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Dominating the oil market.

THE OIL AND GAS INDUSTRY remains at the very heart of the Saudi economy. The kingdom dominates the world market and during the Gulf conflict when supplies from both Kuwait and Iraq were taken out of world supplies, the country's strategic role was evident. Alone among world producers, it was able to increase output rapidly from 5 million b/d to 8.5 million b/d.

James Schlesinger, a former US secretary of energy who addressed the World Energy Council in September, pointed out that "Opec has recently lost some of its institutional role and such as remains is increasingly dominated by Saudi Arabia." He added that "it is clearly Saudi policy to keep prices moderate, and as the only producers with significant spare capacity, it has the power to do so."

At its ministerial meeting held in Vienna last November, Opec took several key decisions. These included the formal re-establishment of national production allocations; the setting of an Opec ceiling of 25.582 million b/d for the first quarter of 1993 (compared to 24.2 million b/d for the last quarter of 1992); accepting the resignation of Ecuador from the organisation; and setting Iraq's quota allocation at 500,000 b/d. Saudi Arabia retained its desired quota of 8.4 million b/d, which represents just over 33% of the overall ceiling.

Reaction from the markets was less than enthusiastic. Faced with a continued erosion of oil prices, Opec's president, Alirio Parra, visited several of the member states to form a consensus for a new agreement to stabilise prices. Significantly, Saudi Arabia said that it was prepared to back a 1 million b/d cutback by the organisation for the second quarter of 1993 provided it was shared proportionately between the members. This would imply Saudi Arabia's output dropping to just over 8 million b/d.

The kingdom has at least 25% of the world's known oil reserves. As Hisham Nazer, the oil minister points out: "If we continue to produce at the present rate, in a hundred years' time we shall still be pumping oil when most of the other producers' will be exhausted or have dried up years before."

At the close of 1992, oil exports were responsible for about 80% of the kingdom's total income. Since the 1970s the avowed goal of economic development strategy has been diversification from dependence on oil. In practice, this will happen very slowly.

In fact, the Saudi government is expected to invest up to $33 billion during the next few years with the two-fold aim of increasing production capacity and expanding oil sector-linked industrial development. It is forecast that within the next three years capacity could increase to 10 million b/d which may benefit from increasing demand and a drop in output from wells in the former Soviet Union.

The arrival of President Clinton at the White House will do nothing to upset the traditionally close Saudi-US relationship. A quarter of US oil imports come from the kingdom and the level of oil imports will increase as domestic production inexorably declines. Saudi Arabia buys more goods from the United States than Japan, while the defence relationship creates thousands of jobs in the United States, and Saudi Arabia remains a major investor in the country.

Last July, Ibrahim al Mohanna, a senior adviser to the Ministry of Petroleum, laid out the six guiding principles of the kingdom's oil policy in a letter to Energy Compass, a leading oil and gas publication. These were:

* stability and predictability in the oil market to ensure Saudi and global economic growth;

* promoting transparency in the market so that prices are determined by market fundamentals;

* discouraging discriminatory taxation against oil, under whatever pretext, including the "carbon tax" proposed by the European Community;

* encouraging large oil producers within and outside Opec to contribute "a fair share" to balancing the market;

* ensuring that Saudi Arabia is never again made a swing producer - market stability is to be a common task of all oil producers and Saudi Arabia will only contribute its proportionate share to their task;

* promoting "reciprocal security" among producers and consumers, with consumers being assured of a steady and uninterrupted supply at market prices.

Saudi Aramco, the state oil company established in 1989, is responsible for 97% of the kingdom's oil production and for all natural gas liquid (NGL) output. It is also responsible for developing oil reserves which are conservatively estimated at 260,000 million barrels. By the middle of the decade it could be spending up to $15 billion on oil field development, and a further $10 billion on upgrading downstream refineries by the year 2000.

While the company has embarked on a programme of international expansion, ranging from acquisitions in Texaco to joint ventures with South Korean and Japanese companies, it is also working on two major developments at home. These are the Al Hawtah group of fields to the south of Riyadh, and the offshore fields in the northern Gulf.

Saudi Arabian Marketing and Refining Company (Samarec) is responsible for the kingdom's oil refining and marketing petroleum, natural gas and sulphur products. Formed at the end of 1988, it took over 12 companies which were originally set up by Petromin, the state-owned oil corporation. Total refining capacity is now in excess of a million barrels a day and an ambitious programme for upgrading seven refineries will eventually cost $4 billion in three phases.

Samarec's chief executive, Hussein Linjawi, says that the comprehensive 10-year upgrading programme will make their refineries "the most advanced in the world". A two-year study has now been completed to figure out what is needed to meet the international demand for lighter and more environmentally friendly products. "We are now in the engineering phase," Linjawi says. "Our aim is to upgrade our refineries mainly to switch from producing fuel oil to gasoline, diesel and the middle distillates."
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Title Annotation:Saudi Arabia Special Report; Saudi oil industry
Author:Arnold, Stuart
Publication:The Middle East
Date:Mar 1, 1993
Previous Article:Incentives for diversifying.
Next Article:Faith in the private sector.

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