Saudi Arabia's new test

Look out, world: Saudi Arabia has confronted another reality test.

The kingdom wants to talk business with the big U.S. oil companies it nationalized in 1973-and a few others. "Business" here means Saudi exploration and production.

And the rumbling everyone should now feel is the petroleum world shaking.

Suggestions sought

Saudi Crown Prince Abdullah ibn Abdulaziz inaugurated these tectonics in a meeting with executives of seven oil companies at the McLean, Va., home of Prince Bandar bin Sultan, Saudi ambassador to the U.S. There, according to reports quoting unidentified meeting participants, Abdullah asked for suggestions about roles the companies might play in Saudi upstream ventures.

His overture is not exactly an invitation to move rigs tomorrow onto the unexplored flanks of Ghawar oil field. But it's a step in that direction, commercially and otherwise.

Politically and very importantly, it's a step outward by a lavishly endowed desert kingdom caught in conflict between a prominent place in Islam and what conservative Saudi Muslims see as a threat from secular modernization. Intensified by national revenues plummeting along with oil prices, the conflict recently has given rise to unusual political instability. The reaction within Saudi Arabia to Abdullah's step thus will be crucial to how far the kingdom progresses toward full embrace of international investment in its petroleum resource.

Commercially, of course, the prospect of such an embrace has staggering potential to change the investment landscape. Saudi Arabia possesses something onto which this year's price slump has refocused attention: scale. Its reserves and its resource are orders of magnitude larger than those of most other countries.

Saudi Arabia estimates its reserves of crude oil and condensate at 260 billion bbl. Skeptics say the number should be reduced by perhaps 30% to account for politically motivated revisions of the 1980s. Even if they're right, so what? The skeptical discount still leaves 180 billion bbl. That's twice the reserves of Abu Dhabi and twice those of the U.S. and Venezuela combined.

Another way to appreciate Saudi scale is to look at where big oil companies now invest billions of dollars a year to find reservoirs able to sustain oil production in the range of 5,000-10,000 b/d/well: water several thousands of feet deep. Saudi wells produce at those rates onshore.

So if Saudi Arabia were to make high-quality upstream opportunities available on attractive terms to international investors, would deepwater exploration disappear? Probably not. The BP-Amoco merger, widely taken as the start of a trend, shows a renewed craving by big companies for scale.

Still, Saudi projects newly available to international investors would siphon capital from somewhere. The geopolitically landlocked Caspian Sea, perhaps? A Russia backsliding toward central economic planning?

It was about this time of year in 1985 that Saudi Arabia recognized that cartels don't work and that politics and petroleum don't sweetly mix. Global oil demand was recoiling from the excessive levels to which the Organization of Petroleum Exporting Countries had driven prices with production restraint. And Saudi Arabia bore most of the restraint as other OPEC members yielded to price temptation.

The first test

When its oil output fell so low that national infrastructure fell into peril, the kingdom passed its first reality test. It revived production, let prices go their own way, and reclaimed market share at the expense of high-cost competitors now long out of business.

In 1998, Saudi Arabia suffers from competitive production from lower-scale resources developed with capital of the scale the kingdom no longer can generate from oil revenues and still support a nation. It thus faces a new test of its sense of economic reality, with possible repercussions no less dramatic than those of 1986.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.