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P R 221256Z FEB 10
FM AMCONSUL DHAHRAN
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INFO RUEHHH/OPEC COLLECTIVE
RUEHDH/AMCONSUL DHAHRAN 0530

C O N F I D E N T I A L SECTION 01 OF 02 DHAHRAN 000031 
 
SIPDIS 
 
DEPT FOR EEB/ESC/IEC, NEA/ARP, AND S/CIEA 
DOE FOR ELKIND, HEGBURG, PERSON 
 
E.O. 12958: DECL:  2/22/2020 
TAGS: EPET ENRG ECON PGOV SA
SUBJECT: SAUDI ARAMCO IS TAPPED AGAIN TO BUILD MAJOR REFINERY 
 
CLASSIFIED BY: Joseph A. Kenny, Consul General, U.S. Department 
of State. 
REASON: 1.4 (b), (d) 
SUMMARY 
 
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¶1. (C) On January 19, the Ministry of Petroleum announced that 
Saudi Aramco had been asked to build the estimated USD $10 
billion Jazan refinery.  This project was originally to be built 
by the Saudi private sector in a move to give them valuable 
experience in managing a big project.  For now, it seems that 
the size and scope of this project, the generally thin margins 
for refining internationally, and the limited interest by 
foreign and domestic firms, are leaving the Kingdom little 
choice but to turn (yet again) to Saudi Aramco to manage a 
large, high-profile project.  End Summary. 
 
 
 
SAUDI ARAMCO IS TRIED AND TRUE 
 
------------------------------ 
 
¶2. (U) Despite expectations that KSA's private sector would have 
its first opportunity to build and own a refinery in the 
Kingdom, Petroleum Minister al-Naimi announced on January 19 
that Saudi Aramco will build the $10 billion Jazan refinery, 
which will have a capacity of 250,000 to 400,000 barrels per 
day. The state oil company was not expected to be involved with 
the refinery beyond offering a 30-year crude oil supply 
contract--at international prices--to the winning bidder. 
Press reports noted that eight Saudi companies and 42 
international companies were prequalified by the Oil Ministry 
for the project, but only two private groups submitted offers by 
the January deadline.  The bidding process for the project was 
delayed several times since 2006 as the Kingdom has struggled to 
attract qualified foreign investors. 
 
 
 
¶3. (C) Some industry observers questioned the plant's potential 
for profit, especially considering the future refinery's 
significant geographical distance from Saudi oil and gas fields. 
 Others were doubtful that the bidding companies had the 
experience to handle such a large and important project.  On 
February 1, a senior Ministry of Petroleum official confirmed to 
EconCouns these speculations, noting that the refining business 
has razor thin margins in general.  He said international firms 
were not interested because Jizan lacked the long-term potential 
to build a significant partnership with Aramco or other Saudi 
parastatal companies, in sharp contrast to ongoing large 
projects in Jubail.  He also confirmed that the Petroleum 
Ministry had offered private companies the chance to manage this 
project to meet long-standing pleas for more opportunities in 
the downstream petroleum sector.  In the end, however, according 
to the MinPet official, one company was clearly not qualified 
and the other had a bad commercial reputation, leaving the 
Ministry no option but to task an unenthusiastic Aramco to take 
on this project to meet domestic development goals.  (Note:  On 
24 January POlOff met with Sami al-Khursani (protect), the 
Assistant to the Chief Engineer at Saudi Aramco, who referred to 
the Jazan project as a "skimming refinery," equipped to produce 
fuel oil for domestic consumption.  Skimming refineries are 
relatively simple, comprising crude distillation, treating, 
upgrading, and blending.  End Note.) 
 
 
 
¶4. (C) On January 25 PolOff met with Khalid Abubshait (protect), 
Saudi Aramco General Manager for Government Affairs and former 
Executive Assistant to Oil Minister Ali al-Naimi, and discussed 
the Jazan refinery project.  Abubshait was mildly critical of 
the project's economic aspects, and thus the reason it failed to 
attract large, well-experienced investors.  Jazan's location 
near the volatile Yemeni border, its distance from crude 
supplies, and the lack of experienced investors were all factors 
in the SAG's decision to tap Saudi Aramco to build the refinery, 
said Abubshait, who was also critical of locating the refinery 
in Jazan as an economic boost to the southern province.  Though 
it may employ a few hundred people, he noted, the SAG should be 
investing to strengthen Jazan's existent fishing and agriculture 
industry.  Furthermore, in the event of an environmental 
disaster at the refinery, he posited that Jazan's fishing and 
agricultural industry would suffer immensely. 
 
 
 
¶5. (C) On January 19, prior to Minister al-Naimi's announcement 
of Saudi Aramco ownership, Reuters reported the possible 
construction of a petrochemical plant alongside the newly 
planned Jazan oil refinery.  Due to the Kingdom's rapidly rising 
domestic gas demand--the predominant feedstock for KSA's 
 
DHAHRAN 00000031  002 OF 002 
 
 
petrochemical industry--it is looking to new plants that will 
rely on oil products, rather than gas, for feedstock in its 
efforts to boost petrochemical production.  Reuters' sources 
suggest that naptha is the best feedstock option for the plant 
and would be produced at the adjacent oil refinery.  Saudi 
Aramco has not announced whether it will develop the 
petrochemical plant, though PolOff sources suggest the 
petrochemical plant will eventually be built, in line with the 
strategy noted above.  MinPet sources in Riyadh have dismissed 
the commerciality of developing naptha as a feedstock. 
 
 
 
COMMENT 
 
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¶6. (C) This project was originally supposed to anchor the 
private-sector led growth of a relatively underdeveloped region 
of Saudi Arabia.  It was also supposed to provide Saudi 
companies with the chance to earn their stripes on managing a 
big project in an important sector.  The scale seems to have 
been too large, raising a cautionary note about the Kingdom's 
ability to achieve its very ambitious development strategies 
over the next decade, many of which assume Saudi companies can 
handle complex projects and arrange the necessary financing. 
This example also illustrates the importance of continued access 
to international capital markets, as Saudi firms do not 
generally have sufficient capital of their own to take on such 
large projects.  For now, Saudi Aramco has another big project 
on its docket.  However, such megaprojects, with complex and 
demanding timelines, could stretch Saudi Aramco's ability to 
effectively carry out their tasks.  Recently, the King Abdullah 
University of Science and Technology (KAUST) campus was subject 
to heavy storms and flooding.  The effects of the rains and 
subsequent flooding highlighted some of the university's 
infrastructural defects.  Saudi Aramco, under stringent 
timelines, built the university (in a remarkable thirty-three 
months).  The King has increasingly turned to Saudi Aramco for 
megaprojects even if they are unrelated to oil.  Such projects 
include the King Abdullah Center for Knowledge and Culture 
("Ithra") and a Sports City in the Western Province near Jeddah. 
 End Comment. 
JKENNY