Saudi Arabia Oil Industry

Background

Saudi Arabia is categorized as the world’s most important oil producer accounting to almost 13 per cent of total world oil production (U.S. Library Congress 1). As the domestic market and consumption of oil has recently come to dominate the oil policy of the country, what remains as concrete truth is that Saudi Arabia continues to cater for the international market, and its actions both directly or indirectly affect the demand and supply of oil in international market (U.S. Library Congress 1).

Thus, Saudi Arabia today enjoys the position of ‘swing producer’ with ability to determine and balance international oil demand and supply. Since the discovery of oil in the country, Saudi Arabian government has remained the major custodian of oil resources in the country, regulating the participation of private players. The first oil concession was signed in1923 with a British company named Eastern and General Syndicate and upon being unable to operate after a relatively period of time, the Saudi government declared in 1928 that the concession had become void (U.S. Library Congress 1). Since then, other concessions have been signed between major oil companies and the government of Saudi Arabia.

Saudi Arabia economy has grown heavily, with over-reliance on oil a fact that has led some analysts to criticize it, claiming that in future, the energy sector of the country may be compromised. The argument is that the country especially regulatory environment has to open up to private investment specifically the foreign companies who, apart from having capital, possess efficient and modern technology, expertise and all what it requires to explore the vast mineral resources of the country that in turn will benefit the energy sector. Writing in his book, ‘Twilight in the Desert’, Matthew Simmons points to the bleak and unpromising nature of Saudi’s oil production economy (Saliba p.1), which further necessitate the need for newer and more avenues of energy exploration. Nevertheless, in 2004, the Saudi government legislated into law a new mining law that gave foreign companies access to the country’s mineral resources (Shammseddine para.1).

Literature Review

Oil Mining in Saudi Arabia

Abdi Aziz ibn ar Rahman Al Saud, “the first king of Saudi Arabia” in 1923 he issued the first oil concession to a British Company that was known as “Eastern and General Syndicate Company” although the king had “not assumed control of western region of the country” (Country Studies 1). In a twisted move, the British company showed no interest hence in 1928 the oil concession was declared null and void (Country Studies 1).

After this episode, exploration for oil did not stop and as more oil fields were discovered in regions that were around the Persian Gulf, which gave the explorers assurance that the peninsula region had deposits of oil (Country Studies 1). As these news become good and promising the setback was however that most companies were blocked from exploiting the new discovered resources due to what existed as, ‘Red Line Agreement’ which did not allow companies to extend there operations specifically in the Middle East region (Country Studies 1).

Saudi Arabian involvement in oil mining and trade started again in1933 when an American company known as Standard Oil Company based in California was granted oil concessions by the government of Saudi Arabia since the company was not affected by the ‘Red Line Agreement’ (Country Studies p.1). Immediately the company changed its name to California Arabian Standard Oil Company (Casoc) which became to be associated with the company for some time. In 1936 Casoc disposed part of its shares to Texaco in order for the company to access some of the marketing facilities that were being owned by Texaco all over the world (Country Studies p.1).

Starting off in 1944, Casoc transformed itself by changing its name to Arabian American Oil Company-Aramco (Country Studies p.1). In 1946, two more companies were incorporated in order to increase the investment capital and marketing channels for the company as more oil continued to be discovered and exploited in Saudi Arabia.

The initial concession was signed on agreement that there was to be “an annual rental fee amounting to 5,000 British pounds in form of gold or its equivalent until oil was discovered” (Country Studies 1). The agreement did not end there since again it was agreed that the company was to ensure that it supply free specified amount of already refined products the Aramco was to produce from the discovered oil in the country (Country Studies 1).

After this agreement was accepted by both parts and formalized, “the company received exclusive rights to explore for, produce, and export oil, free of all Saudi taxes and duties, from most of the eastern part of Saudi Arabia for sixty years” (Country Studies p.1). It later emerged from oil analysts that the numerous terms that were agreed between the government and Aramco were as a result of, “governmental liberal measures, the king’s low estimate of future oil production, and the king’s weak bargaining position” (Country Studies 1).

As part of its operation strategy Aramco initiated and followed a long-range policy that put in place mechanisms to carry out training of the Saudis in order for them to assume many roles that were rising in the company. Nevertheless, the company maintained a tight policy on its top management positions where it did not surrender them easily to the locals (Country Studies 1). Despite there concerted efforts to maintain senior positions to the foreigners, Aramco in 1970 had to yield to the government pressures to do so (Country Studies 1). Further, to dissociate from itself from supply and services sidelines the company put in place mechanisms to solicit subcontracted work specifically to the local business owners where in some instances the company had to provide, “technical, financial, and material assistance and further at the request of the king the company helped to find water and develop agricultural projects” (Country Studies 1).

