Saudi Arabia and the Gold Standard in a 123 Agreement

Opinion My view is that the whole posture of KSA on enrichment is to get the US to keep the Iran deal so that it doesn’t have to spend $ billions on a uranium enrichment program it can’t afford, and doesn’t want or need. 

[May 2, 2018 update below]

Uranium enrichment

Uranium Gas Centrifuges

There has been a lot of back and forth commentary about whether the U.S. should water down the so-called “gold standard” for a 123 Agreement with Saudi Arabia.  This agreement, if it comes to pass, would allow U.S. firms to export nuclear reactors, fuel for them, and other nuclear technologies to the Kingdom of Saudi Arabia (KSA).

Without a 123 Agreement, under the terms of the Atomic Energy Act, there can be no nuclear technology exports. Non-nuclear components that are not tagged as “dual use” would possible.

U.S. nuclear energy vendors and various trade groups have been pushing for the State Department and the Department of Energy to negotiate a less than “gold standard” 123 agreement to open the door to U.S. vendors primarily Westinghouse, which is the only American firm still  activity manufacturing new nuclear reactors – four in China and two at the Vogtle site in Georgia.

So far officials from the U.S. State Department and a delegation led by DOE Secretary Rick Perry have had inconclusive talks in Riyadh and London about a 123 agreement. Clearly, KSA is waiting to see what the U.S. will do about the Iran nuclear deal on May 12th.

Why the Iran Nuclear Deal Matters

For what it is worth, I am offering some practical reasons why the US ought not give up on the gold standard for KSA. However, to get there, the US has to keep the Iran nuclear deal in place.

KSA’s leadership has made it clear that if the US kicks the Iran deal to the curb, it will start a uranium enrichment program that could lead to a capability to fabricate nuclear weapons.

In an interview with CBS, Crown Prince Mohammed bin Salman said Saudi Arabia is not actively pursuing a nuclear weapon, but that could change suddenly.

“Saudi Arabia does not want to acquire any nuclear bomb, but without a doubt, if Iran developed a nuclear bomb, we will follow suit as soon as possible,” he said in an interview that will air on the news magazine program “60 Minutes.”

On the other hand, KSA would might be OK with a gold standard 123 agreement, or something very close to it IF, and it is a very big IF, the US and the other parties to the Iran deal stood behind it and made a commitment to work on extending it’s life beyond 15 years.

If Trump tears it up, he virtually guarantees three things –

  1. KSA will pursue enrichment,
  2. No one, including DRNK, will trust the US to keep its commitments on nonproliferation agreements,
  3. Iran will most certainly restart its nuclear program and probably make progress in developing the capability to fit a nuke on one of their intermediate range ballistic missiles.

Anyone who thinks these outcomes are positive for US interests or that tearing up the Iran deal will lead to regime change in Iran needs to have their head examined.

My view is that the whole posture of KSA on enrichment is to get the US to keep the Iran deal so that it doesn’t have to spend $ billions on a nuclear fuel  program it doesn’t want or need.

The US Might Give Away the Farm for Nothing in Return

Getting back to the gold standard, the US offered Vietnam a less than gold standard 123 agreement which turned out to be pointless.  That country made all of its plans for new nuclear plants, subsequently cancelled, with Japan and Russia.  What did we gain there?

Insofar as US interests are concerned, Westinghouse is NOT in the running despite what industry trade groups might say on behalf of their members.  The company is still in bankruptcy due to its massive and self-inflicted failure with the V C Summer nuclear project in South Carolina.

Note that the UAE rejected Areva’s EPR for similar reasons, e.g., schedule delays and huge cost over runs at a FOAK plant in Finland. So the US might well be positioning itself to give away the store for nothing in return.

South Korea has the pole position for KSA business because it is completing a $20 billion new build of four 1400 MW nuclear reactors in the UAE. Plus, it has an experienced workforce that has a management team with experience in an Arab country that is very influential with KSA.

