level of 
technology the Chinese and Russian firms in particular have 
been able to share.  Saudi Aramco and MinPet may finally have 
determined that if they want access to the latest technology 
- in whatever segment of the petroleum sector - they will 
have to pay for it.  COP and other American firms proved to 
Saudi Aramco several years ago they will walk away from 
commercially unattractive projects.  ConocoPhillips, five 
years later and now a merged firm, may finally have its time 
in the Saudi sun. 
 
GFOELLER