SAUDI ARABIA: New figures face fresh challenges

22 September 1995

CHANGES at the top of Saudi Arabia's oil ministry do not occur very often. When Zaki Yamani was appointed oil minister in 1962, he stayed in the post for the next 24 years. When he did finally go, it was in the wake of the oil price crash of 1986. No such drama surrounded the departure of his successor Hisham Nazer who stepped down in the cabinet reshuffle announced by King Fahd in early August. Nevertheless there are parallels. Oil prices are again weak, and are expected to remain so for some time. And the kingdom is forging a new strategy, which is intended to boost oil revenues and offset lower crude prices.

The appointment of Saudi Aramco's president and chief executive officer Ali Naimi as Petroleum & Mineral Resources is a telling indicator of Saudi thinking. Both Nazer and Yamani were accomplished diplomats, versed in the skills needed to negotiate the labyrinth of OPEC politics. Naimi, by contrast, is a technocrat, with nearly 50 years in the oil industry behind him. During that time he has moved up the ranks of state oil giant Saudi Aramco from office boy to president and chief executive officer. A technical background makes him well suited to overseeing the new schemes which are intended to add value, improve margins and deliver higher returns from every barrel of oil sold.

The development of new oil fields, notably the giant Shayba field, is already underway, marking the shift to higher earning medium and light crudes. The kingdom's refining capacity is being increased at home and abroad, particularly in the rapidly growing markets of the Far East.

Naimi's replacement as acting president and chief executive officer at Aramco is Abdullah Jumaah. Like Naimi, Jumaah has been at Aramco throughout his career. Unlike Naimi, his background is less technocratic and more oriented towards marketing and industrial and government relations. From 1981 to 1984 he was vice president of the power systems division and managing director of local utility Saudi Consolidated Electric Company for the Eastern Province, which provides power for the kingdom's major industries. A close associate of Naimi, Jumaah is understood to have been his favoured replacement.

The task ahead of Naimi and Jumaah is to manage a shift in the kingdom's oil policy away from an OPEC-centred policy to a more commercially-oriented one. OPEC's star is waning. Its ability to influence world crude oil prices has been undermined by the inexorable growth of non-OPEC production. New non-OPEC capacity is coming on stream, particularly in the North Sea, and new technology is slashing production costs in even the most hostile physical environments, making this new oil competitive even at today's relatively depressed prices.

As the world market opens up, the kingdom is emphasising quality over quotas as a means of maximising revenues. The decision in November 1994 to maintain the OPEC production ceiling at 24.52 million barrels a day (b/d) for a further year did shore up prices in early 1995. However, it has prevented the organisation from taking advantage of the increase in world crude oil demand which has enabled non-OPEC producers to increase their market share at OPEC's expense.

One of Naimi's first major tasks in his new role as oil minister will be to negotiate new ceilings when OPEC ministers gather for their annual meeting in Vienna in November. The effect of the pressure from non-OPEC producers is to devalue production quotas as a mechanism for maintaining prices. Saudi Arabia's unstated goal is to retain both its 12.5 per cent share of world output and its 33.3 per cent share of OPEC production. In order to achieve these goals output will have to rise whatever the conse

Other projects are more advanced. The Haradh field is scheduled to come on stream in 1996 with a capacity of 300,000 b/d of 34degrees API crude. The UK's Babcock King Wilkinson is carrying out the front-end engineering and design of phase two of the field development, comprising a 300,000 b/d gas oil separation plant and associated gas gathering and water injection facilities. The Hawtah field in central Arabia has also been opened up. The 150,000 b/d field began producing a new grade of crude, Arab super light, with an API of 44degrees-50degrees, in late 1994. Further work is expected in the area.

Aramco is also pressing ahead with its strategy to develop downstream interests abroad. A court ruling in Greece in July finally enabled Aramco to go ahead with its plans to take a 50 per cent stake in Greek refining company Motor Oil Hellas Corinth Refineries and its marketing subsidiary Avin. The estimated $430 million deal, which was agreed in principle in April, had been threatened by a dispute within the Vardinoyannis family, which owned the company. It gives Aramco a 50 per cent stake in Motor Oil Hellas, which owns the 100,000 barrels-a-day Corinth refinery and a chain of around 700 petrol stations.

Sinking roots

However it is in the rapidly-growing Asian markets that Aramco is looking to sink local roots. Demand for crude oil in the Asian economies grew by 5.1 per cent a year from 1985-94. Conservative estimates suggest that future growth will average 2.3 per cent a year, putting Asian crude oil consumption on a par with North America by 2010. The largest demand growth will be for middle distillates, including kerosine, jet fuel, diesel, marine diesel, and number two heating oil. A significant portion of this growth is also accounted for by gasoline and petrochemical feedstocks, mainly naphtha for ethylene plants and aromatics complexes.

The courts have also been involved in Aramco's purchase in February 1994 of a 40 per cent stake in Philippines' refining company Petron Corporation. The supreme court of the Philippines in July rejected an appeal by a group including members of parliament who questioned the sale on the grounds that the shares were sold below the market rate. Petron's assets include the 155,000 b/d Bataan refinery, which now has most of its crude requirements met by Aramco. An expansion programme is under way which will increase capacity to 180,000 b/d in 1997, while a second phase could increase output to 380,000 b/d.

In China plans to expand the Thalin refinery, in which Aramco is the largest shareholder, are set to go ahead in 1996. The $1,500 million scheme will increase the refinery's capacity to about 300,000 b/d. The refinery, located in north-east China, is a joint venture of Aramco, which has a 45 per cent stake, South Korea's Ssangyong Refining Company, with a 15 per cent stake, and the Chinese state oil company Sinopec, which has 40 per cent.

Efforts to acquire a stake in the 170,000 b/d Maoming refinery, the second largest in China, are not going so well. Aramco is seeking a 50 per cent shareholding in Maoming but the Chinese government's policy of restricting ownership by a single foreign entity to 49 per cent is blocking progress.

Saudi Arabia, like its OPEC partners, has had a frustrating summer of falling oil prices and rising non-OPEC production. In late September Ali Naimi is expected to go to Venezuela for his first major appearance as the kingdom's new oil minister. The meeting he will attend is a sign of the times. With delegates from both consumer and producer nations, it marks the first time that an OPEC state has hosted direct producer- consumer dialogue. The Caracas conference is likely to set the tone for OPEC's own meeting in November.

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