Other oil concessions agreement that the government granted after the Aramco one of 1933 included one that was awarded to Getty Oil Company in 1949 where the company was permitted to explore oil specifically in the Divided Zone (Country Studies 1). The company operated in the region until during the Persian Gulf War when major infrastructures of the company were heavily damaged in the region forcing it to close down its operations. Another oil concession was awarded in 1957 by the Saudi government to the Arabian Oil Company (AOC) that largely had majority shares owned by the Japanese citizens. The company was given two years to carry out its activities of oil exploration specifically on the offshore of Divided Zone region (Country Studies 1).

In 1962, another company by the name General Petroleum and Mineral Organization (Petromin) was created generally as a public corporation and had majority shares of Saudi Arabian government. The major responsibility of the company was to, “develop industries based on petroleum, natural gas, and minerals by itself or in conjunction with investors, foreign or domestic and its activities largely centered on the country’s hydrocarbon resources and other minerals” (Country Studies 1). As it expanded its activities the company became largely and greatly, “responsible for domestic distribution of petroleum products, partly by purchasing Aramco’s local marketing facilities. It also began marketing crude oil abroad and became involved in tanker transport” (Country Studies 1).

Saudi Arabia’s new mining law

In 2004, the Saudi Arabian government enacted a new mining law that many have perceived to possess the capability to allow and provide foreign companies with sustainable and conducive environment to access and exploit mineral resources in the country (Trade Arabia Business News Information 1). According to the new code the aim is to encourage and sustain the mining industry in Saudi Arabia. The new code is further to be implemented by the Ministry of Petroleum and Mineral Resources where the ministry will be responsible in issuing seven different types of licenses (U.S-Saudi Arabian Business Council 4).

According to the law both foreign and private investors are presented with opportunity to choose from the three non-exploitation licenses and four exploitation licenses. The non-exploitation licenses include the reconnaissance and material collection licenses that are both supposed to exist for two years while the exploration licenses are supposed to take a maximum of three years (U.S-Saudi Arabian Business Council 4). According to Saudi’s 2007 Monetary Agency report (SAMA), there was a total of 1,269 mining licenses that were valid by the year 2006 which included 65 for prospecting, 32 for exploration, 28 for small-sized mines, 11 for mining concessions for the various metal cores and 30 for mining concessions for exploiting ores of the country’s cement industry (U.S-Saudi Arabian Business Council 4).

Describing the benefits of the new mining law, oil analysts observed that, “the mining sector in top oil exporter Saudi Arabia is slowly gaining momentum as foreign companies look to make investment in a sector the government sees as important for economic diversification” (Trade Arabia Business News Information 1). In its capacity Saudi Arabia is one of the Middle East companies in possession of one of the largest oil reserves in the world but at the same time possess numerous and large deposits of other minerals (Trade Arabia Business News Information 1).

According to mining executive, “the new adopted mining law is beginning to bring results to the Saudi Arabian mining resources” (Trade Arabia Business News Information 1). At the same time, according to an Australian company official, his observation and sentiments are that, “I think that the mining industry in Saudi Arabia is going to start booming and we will see a lot more of foreign money poring into exploration The changes in the law and increasing knowledge of prospecting in Saudi Arabia has created the conditions for the boom” (Trade Arabia Business News Information 1). In its operation, the new mining law requires foreign and other private companies to work in conjunction with the “Saudi’s state run Saudi Arabian Mining Co (Maaden) or through joint ventures with local companies” (Trade Arabia Business News Information 1).

As a result, many Australian companies have shown great interest of establishing their business and operations in Saudi Arabia. According to Australian Trade Commission officer based in Saudi Arabia the Australian companies that have shown interest include, “Hatch, Syrah Resources and Ausenco” (Trade Arabia Business News Information 1). Further according to the official, the Australian department at the ministry was being, “overwhelmed with applications although notably procedures are not smooth and regulated enough. Opportunities presented by the Saudi’s country were immense as compared to other countries” (Trade Arabia Business News Information 1).

According to the law, seven different mining licenses had been initiated and made available by the Saudi’s government specifically spearheaded by the Ministry of Petroleum and Mineral Resources. At the same time, the law code had reduced drastically the “area to be covered by the license from the earlier requirement of 10,000 square kilometers to the current state of 100 square kilometers” (Trade Arabia Business News Information p.1).

According to a published story by Reuters concerning the new mining law, “the oil and mining economy in Saudi Arabia largely lacks the services and contractors that it needs to grow more quickly while at the same time, the economy lacked local contractors who can work in the mining sector, there are not enough companies and demand is higher that that” (Trade Arabia Business News Information p.1). According foreign companies possess the ability to carry out activities but they will eventually ask for, “Certain logistics, they need drilling, mining exploration, manpower and companies who can provide these services, in turn this will facilitate the development of the industry which is very promising” (Trade Arabia Business News Information 1).

Why Saudi Arabia’s oil industry need to open up for foreign investment

Gawdat Bahgat, the director of the Center for Middle Eastern Studies at the Indiana University, notes that, Saudi Arabia’s government continues to stick and foster a state-control policy for its energy sector and this particular experience came to fore fold in 1998 when while in Washington the country’s prince Abd Allah ibn Abd al-Aziz held meeting with top senior officials of the American oil companies (Bahgat 1).

