Despite debt, Saudi spends for the future – A World of Oil

Kurt S. Abraham

In many nations, governments that take on major new spending while debt is at near-record highs are considered imprudent. Yet, this appears to be exactly what Saudi Arabia intends to do.

Consider some facts: The Kingdom is reeling under a nearly $35-billion foreign debt, most of that owed by Aramco and other government institutions. According to a report by Abu Dhabi-based Arab Monetary Fund (AMF), this debt should rise to $35.1 billion by the end of 2002. Furthermore, official figures show that Saudi is the most indebted Arab country in terms of local borrowing. The Gulf News reported that domestic debt is estimated at 630 billion riyals ($168 billion), or nearly equal to the country’s GDP.

Meanwhile, Saudi will go ahead with a significant expansion of crude capacity over the next three years. Aramco will develop reservoirs at two existing fields in eastern Saudi and add 650,000 bpd of new capacity, at a cost of $ 1.5 billion. The project will double output offshore at Abu Safah field, where the current rate is 150,000 bopd. Another 500,000 bopd will come from new development of higher-grade Arab Light crude at Qatif field onshore. Arab Light is in high demand by U.S. refiners. Aramco has hired Eni, Halliburton and other contractors to develop the fields by 2005. When they go online, the fields will boost capacity 6% from the current 10 million bopd. Saudi’s present OPEC quota is 7.05 million bopd.

This will be the Kingdom’s first major expansion since the mid-to-late 1990s, when Shaybah oil field was developed. Some analysts believe that Saudi is using this project to counter a rapid recovery in Russian oil capacity, which has regained about 1 million bpd during the last two years. It also is a way for Saudi to retain its spot as the single largest foreign supplier of crude to the U.S; 17% (1.7 million bopd) of U.S. oil imports come from Saudi.

From this editor’s vantage, the new project is a calculated gamble. Yes, the Kingdom has significant debt, much of it due to the cradle-to-grave social spending that the royal family has committed to over the years. Yet, with the population growing, something has to be done to increase revenues, to cover even greater spending in the future. Officials will try to maximize and expand oil export revenues, even within the OPEC quota. This can be done by using the newly developed Arab Light output (which commands a higher price) to supplant medium and heavy production that can be mothballed.

Furthermore, the Saudis will be able to exploit any increases that occur in the price differentials between the grades, as the average price level rises with greater demand. They are also counting on the world economy, including the U.S., to bounce back relatively soon, so that American thirst for petroleum will grow beyond pre-September 11 levels. Thus, the Saudis are invoking that old business maxim: “You have to spend money to make money.”

Meanwhile, the opening of the natural gas upstream sector to foreign firms has stalled. There had been a March 2 target date for the government to sign final deals with the partners in Core Ventures 1, 2 and 3. However, no signings had been announced as of mid-March, and the negotiation could drag on for several months. A key sticking point appeared to be the rate of return offered on the foreign operators’ investments.

AMF expects the Kingdom to record a $4.1-billion deficit this year, compared to an $8.3-billion surplus in 2001 and a $ 14.3-billion surplus in 2000.

COPYRIGHT 2002 Gulf Publishing Co.

COPYRIGHT 2002 Gale Group

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