Fw: Stratfor The Future of Foreign Investment in Saudi Oil

[Ulhas Joglekar]

> The Future of Foreign Investment in Saudi Oil
> 30 October 1999
> Summary
> Saudi Arabia first raised the prospect of allowing foreign investment in
> exploration and production (E&P) in late 1998 when oil prices were
> critically low. Now prices are up, and although there is no immediate need
> to allow upstream investment, the Saudis are stringing Western companies
> along in case prices decline again. It is doubtful Riyadh will seriously
> proceed to open its upstream oil sector as long as prices remain high. If
> prices begin to fall – a possibility due to overproduction – Saudi Arabia
> will then allow foreign investment in its oil prospecting and production.
> Analysis
> Saudi Arabian Foreign Minister Saud al-Faisal said Sept. 26 that his
country
> would soon move closer to negotiations with foreign oil firms bidding to
> invest in its oil industry. A ministerial petroleum committee will submit
a
> strategic study of foreign investment in the energy sector to Crown Prince
> Abdullah at the end of next month.
> Foreign oil investment in Saudia Arabia is nothing new. The kingdom
> nationalized its oil industry 20 years ago and has periodically turned to
> foreign investments to compensate for its lack of funds and expertise.
> However, the country had never allowed foreign investment in the upstream
> oil sector. Upstream refers to exploration and production, while
downstream
> includes refining and distribution.
> Saudi Arabia first hinted at bringing in foreign upstream investment in
> September 1998 during a secret meeting attended by Crown Prince Abdullah,
> former President George Bush and CEOs from seven major oil companies. That
> year, the government had based its budget on a $16 per barrel oil price,
but
> actual crude oil prices averaged between $10 and $13 for most of the year.
> Facing economic desperation, the government responded by floating the idea
> of foreign investment.
> Oil prices began to rise and in February 1999, during a visit by U.S.
Energy
> Secretary Bill Richardson, Saudi Arabia ruled out foreign investment,
saying
> it was only accepting downstream investments. Since then, however, there
> have been indications that the Saudi position has changed slightly. Saudi
> Oil Minister Ali al-Naimi told a Houston oil forum Oct. 21 that Saudi
Arabia
> was not against foreign investment in oil and gas exploration and
production
> "in philosophy and principle," but added that such investment would have
to
> be mutually beneficial to all parties. Naimi said, "What we need is not
> somebody to come and produce oil or gas and sell it to others; we need
> integrated projects."
> Saudi Arabia’s openness to foreign upstream investment is guided entirely
by
> their economic situation. Right now, since Saudi Arabia is primarily a
> producer and exporter of raw crude, it must stabilize crude oil prices to
> stabilize the economy – its principal concern.
> However, it has only a very limited control over prices. Although Saudi
> Arabia was one of three architects of an agreement among oil exporting
> countries to cut production until March 2000 in an effort to stabilize
> prices, poorer countries aren’t sticking to the plan. Countries like
> Nigeria, Venezeula and Indonesia are more concerned with their own
economic
> needs, and are likely to overproduce and bring oil prices down.
> Poorer oil-producing countries like Indonesia and Nigeria have already
> exceeded OPEC quotas. Also, non-OPEC members like Chad and Mexico are not
> subject to OPEC quotas and contribute to over-production. Iraq is also
> increasing its production despite U.N. sanctions. Russian firms have
already
> begun fulfilling exploration and production contracts. Since the OPEC
> meeting in September 1999, Stratfor has seen indications that oil prices
> may, in fact, have already peaked.
> Saudi Arabia’s ambiguity as to whether it will accept foreign investment
in
> exploration and production is intentional: It is stringing along U.S. oil
> companies until it sees what oil prices will do. Saudi is anxious for
> foreign investment in its downstream industry, such as refining, and is
> making these investments attractive. But foreign oil companies would still
> rather have the exploration and production deals. U.S. oil firms Arco,
> Chevron, Conoco, Exxon, Mobil, Phillips Petroleum and Texaco have all
> submitted proposals to Saudi Arabia. Other foreign companies expressing
> interest are France’s Elf Aquitaine and Total, Royal Dutch-Shell and Italy
’s
> ENI group.
> On Oct. 16, U.S. Commerce Secretary William Daley called for the United
> States and Saudi Arabia to "move from simply buyers and sellers to true
> trade partners" after talks with the kingdom’s top officials. The Saudi
> commerce minister commented after talks with Daley, "We will be able to
> conclude our negotiations in the coming months," when the kingdom’s new
> foreign investment law will be ready. Saudi Arabia is currently reforming
> its tax system to remove obstacles to foreign investment.
> All excuses aside, it is unlikely that we will see real development on the
> issue of Saudi Arabia allowing foreign investment in its upstream oil
> industry until oil prices begin a steady decline. If this occurs – and we
> think it will – the Saudis will have only to open the door. The oil
> companies are waiting.
>
> info at stratfor.com
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>