As the events would turn out, the prince’s talks with these major oil companies invited government reactions to change and modify its energy policy it has pursued for a long time. Citing evidence from other regions involved in production of oil, it is a true fact that most crude oil producers are moving away from government-controlled energy sector and are now embracing to foreign investments in the sector (Bahgat 1). More international oil companies (IOC) are being invited and numerous reasons have been associated to this change of motive.

First, Saudi government is seen to be limited by capital which it can invest in more oil exploration activities or research undertaking. At the same time, the government is limited by capital, which it can acquire new, and sophiscated equipment to be deployed in oil exploration.

Secondly, the Saudi government is largely incapacitated with regard to new and modern technology. Attached to lack of capital and manpower to foster a new technology, the country is disadvantaged greatly from using the new technology (Bahgat 1).

Third, the country is seen to lack adequate skilled human manpower as compared to IOC. Therefore major activities of oil economy have been deterred by insufficient and inadequate skilled manpower.

The above reasons coupled and supplemented by numerous reports by oil experts about the future bleak of oil industry in Saudi Arabia calls for need to open up the country for foreign investment. Foreign companies in particular are seen to possess sophiscated and advanced technology which when deployed in Saudi Arabia’s oil industry can give promise of the industry meeting the needs of the current consumer demand and future demand.

More so, foreign companies possess sufficient capital which can amount to numerous investments in the oil industry in Saudi Arabia. Since oil economy is the mainstream of Saudi’s budget, less amount is set aside for re-investment in the oil industry to spur growth but when compared to foreign companies, they possess a lot of unutilized capital which if injected in Saudi’s oil industry can spur great growth.

Lastly IOC constitute a large pool of trained and experienced human power especially with regard to oil mining technology, exploration techniques, management issues and financial budgetary matters. If such technocrats can be deployed in the country they possess capability to transform the oil industry and to that extend the entire energy sector (Bahgat p.1).

Recommendations

In order to achieve the confidence of foreign investors the government has to ensure proper and favorable incentive exist which in turn can act as a bait for these companies. Therefore need for change and modification of the country’s energy sector policy especially with regard to oil and other minerals is inevitable if genuine growth is to be realized in the industry. Debra Johnson and Colin Turner offer suggestion that oil-producing countries that refrain from opening up to the foreign investors are likely to find life in oil industry more difficult (Johnson and Turner 316).

At the same time, those that embrace and initiate reforms to attract foreign investors should put into account the following factors: “the reform must be credible or even the most promising oil resources will not attract investors; even if reform is credible, foreign capital is finite and there will be intense competition among host countries to attract this capital; it is not only the foreign investment regime but also the state of oil markets that influence foreign investment in the oil sector; lastly geopolitical factors which can act to delay or even deter investment need to be identified” (Johnson and Turner 316).

Conclusion

Crude oil remains the most valued form of natural resource in Saudi Arabia and its contribution to the economy of the country is immense. Today Saudi Arabia remains as one of the dominant forces determining world’s oil demand and supply and currently it account for almost 20 per cent of total global oil consumption (Ramady 7). Nevertheless, due to possession of large amounts of crude oil than any other country in the world, other nations refer to the country as, ‘central bank’ of the global oil (Ramady 7).

Central to Saudi’s oil production and supply oil has been the state-controlled policy where the government has remained the largest producer, storerer, and supplier of oil and only limited companies that have been offered concessions permits provide back-up and necessary help for the government to oversee these. Foreign and other private companies have been subjected to non-conducive business environment in the country’s oil and mineral sector in the past, a factor that resulted into many of them showing less interest in investing in the country. Further oil analysts’ reports have shown that the government lacks enough and adequate capacity to initiate major growth in the oil industry as it continue to be limited by lack of capital, human resource manpower and advanced and sophiscated technology.

But since 2004 when the mining law was signed into full law, more opportunities have been presented to foreign companies to invest in once restricted sector in the country. These particular initiatives are highly recommended since they are likely to see the transformation of this important sector to Saud Arabian government and people by spurring enormous growth.

Works Cited

Bahgat, Gawdat. “Foreign Investment in Saudi Arabia’s Energy Sector.” Middle East Economic Survey. 2004. Web.

Country Studies. Oil Industry. N.d. Web.

Johnson, Debra, and Turner, Colin. International business: themes and issues in the modern global economy. NY, Routledge. 2003.

Ramady, Mohamed. The Saudi Arabian Economy: Policies, Achievements, and Challenges. NY, Springer. 2010.

Saliba, Chris. The Bleak Future of Saudi Arabian Oil Production. 2010. Web.

Shamseddine, Reem. “Saudi mining sector seen booming.” Arabian Business. Com. 2010. Web.

Trade Arabia Business News Information. Saudi Mining Sector Seen Booming. 2010. Web.

U.S. Library of Congress. Oil Industry. N.d. Web.

U.S-Saudi Arabian Business Council. The Mining Sector in the Kingdom of Saudi Arabia. 2008. Web.

Wonko-ga. Saudi Arabian Oil Industry. 2004. Web.