Industry is hopeful a meeting between Saudi Crown Prince Abdullah and President George W. Bush-at presstime still scheduled last week at the president’s ranch in Crawford, Tex.-will help ease growing concerns that Middle East tensions will stifle investment in the kingdom.
To join Abdullah in Texas were two key officials whose cooperation is needed to move various projects forward: Ali al-Naimi, minister of petroleum and mineral resources, who is officially overseeing the kingdom’s $25 billion gas initiative plan designed to give foreign investors a stake in natural gas, water, and electricity projects; and Ibrahim al-Assaf, minister of finance and national economy, whose task it is to see that Saudi Arabia liberalizes trade laws enough to join the World Trade Organization.
On the eve of the visit, Al-Naimi sought to dispel nagging speculation by Western oil companies that the gas deals were unlikely to be finalized because of rising Middle East violence.
Investment climate
"There is no political setback to this initiative," Al-Naimi said at a conference last week sponsored by the Council on Foreign Relations, Petroleum Industry Research Foundation Inc., and the US-Saudi Arabian Business Council. Other high-level officials who spoke at the conference included Sec. of Energy Spencer Abraham; Senate Committee on Energy and Natural Resources Chairman Jeff Bingaman (D-NM); Alan Larson, Undersecretary, Economics, Business, and Agricultural Affairs, US Department of State; and David O"Reilly, Chairman and CEO of ChevronTexaco Corp.
The oil minister conceded that there have been delays but suggested the differences between state-owned Saudi Arabian Oil Co. and the companies could be resolved.
"It boils down to what is the price of a gallon of water or price per megawatt-hour to consumers and what subsidy, if any, the government will pay," Al-Naimi said. "That’s it in a nutshell; [repercussions from] Sept. 11 or the Middle East situation have very little to do with the negotiations," he added.
As early as last January, US companies predicted delays in finalizing the contracts for political and legal reasons. Diplomatic tensions between the two countries are lessening but still exist, and the lucrative double-digit return on investment first offered by Saudi royals over a year ago has not been consistent with what Saudi Aramco is offering at the negotiating table (OGJ Online, Jan. 14, 2002).
Al-Naimi, however, brushed aside rumors that Aramco has decided that, if it wants any foreign investment at all, it would like it to come from oil companies that are largely state-owned, such as Statoil ASA, and not private multinational oil companies that may have higher expectations of what the gas deal could bring down the road.
"There are exciting times ahead for us," he told the conference. Later with reporters he suggested that while he does not foresee adding partners to the core projects discussed under the gas initiative, he does expect additional investment opportunities to become available.
"This particular initiative, no; but Saudi Arabia has a lot of acreage, and we’ll definitely go after additional acreage and additional partners,’ he said.
ChevronTexaco’s O"Reilly also told the conference his company was upbeat on future investments in the kingdom. ChevronTexaco is not one of the companies currently negotiating with the Saudis on the upstream gas and associated downstream projects now being negotiated with other Western companies. But O’Reilly later told OGJ that he expects his company to be involved in other future projects.
Calming market jitters
Al-Naimi also sought to calm lingering market fears that the kingdom would either consider stopping its own oil exports to the US or allow world oil prices to escalate for a sustained period of time because of the White House’s support of Israel.
"As the world’s dominant oil producer and supplier, Saudi Arabia has been committed to ensuring the stability of the international oil market and the reliability of supplies to consumers," he told the conference, which included a broad mix of US and industry officials, academics, and analysts.
"Saudi Arabia has also consistently championed the cause of price moderation. In times of crisis, Saudi Arabia has stepped forward to ensure that adequate supplies of oil were available in world markets…Saudi Arabia was able to provide this protection for the world’s economies because it has maintained, at considerable expense, large quantities of spare production capacity. I might add that few countries or companies are willing to or perhaps able to bear the cost of such insurance."
The kingdom has one quarter of the world’s proven reserves and maintains more than 3.5 million b/d of excess production capacity.
"This alone is more than the total output of many other major producers, and close to half of daily US production. No other country is even close to having this much standby capacity," he said.
Provided market conditions warranted action, Saudi Arabia could raise crude exports to about 9 million b/d within 2 weeks, Al-Naimi told the audience later as part of a question-and-answer session. The kingdom’s production quota under the Organization of Petroleum Exporting Countries is officially 7 million b/d, although analysts peg Saudi Arabia’s actual production at 7.2-7.4 million b/d.
The kingdom could produce even more than 9 million b/d, but it could take as long as 90 days to add those incremental volumes, he said.
Al-Naimi also suggested OPEC may consider higher production numbers at its June meeting if market conditions justify it. But he stressed several times to reporters that it is too soon to predict what the group would decide to do, given that current oil prices are within "comfortable" ranges.
Market transparency
Several speakers, including Al-Naimi, called for greater market transparency to help shield both producers and consumers from oil boom-and-bust cycles.
"Producers suffer from a lack of transparency and a lack if accurate information on [world] supply, demand, and inventory," he said.
Al-Naimi said Saudi Arabia is working hard to establish in Riyadh an international energy forum designed to help establish a "solid relationship and common goals among oil producers and consumers as well as the oil industry at large."
About 60 countries and international energy organizations have expressed their support for the project, which will be finalized at the next producer-consumer meeting in Osaka, Japan, in September.
"Today, as producers and consumers, we are reaching toward a far better understanding of codependence," Al-Naimi said.
Bingaman: Easier said than done
Bingaman echoed Al-Naimi’s interest in improving data collection and communication between the world"s oil producers and consumers. But he suggested that realizing such a goal will be a challenge for energy policy-makers.
"This is easier said than done. Timely data and information exchange with so many players–producers, government and private sector, traders, consumers–is the No. 1 challenge," Bingaman said.
Bingaman recalled that, during the last price downturn, there were stories and rumors of million of barrels of missing oil. Producers in the US were concerned those "missing barrels" would flood the market at some point and further depress prices.
"What became increasingly clear, however, was that the lack of reliable and timely information on world oil supply, demand, and stocks was the culprit. When it takes 6 months to know what is happening in a market that experiences minute-by-minute price changes, there’s clearly a problem for everyone but the speculators," he said.
Nevertheless, the senator said he was encouraged by recent efforts to close the knowledge gap.
"I understand progress is being made on the transparency issue through ongoing discussions as part of a producer-consumer dialogue. The commitment of the US and Saudi Arabia to that process is critical. Continued volatility to the degree experienced in recent years will only cause further instability in exporting countries revenues, private sector investment, and economic growth in developing countries."
But to make real progress in stabilizing world oil markets, cooperation and realism will be needed, Bingaman said.
Improving corporate reporting of assets and liabilities would be an important step forward "even though we [the US] haven’t been a good example," the senator said in a veiled reference to the Enron Corp. financial implosion last year that some analysts blame on lax US accounting rules that encouraged company officials to misrepresent their earnings.
Other countries need to take action as well, he added.
"The investments Saudi Arabia has made in excess capacity are a critical factor in market stability. At the same time, the international private sector needs clear, longer-term market signals and short-term cash flow stability in order to maintain capability and to ensure ongoing investments in capacity. That applies equally to the downstream part of the oil sector," said Bingaman.
