The oil majors are back in Saudi Arabia, but not quite as they wanted
The return of the majors into the world’s most powerful oil-producing nation—Saudi Arabia—may not be following the script that they themselves would have written, but it is an event of massive significance, especially for the Saudi economy.
In mid-May, Saudi Arabia announced the names of eight oil companies, which will carry out natural gas projects valued at $40 billion, although their eventual value could climb as high as $100 billion.
Most probably the most lucrative project is located in south Ghawar near Al-Hufuf in Saudi Arabia's eastern province. It was awarded to a consortium, including Exxonmobil, Royal Dutch Shell, BPAmoco and Phillips Petroleum.
A project in the Red Sea region was awarded to another consortium led by Exxonmobil, which is joined by Enron and Occidental Petroleum.
The largest project from a geographical perspective, covering 440,000 square kilometers in the desolate Shaybah region in southeast Saudi Arabia, was awarded to a consortium comprising Royal Dutch Shell, TotalFinaElf and Conoco.
Companies which had been shortlisted, but never made the cut, include ENI of Italy and Chevron and Marathon of the United States. Reportedly, though, they have been told that business may be pushed their way at a later date.
The appetites of the western oil majors were first whet in 1998, when they were invited to a powwow in Washington DC, with Saudi Arabia’s Crown Prince Abdullah. At the time, with oil prices edging down toward the $10 per barrel mark, the major saw a way back into the Saudi oil industry, and, for their part, the Saudi did not deny that this could be the ultimate outcome.
But, when oil prices skyrocketed during 2000, the Saudis readiness to permit the majors access into the oil sector eroded. Eventually, all the Saudis were prepared to consider was the gas sector, as well as petrochemical, power and desalination plants.
To say that the oil companies felt shortchanged would be understating the fact, but none of them were prepared to back out of a deal with a country holding about a quarter of all the world’s known oil reserves. Nonetheless, they moved on ahead despite the fact that the potential rate of return on their investment fell from a double to a possibly single digit—although some of the players are more optimistic on that count.
The majors’ readiness to press forward was not only based on the assumption that it was necessary in order to reestablish a foothold in the Saudi energy sector, but also on the knowledge that they were increasing their involvement in a commodity with a growing market potential. According to the Financial Times, gas consumption currently stands at 3.4 billion cubic feet a day and is expected to grow between 7 percent and 10 percent per annum. Furthermore, the majors know that Saudi Arabia is largely dependent upon their expertise and capital to get in on the game.
Economists are pointing out that the flow of foreign capital into Saudi Arabia as a result of the new gas projects will be the most significant in the country’s history. So will be the impact on the country’s economy. For its part, the government in Riyadh is hoping for a massive upgrade of the power and water sectors, a range of contracts for Saudi firms offering support services, and a reduction in the unemployment rate, which currently stands at about 14 percent.
The gas projects undoubtedly will create jobs, although many of them will be located outside of the main population centers. Furthermore, there is likely to be significant influx of foreign—and mainly Western—foreign experts, which could further complicate the kingdom’s already delicate social balance.
Another desire is that the obvious readiness of foreign business concerns to invest in Saudi Arabia may inspire some of the country’s most wealthy nationals to do the same thing. According to the Financial Times, there is currently between $800 billion and $1 trillion of Saudi capital located abroad.
Saudi Arabia is not the oil producer looking for foreign investment, and some of its Gulf neighbors are following developments with a nervous knot in their stomachs. Among them are Kuwait and Iran, who also are keen to outside capital being used to develop their oil sectors, and cognizant of the fact that Saudi Arabia may already have laid its hands on much of the best money that is available. – (MENA Report)
© 2001 Mena Report (www.menareport.com)
- The oil majors are back in Saudi Arabia, but not quite as they wanted
- ExxonMobil, Shell join bidding for all three Saudi gas ventures
- Foreign bids for Saudi gas projects passed on to Fahd's petroleum council
- Oil majors have until August 26 to bid for giant Saudi gas projects
- Saudi to meet oil companies bidding for energy projects