SAUDI ARABIA - Forecasting Saudi Formulae.

The prices of the Saudi crudes relative to each other are a reflection of their qualities: the yield and sulphur content of the residue (residual fuel oil). When the price of HSFO is high relative to that of crude, Arabian Heavy will be at a relatively small discount to Brent or vice versa. The price of Arab Super Light follows the price of naphtha (see OMT).

The key forecast related to Saudi formula pricing is that of Saudi Aramco's production of high and low sulphur crudes. This leads to the forecast of price differences between low and high sulphur residual fuel oils. The consensus forecast now is that the sulphur premium will stay relatively low in the near future, as the mix of Saudi crude oil exports has become lighter with lower sulphur content (see Part 2).

Saudi Aramco has since 1994 earned more from east of Suez markets than from its sales to the US and Europe. Sometimes the difference comes to about $1/b. The same is true in the case of Iran's NIOC, Kuwait's KPC and the other NOCs of the Middle East.

Saudi Aramco has since reduced the volume of medium and heavy crude exports in favour of the lighter grades, with Arab Super Light now averaging about 200,000 b/d. But the reduction of heavy grades' exports to east of Suez markets was less severe than in the case of its sales to west of Suez markets.

Saudi Aramco has eliminated the role of middlemen (mostly involved in private Saudi oil firms) by opening its own sales offices in big markets. At the beginning of 1997, Saudi Aramco took over the sale of 400,000 b/d of crudes from BP and Shell, which the two majors used to market against a fee under the Yamamah arms-for-oil deal. It has established direct relationships with oil refiners and other end-users for crudes, oil products and gas liquids. Saudi Aramco's term clients for crude oil and products exceed 50 and lift the bulk of the kingdom's exports.

Of strategic importance is the flexibility of Saudi Aramco's crude oil supply system. In the event of emergency, for example, it can quickly pump 5m b/d from the Eastern Province to two terminals on the Red Sea - Yanbu' and al-Mo'ajiz. But the latter terminal relates to a crude oil pipeline from Iraq built by Saddam's Baathist regime and seized by the Saudi state in 2001. It is not yet clear whether Baghdad, now that it is controlled by the US, would reclaim both the pipeline and the terminal of al-Moajiz. Saddam's regime did contest the Saudi seizure in 2001. This Iraq factor has become a major issue as US-controlled Baghdad wants to begin a massive reconstruction programme as soon as possible, with plans to raise Iraq's oil export potential to the maximum and at top speed (see background in Vol. 61, No. 15).

Built in the 1980s, the pipeline to al-Mo'ajiz has a capacity of 1.65m b/d, linking Iraq's southern oilfields to the Saudi Red Sea coast. Al-Mo'ajiz lies north of the Saudi terminal of Yanbu'. Saudi Arabia closed the line and the terminal after Saddam's Iraq invaded Kuwait in August 1900.

In June 2001 the Saudi government expropriated the pipeline and terminal. As Saddam's government protested, the kingdom's then Second Deputy Premier and Defence Minister Prince Sultan ibn Abdel Aziz (now the crown prince) told reporters: "The pipeline, as you know and as everybody knows, basically belongs to Saudi Arabia... The pipeline and the land are Saudi. Therefore Iraq has no right to protest against anything".

In response, an Iraqi Foreign Ministry spokesman was then quoted by the official Iraqi News Agency (INA) as saying: "This statement is a sheer allegation and an exposed lie which has no ground and the Saudi defence minister, undoubtedly, knows the reality of this lie. Saudi Arabia has no right to seize the ownership of the whole pipeline".

INA said the pipeline and terminal, which went on stream in 1989 for the export of Basra Light, were built in accordance with agreements signed by the governments of Iraq and Saudi Arabia.

A Saudi statement later said: "The just compensation due to the government of Iraq" would be deducted from Saudi Arabia's claims against Baghdad for damages incurred as a result of Iraq's August 1990 invasion of Kuwait. In May 2002, as relations between Baghdad and Riyadh improved following an Arab summit conference in Beirut in late March, Saddam's Iraq revived its claim to the pipeline and terminal.

An Iraqi official was quoted by INA as saying the southern Iraqi section of the pipeline had been rehabilitated and needed to do similar work along the section running through Saudi territory and at the terminal.

Under Saddam's government, Baghdad has been planning to expand the combined capacity of Mina Al Bakr and Khor Al Amaya terminals on the Persian Gulf to 3.2m b/d, as a minimum. But the government then said work on this was only to begin after the UN sanctions. It was also planning to have a large fleet of crude oil and products tankers (see background in Vol. 52, No. 19). The Saddam government said in 2000 it intended to lay two to three 42/48-inch crude oil pipelines between new storage depots and a rebuilt Fao terminal (120-130 km), and complete a second north-south strategic pipeline.

The latter project required some 230 km of 42-inch line and expansion of the first pipeline's four pump stations. The 18-42-inch strategic pipeline system, built in the 1970s and expanded with a 42-48-inch twin line in the early 1990s, should have a capacity of 1.4m b/d to pump crude oils either from Rumaila in the south to the northern pipeline system or vice-versa, giving Iraq flexibility to shift exports either way. The pipeline's total length is 760 km, consisting of 655 km from the Rumaila fields to Haditha in the north-west and 105 km from Rumaila to Fao in the south.

Storage facilities at Fao were linked by marine pipelines to Mina Al Bakr and Khor Al Amaya. The line's main pump station, K-3 at Haditha, and three intermediate stations were nearly destroyed in the 1991 war. K-3 was repaired and put in operation in November 1991. The other stations were repaired in 1992. Parts of the system were damaged or destroyed by sabotage after the US invasion.

The Iraq-Syria pipeline, which used to pump Kirkuk crude oil from Haditha to Syria's Mediterranean terminal at Banias and was re-opened in late 2000 after repairs, was closed during the US invasion in March 2003. (This line was not approved by the UN, and from late 2000 the US pressed Syria to stop it. Syria, however, kept running the pipeline and took between 150,000-200,000 b/d of Iraqi crude for local use at a discounted price of $15/b and Damascus paid for this outside the UN framework).

If all these outlets are rehabilitated and expanded as planned by Saddam's government, including the pipelines to al-Mo'ajiz and Banias and Iraq's Gulf terminal of Fao, Iraq's oil export capacity would be 6.85m b/d. This can be reached within less than 18 months of work on fast-track basis - now that the US is in control - assuming that sabotage and a raging Sunni insurgency have been overcome.