By Ed Blanche

Saudi Arabia’s landmark agreement to allow eight major western oil companies back into the kingdom to develop the natural gas sector — with investment of up to US$50 billion — marks a significant shift in Saudi economic policy and demonstrates how, even when political relations between Riyadh and Washington are seriously strained, as they are over the Israeli-Palestinian conflict, the Saudis are committed to maintaining strategic ties.

The agreement, described by Saudi foreign minister Prince Saud Al Faisal as an ?important historic event? is expected to be finalised by the end of the year. The deal underlines how in this often ambivalent relationship, a cornerstone of America’s Middle East policy, the mutual interest of the two states has again overcome mutual antagonism, as it has since US-Saudi relations were established over 50 years ago.

For their part, the Saudis have pledged they will not use the ?oil weapon? again despite the current friction with the US and, to a lesser degree, Europe. Oil minister Ali Al Niami declared in July: ?I want to assure you of one thing: the time of the oil weapon is past. We don’t want to commit suicide. Our best weapon is money — and we will only get money by selling oil.? Within the Organisation of Petroleum Exporting Countries (OPEC), the balance of power rests primarily with Saudi Arabia, the world’s largest producer — with at least half the world’s spare production capacity — and to a lesser extent with the UAE and Kuwait.

The departure of the Clinton administration, viewed by many Arabs as the most pro-Israeli government for many years, has also eased friction between Saudi Arabia and the US over higher oil prices, the result of production cuts by OPEC and several key non-OPEC producers in early 1999. The cavalier actions last year of the Clinton administration’s energy secretary, Bill Richardson, offended Riyadh mightily. In the run-up to the November 2000 presidential elections, seeking to strong-arm the Saudis and their Gulf allies into boosting production in order to push down prices, Richardson claimed high oil prices were seriously threatening the global economy.

These actions culminated in a startled Richardson getting a 10-minute tongue-lashing from the Saudi foreign minister, Prince Saud, on the private nature of the ?special relationship? between the two countries, and a lecture on how neither should use the media to pressure the another, particularly on such sensitive and vital issues as world oil prices.

Bush’s energy programme seeks to increase US domestic production

The Bush administration, with its array of former oilmen including the president himself, vice president Dick Cheney and other senior figures, has taken a totally different tack. OPEC’s decision in July to trim production by one million barrels a day from 1 September, the third cutback this year, to push prices back to the $25 a barrel comfort zone — equivalent to $28 for higher-quality US benchmark light crude — was apparently quite acceptable to Washington. Following the bombing of the World Trade Centre and the Pentagon on 11 September shocked traders drove up crude prices by more than $3.50 per barrel to a nine month peak of $31.05 but prices are likely to stabilise at below $30 a barrel, providing the Americans do not launch retaliatory strikes in producer states.

Apart from securing supply, Bush’s energy programme seeks to increase US domestic production and reasonably high prices will bolster that policy. Bush’s energy secretary, Spencer Abraham, who is of Arab extraction, has already held behind-the-scenes consultations with Riyadh and been assured by Naimi that the Saudis will ensure price levels do not surge up to the $30 mark once more. ?We will not be begging anybody for oil,? Abraham said in July. ?We intend to engage in quiet diplomacy with OPEC, not public diplomacy.?

Amid mounting criticism of the US in the Arab world, most notably by Crown Prince Abdullah and other members of the powerful and traditionally pro-American Sudairi faction of the ruling Al Saud family, over Washington’s failure to rein in the Israelis, Bush’s father, highly regarded in the Gulf as a friend, intervened with a telephone call to Prince Abdullah in July, to assure him the new US president was striving to be even-handed and to end the Intifada bloodshed.

Saudi Arabia does not have to have viewpoints that are 100 per cent identical to those of the United States

As one learned Arab commentator noted: ?I don’t think strategic relations (between the USA and Saudi Arabia) will be affected, no matter how enormous the pressures and irrespective of any changes in existing circumstances, such as the rapprochement between Saudi Arabia and Iran.

?These are deep strategic relations that are unaffected by other associations. Saudi Arabia does not have to have viewpoints that are 100 per cent identical to those of the United States? Thus, recent Saudi statements and the criticism directed at the US administration? do not stem from hostility. These are positions designed to protect Saudi Arabia’s status as the standard bearer of Islam.?

The Israelis reached the conclusion years ago, possibly even before the Saudis themselves, that Saudi Arabia’s oil power could threaten them more effectively than the combined military forces of the Arab world, by forcing the Americans to choose between political commitment to the Jewish state and their strategic need for Arab oil. With this in mind, the Israelis sought, with some success, to foster the perception of the Gulf’s potentates as a threat to the global economy. The Americans, despite intense domestic pressure from the powerful pro-Israel lobby, have sought to balance these two opposing positions ever since and may have to do so for some time to come.

As global oil reserves are depleted five Gulf states will assume increasing importance

For now, however, the fact is OPEC’s power has been severely curtailed over the last three decades to the point where it is now the oil-exporting countries that are worried about economic security. The price collapses in 1986 and 1998 underlined how they no longer had control of the market or the oil revenues on which their economies have become dependent. The Saudis and their Gulf allies found themselves with big budget deficits for the first time and the $60 billion cost of the 1990-91 Gulf War and its aftermath left them reeling. The ?oil weapon? — the manipulation by exporting states of the price and/or the supply of oil, with the intention of changing the political behaviour of the consumer nations — had become obsolete.

