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RUEHRH/AMEMBASSY RIYADH PRIORITY 0244
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RUEHDH/AMCONSUL DHAHRAN 0349

C O N F I D E N T I A L SECTION 01 OF 03 DHAHRAN 000228 
 
NOFORN 
SIPDIS 
 
DEPT FOR NEA/ARP JOSHUA HARRIS AND JEREMY BERNDT 
 
E.O. 12958: DECL:  8/31/2019 
TAGS: ECON ENRG EPET PGOV SA CH
SUBJECT: SAUDI ARAMCO-DOW CHEMICAL $24 BILLION PETROCHEMICAL PROJECT 
MOVING FORWARD 
 
REF: A. A. 07 RIYADH 1006 
     ¶B. B. DHAHRAN 74 
 
DHAHRAN 00000228  001.2 OF 003 
 
 
CLASSIFIED BY: Kevin Kreutner, Acting Consul General, EXEC, DOS. 
 
REASON: 1.4 (b), (d) 
SUMMARY 
 
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¶1. (SBU) Saudi Aramco project finance managers confirmed that 
the $24 billion joint venture (JV) with Dow Chemical is moving 
forward, despite the economic crisis.  In return for access to 
cheap, discounted feedstock (primarily ethane and naphtha), Dow 
is sharing with Aramco a number of the "crown jewels" of the 
chemical company's most advanced technology.  Although many of 
the Dow-Aramco chemical products will not directly compete with 
those of the national petrochemical giant SABIC, both companies 
will be vying for scarce feedstock allocations from the Ministry 
of Petroleum and Minerals (MinPet).  The large integrated 
refinery and petrochemical complex's products will be marketed 
towards the GCC and Asia.  END SUMMARY. 
 
 
 
DOW-ARAMCO PROJECT MOVING FORWARD 
 
--------------------------------- 
 
 
 
2.(SBU) Saudi Aramco's $24 billion dollar JV with U.S.-based Dow 
Chemical will reportedly result in one of the largest single 
phase petrochemical complexes in the world, at Ras Tanura on the 
Persian Gulf coast a few dozen miles north of Dhahran.  (NOTE: 
Ref A provides detailed information on the specifics of the 
Dow-Aramco project.  Cost estimates of the JV have not been 
finalized, but range from $20 to $27 billion.  END NOTE.) 
However, the global economic crisis has hit the petrochemical 
industry hard.  According to a recent Saudi bank report, 
approximately $27 billion worth of petrochemical projects were 
put on hold in Saudi Arabia this year alone.  In addition, in 
December 2008, a $17 billion joint venture between Dow and 
Kuwait's state-owned Petrochemicals Industries Company 
unexpectedly collapsed.  The proceeds from the Kuwaiti deal were 
slated to pay down debt resulting from Dow's recent acquisition 
of Rohm & Haas, a petrochemical firm.  This perfect storm has 
raised industry speculation about Dow's ability to raise its 
share of the substantial up-front capital investment required 
for the Saudi venture. 
 
 
 
¶3. (C/NF) In an August 24 meeting with EconOff, a Saudi Aramco 
project finance manager said that both Aramco and Dow had 
already "sunk $500 million that I can tell you about [into the 
project]."  "The project will get done, there is too much on the 
line for both [Dow and Saudi Aramco]," he said, adding that both 
Aramco and Dow are fast approaching the point where too much 
money has been invested to "walk away" from the deal.  In an 
August 26 teleconference, Lisa Schroeter (strictly protect), Dow 
Chemical's Director for International Policy, told EconOff that 
approximately 900 Dow employees are already working on the JV, 
indicating Dow's seriousness to carry out the project. 
 
 
 
DOW GETS CHEAP FEEDSTOCK, ARAMCO GETS HIGH-END TECHNOLOGY 
 
--------------------------------------------- ------------ 
 
 
 
¶4. (C/NF) Saudi Arabia is a significant player in the 
petrochemical industry; it currently accounts for 7% of the 
global supply of basic petrochemicals, and its share is growing. 
 The key to the Kingdom's success has been access to heavily 
discounted gas feedstock, primarily ethane, which sells at $0.75 
per million British thermal units (Btu).  The consistent flow of 
feedstock at a cheap fixed price is particularly attractive to 
an industry with huge capital outlays that often require several 
decades to see a return on the initial investment.  Schroeter 
confirmed this when she said, "Ras Tanura is key because the 
fixed price [of feedstock] is reliable." 
 
 
 
 
DHAHRAN 00000228  002.2 OF 003 
 
 
¶5. (C/NF) According to the Aramco project finance manager, in 
return for the cheap ethane and naphtha feedstock allocations, 
Dow will share the "crown jewels" of the chemical giant's 
technological know-how.  These downstream technologies were 
specifically chosen because they will maximize job creation in 
the Kingdom.  However, the final set of technologies agreed upon 
had to be approved by MinPet before the JV would be granted a 
feedstock allocation.  The gate keeper to the gas allocations at 
MinPet is Prince Faisal bin Turki Al-Saud (Ref B).  In the end, 
the prince granted the initial ethane allocation, though this 
process must be renewed annually until a final investment 
decision is made and construction of the complex begins. 
 
