Prince Abdullah’s Oil Initiative

Prince Abdullah’s Oil Initiative

The most interesting change in economic policy of the last few years involves the Crown Prince. In October and November 1998 Prince Abdullah went on a six week foreign tour, which took him to Paris, London, Washington, Beijing, Tokyo, Seoul and Lahore. His main purpose was to promote investment in the Kingdom, encourage Far Eastern countries to expand their purchases of Saudi crude and show the Americans and British that he is not less pro-Western than King Fahd. In Washington he broke new ground when he met senior executives of seven large oil companies and invited them to come forward with proposals for their re-entering the Saudi hydrocarbons sector, which has been closed to foreign companies since Aramco - originally owned by Chevron, Texaco, Exxon and Mobil - was taken over by the government in the mid-1970s. He gave no indication of what sorts of proposals he hoped to receive; it was suggested afterwards in the Kingdom, and by oil industry executives, that he was just looking for ideas. To receive and review the proposals a new oil policy committee has been established. Its members are the Foreign Minister and former deputy oil minister, Prince Saud Al-Faisal, who is its secretary general, the ministers of Finance, Oil and Industry and two ministers of state. The intention is that it should not be only the Ministry of Oil and Saudi Aramco that give their opinions on the oil companies’ proposals.

There has been talk of Prince Abdullah’s initiative being prompted by the kingdom’s need for capital and sophisticated technology. This is true only in limited areas, mainly concerning gas production and distribution. In oil production Saudi Aramco is a very competent company - much more so than any of the other national oil companies in the Middle East or North Africa. And if it needed to borrow internationally to expand its output it would easily be able to do so, because even with prices at around $10 a barrel, all Gulf fields give a very attractive return on investment.

What really concerns a small number of able and knowledgeable Saudis at the top of the government and private sector, who seem to have an influence on Prince Abdullah, is how Saudi Arabia and the rest of the Middle East have been capturing only part of the growth in global demand in the last 15 years, in spite of their having the biggest oil reserves and low (though rising) production costs. The problem has been that there have been huge advances in exploration and production technology, which have made economic the exploitation of small pockets of oil in difficult locations, and greatly increased the amounts of oil that can be recovered from fields already developed. Traditionally the oil industry reckoned on getting out of a reservoir about 35 per cent of the "oil in place"; now it is talking of figures of up to 60 per cent. In most areas of the world - almost everywhere barring the Middle East - the oil companies which own this technology have been allowed to be equity investors in oil developments, and so they have had an incentive to produce their own relatively high cost but profitable fields, rather than buying highly taxed oil from state companies in the Gulf.

The idea of some of the people close to Prince Abdullah is to find a way of getting the oil companies to turn away from high cost sources, such as the Caspian, Khazakstan and various deep water offshore areas, and buy from Saudi Arabia. One often hears Saudis ask why "difficult" oil should be developed in these places, when a quarter of the world’s known reserves are easily available below the Kingdom. In short, what the Saudis really want is not so much capital and technology as more markets, higher production and bigger revenues - regardless of what this will do for the Organisation of Petroleum Exporting Countries (OPEC), which is increasingly regarded as irrelevant. The problem is that getting the companies to buy from the Kingdom or develop Saudi fields under some form of licence, rather than produce their own crude elsewhere, would involve surrendering to them a large part of the profit now taken by the government as tax. Also any arrangement which seems to give companies ownership of production or installs them as contractors alongside Aramco will be highly sensitive on political grounds.

For practical purposes, therefore, it is thought that the American oil companies - and other big companies that want to get involved - will have to confine their proposals to the gas sector. Later it is possible that they will be allowed onto unexplored Aramco acreage, and in the long term they might even be given undeveloped Aramco fields to bring into production. There are a few Saudis who are saying that it will do Aramco good to have its operating practices compared with those of foreign companies. All will depend on how acute the government’s need is for revenues and how public attitudes evolve. The Saudi government is quite open in saying that it likes to introduce change slowly so that the people have time to accept it. At present there are strong interests opposed to the involvement of foreign companies in either oil or gas. The Oil Ministry and Saudi Aramco are unenthusiastic about the Crown Prince’s initiative. And the mass of the Saudi middle class believes that foreign companies are unnecessary and that their own company is capable of producing all the oil the Kingdom needs to sell. It is often pointed out that Saudi Aramco is extracting oil from only a few of the fields that have been discovered and appraised. The popular belief is that sooner or later non-Middle Eastern sources of oil will run out, and that then the world will come begging to the Gulf to buy oil at its "proper" price, which would be well over $30 a barrel. There is very little knowledge of the technological changes that have taken place, or of the fact that in the Western industrialised countries demand for oil has plateaued, or of the likelihood that in the next twenty years there will be radical improvements in the efficiency of energy use. Western governments’ carbon tax plans and talk of the need to cut the burning of hydrocarbon fuels are seen as being unfair or unnecessary. The idea that most of Saudi Arabia’s oil may ultimately be left in the ground is unthinkable.