Indeed, the situation has been reversed, with three key OPEC members — Iran, Iraq and Libya — all subject to US or UN sanctions, and sometimes both. But as global oil reserves are depleted amid rising demand, it is generally believed that within the next two decades the centre of gravity of world oil production will be the five Gulf states of Saudi Arabia, Iraq, Iran, Kuwait and the United Arab Emirates.

The agreement set the seal on the first foreign investment in the kingdom’s energy sector since 1975

A recent report by the Centre for Strategic and International Studies’ Strategic Energy Initiative, The Geopolitics of Energy in the 21st Century, says that if, as projected, demand for oil increases by 50 per cent over the next 20 years, Gulf oil production must increase by 80 per cent. This is achievable, it says, with foreign investment participation and if Iran and Iraq are free of sanctions. The report adds that the most significant trend during this period will be the increasing inter-dependence between energy suppliers and consumers as oil production in North America and Europe declines and Gulf production increases. Asian imports of Gulf oil are also projected to increase alongside the rapid spread of the use of natural gas. The report also notes that by 2020, some 50 per cent of the estimated global demand for oil will be met by countries whose internal stability is classified as ?doubtful?.

The Saudis’ 3 June agreement with the oil companies set the seal on the first foreign investment in the kingdom’s energy sector since the industry was nationalised in 1975, in the aftermath of the 1973 Arab-Israeli war and the oil embargo that followed. ?This is going to be the most important flow of foreign investments in the history of the country,? commented Brad Bourland, chief economist with the Saudi American Bank. ?It will have a huge impact on the economy.?

Western companies will help Saudi Arabia convert desalination and electricity generation plants from oil to gas

The deal, a key step in diversifying the kingdom’s economy, involves the integrated development of three vast natural gas fields covering 440,000 square kilometres, approximately the size of Sweden, making it the largest area in the world for hydrocarbon investment. ExxonMobil of the US will head a consortium with Royal Dutch/Shell, British Petroleum and Phillips, also of the US for the main prize, the South Ghawar Project in the Eastern Province. Exxon leads another consortium with two other US firms, Occidental and Marathon, on the north Red Sea coast. Royal Dutch/Shell takes the lead with France’s TotalFinaElf and Conoco of the US in Shaybah in the Rub al-Khali, Saudi Arabia’s vast Empty Quarter in the southeast. Collectively known as the National Gas Initiative, the projects will be carried out in partnership with the state-run Saudi Aramco oil giant over 30 years.

The US energy giants have been particularly eager to return to Saudi Arabia, where until 1975 Exxon, Mobil, Chevron and Texaco managed the kingdom’s oil industry as part of the Arabian American Oil Company. The western companies will help Saudi Arabia convert its utilities, such as desalination and electricity generation plants, from oil to gas power, freeing more of the kingdom’s crude oil for export while building new infrastructure and creating jobs for Saudi Arabia’s swelling population.

While the oil sector is off-limits and will remain firmly in Saudi hands, the companies clearly hope they will eventually be allowed back into that end of the industry. In the meantime, the upstream gas industry is enticing. Saudi Arabia has proven reserves of 6.6 trillion cubic metres, the world’s fourth largest deposits.

International oil companies are falling over themselves to get back into Libya and Iraq

Crown Prince Abdullah, who has played an increasingly important role in the day-to-day running of the country since King Fahd’s health scare in 1995, warned his countrymen a couple of years ago that the oil boom days were over; that the kingdom could not ignore globalisation and must, like its neighbours, wean itself away from its near-total dependence on oil revenue. Eager to demonstrate a new economic openness that could help its bid to join the World Trade Organisation (WTO) and expand private business, the Saudis last year announced a new law designed to attract foreign investment, the first such reform in 21 years.

Iran, another major OPEC member, has been driving to attract foreign investment in its oil industry to finance modernisation and expansion, although US trade sanctions and internal opposition from hard-line conservatives has hampered this. Kuwait is also pushing a controversial $7 billion plan to allow foreign oil majors to run its northern oilfields, stressing the need to boost production capacity from 2.5 million barrels a day to 3.5 million. The emirate’s parliament says such a scheme violates the constitution, which prohibits foreign ownership of natural resources.

International oil companies are falling over themselves to get back into Libya and Iraq once UN sanctions are lifted. American firms remain barred because of sanctions, although if some in the Bush administration have their way that situation could well change. In the meantime, the trend appears to be strongly towards regional oil producers opening up once again to the oil majors, a development that could impact deeply on the region’s economic future and strategic relations with the West, whose dependence on their energy wealth will only increase in the decades ahead.

Copyright © IC Publications Limited 2001. All rights reserved. No part of this site may be reproduced or transmitted in any form by any means or used for any business purpose without the written consent of the publisher. Whilst every effort has been made to ensure that the information contained herein is as accurate as possible, the publisher cannot accept responsibility for any consequences arising from its use.

Back to the top
Contents