Finally, the UAE is very influential with KSA on nuclear matters because of its experience with inking a 123 agreement with the US forswearing enrichment and reprocessing.  The US and the international community have made a big deal out of the fact that this Agreement reflects the UAE’s renunciation of any intention to develop domestic enrichment and reprocessing capabilities in favor of long-term commitments to obtain supply of nuclear fuel from reliable and responsible international suppliers. That’s the essence of the “gold standard.”

Why South Korea has the Pole Position for a KSA Nuclear New Build

KSA is much more likely to want to build small commercial reactors, like the South Korean SMART unit, because they are less costly, easier to manage, and can be acquired one by one over a longer period of time. An agreement between KSA and ROK to build two SMART reactors there could be a model for the US.

The difference is $400M for a SMART reactor v. $4B for one big one from someone else.  The low cost of a SMART unit means that over a 10 year period KSA can ramp up to the same amount of nuclear powered electrical generation capability as buying one large unit with its huge upfront costs. It’s clearly a cash flow issue.

Oil prices determine KSA’s buying power. As long as the price stays under $100Bbl, KSA will be price sensitive about any spending on commercial nuclear plans. As for enrichment of uranium, the global market for uranium has a huge surplus which is why the price of yellowcake is at a record low.  In the make v. buy equation, buying wins hands down.

Where We Go From Here?

President Trump has a mixed bag of motives for wanting to rip up the Iran nuclear deal. One of them is hugely irrational. As I see it his angst over the fact that it was one of President Obama’s signature accomplishments is not a reason to toss valid American interests out the door. The other is he is being egged on by Israel PM Benjamin Netanyahu who has his own national security and domestic political reason for wanting regime change in Iran.

There are real and hard reasons why it is in the US interest to keep the Iran deal and to work with KSA toward a 123 agreement that incorporates the gold standard. KSA knows that the road to regional political trouble lies in a commitment to spending on nuclear capabilities it does not want, need, nor can afford. What is everyone waiting for?

Update May 2, 2018 – Can KSA Afford Its Nuclear Program?

The Reuters wire service reported on May 2 that Saudi Arabia would need oil prices to average $85-$87 a barrel this year to balance its state budget, according to the International Monetary Fund (IMF). The current price of “Brent Crude” on May 2nd was $73/bbl according several financial wire services.

According to a CNBC report for April 18th, Barclays sees international benchmark Brent crude to average $68 a barrel in the second quarter, but sees crude prices falling into correction in the back half of 2018. Barclays also said it expects the oil market will swing back into surplus in the final months of the year and remain oversupplied through 2019.

According to Energy experts familiar with KSA’s economy the price of oil would need to be $100/bbl or greater to afford a large scale (16 reactors) nuclear energy reactor construction program. Meanwhile, they point out the 2018 Saudi budget features a deficit of US$52 billion and some observers believe the Kingdom is stretching itself too thin with all its ambitious reform plans.

The current oil price, and long term outlook, make anything more than the first two full size units, or a stretched out program of building SMRs, unaffordable. The country is not going to tap its sovereign wealth fund for this effort.

What the low price of oil means is that KSA is coming up short in terms of financing its ambitious program of building 16 LWR type units at power ratings of 1000 MW or more. Given these numbers, the likelihood that it would spend several billion more on enrichment facilities, and in the absence of reactors to use the fuel, diminishes accordingly.

U.S. nonproliferation experts point out that if KSA really feels provoked by the loss of the Iran nuclear agreement, it could decide to become a nuclear state absent building any commercial reactors.  If that were to be the case, the spending on a weapons program moves into the stratosphere. Not only does the country need the infrastructure to produce the fissile material, it also needs a delivery system(s), which is either planes or missiles.  To mix some metaphors, the KSA finance ministry’s calculators may melt down over the enormous scope of these costs. Also, unlike the commercial nuclear reactor project, there is no revenue stream from a weapons program to offset its costs.

If KSA’s leadership fundamentally commits to a nuclear weapons effort, it will have to sacrifice a great deal domestically to achieve that end.  As we know from watching protests in Iran, when the cost of international military adventures takes a big bite out of domestic spending, the result can be destabilizing for the regime in power.

It follows that any evaluation of KSA’s threat to start enrichment efforts needs to also look at the details of the country’s balance sheet in addition to following the high profile media pronouncements of the defense ministry.

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