 
 
ARAMCO STEPPING SQUARELY ON SABIC'S TURF 
 
---------------------------------------- 
 
 
 
¶6. (C/NF) Notwithstanding Aramco's $10 billion Petro Rabigh JV 
with Japanese powerhouse Sumitomo Chemical on the Red Sea coast, 
the Dow project is Aramco's biggest and boldest move into the 
petrochemical market -- a domain largely dominated by the 
Kingdom's other major national company, Saudi Basic Industries 
Corporation (SABIC).  In a meeting earlier this year, Aramco CEO 
Khalid al-Faleh said that in most cases the Dow-Aramco JV would 
not be going "head-to-head" with SABIC, but that a "little 
competition" is always good.  SABIC executives have made similar 
comments.  Hamad al-Madi, General Manager for SABIC Eastern 
Province, said that they view the Dow JV as a "challenge, not an 
obstacle" and that a "monopoly kills the economy." 
 
 
 
¶7. (SBU) However, despite the polite commentaries from Saudi 
Arabia's two largest state-owned companies, the petrochemical 
industry is competing for the same precious feedstock: gas 
(ethane and methane) and liquids (naphtha, butane, and propane). 
 In Saudi Arabia, this competition is fierce due to the heavily 
discounted price of the feedstock, particularly the increasingly 
scarce ethane gas.  Whereas SABIC has historically invested 
heavily in ethane-based chemicals, the Dow-Aramco JV will use a 
more balanced feedstock mix of ethane, methane, naphtha and 
natural gas liquids.  Nevertheless, the Dow-Aramco JV will 
certainly increase the demand for the Kingdom's scarce 
hydrocarbon resources. 
 
 
 
DOW EYES THE CHINESE MARKET, WARY OF POLITICAL FALLOUT 
 
--------------------------------------------- ---------- 
 
 
 
¶8. (SBU) With Saudi Arabia's rapid ascent as a major 
petrochemical producing nation, the Kingdom is increasingly in 
competition with China, which is also a major petrochemical 
player.  Whereas Saudi Arabia's comparative advantage lies with 
cheap feedstock, China has cheap (and skilled) labor and is 
closer than Saudi Arabia to their shared destination market, 
Asia.  Recently, tensions have surfaced with Chinese officials 
accusing SABIC of "dumping" chemicals on the Chinese 
marketplace. 
 
 
 
¶9. (C/NF) Dow's Schroeter told EconOff that the Aramco JV will 
have two primary target markets:  the GCC and Asia.  (NOTE: 
Schroeter made this point to highlight that the Aramco JV would 
not compete directly with the domestic U.S. petrochemical 
marketplace.  END NOTE.)  She also voiced some concern about the 
ramifications of China's anti-dumping accusations in the 
Sino-Saudi commercial relationship.  However, as Saudi Arabia's 
share of foreign oil sales to China continues to increase (it 
reportedly was the country's largest supplier of oil in July, 
overtaking Angola), we expect commercial ties between the 
countries remain strong. 
 
 
 
DOW AND ARAMCO VOICE VISA CONCERNS 
 
 
DHAHRAN 00000228  003.2 OF 003 
 
 
---------------------------------- 
 
 
 
¶10. (SBU) Reflecting similar concern raised by Dow employees in 
Ref A, both Schroeter and Aramco officials were apprehensive 
about difficulties in securing U.S. business visas for Saudi 
nationals needing to travel to the United States.  Due to long 
visa appointment wait times and Security Advisory Opinion 
processing times, EconOff recommended that Aramco and Dow work 
early to identify the Saudi nationals who will need to travel to 
the U.S. for the JV.  Operating within the consular section's 
guidelines, the Consulate will remain flexible to help 
facilitate this strategically important multi-billion dollar 
U.S.-Saudi joint venture. 
 
 
 
COMMENT 
 
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¶11. (C) Competition between Aramco and SABIC will intensify as 
the Saudi national oil company giant intensifies its presence in 
the petrochemical sector.  The decision for Aramco to move into 
petrochemicals was a profit-driven business decision.  Unlike 
the refining sector, which requires large, risky investments 
with thin profit margins, integrating a refinery with a 
petrochemical complex allows for more value-added products, 
thereby spreading the initial capital costs over a broader 
product line with higher margins.  Although this move makes 
economic sense, an important strategic decision such as this 
must also receive the blessing from the highest levels of the 
Saudi government.  Therefore, the decision for Aramco to compete 
with SABIC in the petrochemical industry is just as much a 
political decision as it is an economic one.  Nevertheless, Post 
believes that the two giant government-controlled firms (the SAG 
owns 100 percent of Aramco and 70 percent of SABIC) will 
co-exist and prosper in the Kingdom, as the SAG would not let 
either firm fail or squander profits fighting the other over the 
spoils of the Kingdom's patrimony.  END COMMENT. 
KREUTNER