Forget Saddam being a nasty ol’ dictator/mass murderer, here’s the best reason yet to strike on Iraq and get a government which will be easier to deal with for the US:
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September 10, 2002
Sands of time running out for Saudi Arabia oil hopes
by Carl Mortished
YOU might think that relations between the United States and Saudi Arabia could hardly get worse, but the Kingdom’s rulers have an unerring ability to score own goals. Over the weekend, they all but scrapped a $25 billion (£16 billion) project aimed at rescuing their economy and aligning it more closely with the West.
The Saudi Gas Initiative was launched more than 12 months ago after several years of talking and teasing from Riyadh. The hope was that vast unexploited gas reserves could be transformed into a new industry of power stations and desalination plants offering jobs and opportunity for young Saudis.
It was the pet project of Crown Prince Abdullah. On the one hand, it would diversify a stagnating economy and provide discontented young Saudi males with a more productive vision of the future than the one touted by radical clerics. On the other hand, it would send a political signal to Washington that the anointed heir to the ailing King Fahd was “on our side”. For the first time for four decades, American oil companies would be welcomed to the Kingdom and offered a stake in the world’s biggest energy reserves.
Whispers even suggested that the gas deal would be a stepping stone to a stake in Saudi oil reserves somewhere down the line, a line that the Saudis have previously refused to cross. Needless to say, the oil majors rushed to sign preliminary deals. Three “core ventures” were agreed. ExxonMobil led the largest, a $15 billion project with Shell, BP and ConocoPhillips as partners. The second venture, also led by Exxon, included Occidental and Marathon; the third consisted of Shell and TotalFinaElf.
From the start, the gas initiative was built on shifting sand. The Saudis deny that any oil concessions were ever on offer and Saudi Aramco, the state oil company, has ensured that its reserves stay off the table. For its part, ExxonMobil, the lead negotiator, has refused to budge from its requirement of standard oil industry terms, a 15 per cent-plus return on investment. For the Saudis, who believe this is a low-risk venture, Exxon’s price is too high.
Losing Exxon, Shell and BP may mean paying a still higher price. Paul Sankey, oil analyst for Deutsche Bank, believes Exxon is right to stick to its guns. “With no oil in prospect, they had nothing to go for,’’ he said. “What must now be worrying the Saudis is what if Exxon pops up later in Iraq?” It is ironic that Iraq, the most vilified of all the key oil-producing Arab states, is the one closest to admitting foreign oil companies while the Saudis feud internally over the price for welcoming the son of Standard Oil, and BP’s attempt to gain access to Kuwait’s northern oilfields remains stuck in political sand.
Baghdad, however, is keen to do business. TotalFinaElf has agreed to develop two giant oilfields in the south of the country. Lukoil, a Russian company, is involved, as are Italy’s ENI and Repsol of Spain. Even Shell has an agreement to develop an Iraqi prospect.
Of course, ExxonMobil would not dare to be seen in Baghdad in current circumstances, but there can be no doubt that a contingent of US oil executives will land shortly after the marines.
Meanwhile, ExxonMobil has been showing more enthusiasm for gas projects in other countries, in particular China’s West-East pipeline. Dubbed a white elephant by many and spurned by BP, the project would pipe gas from deserts in the west to Shanghai. Nevertheless, Shell and Exxon support the project, which Petrochina says carries a return on investment of just 12 per cent.
One can only presume that Exxon and Shell have done their risk assessments and concluded that the Chinese white elephant is less endangered than the gassing Saudi camel. China’s economy is growing at a spanking pace and has just secured membership of the World Trade Organisation.
Saudi Arabia has not a hope of joining the trading club. While it shuns foreign investors, its economy will barely grow this year. It is paying $7billlion a year in debt service payments, and per capita income has been in decline since the 1980s as the population soars.
High oil prices will halve Saudi Arabia’s $12 billion budget deficit this year, but the future looks grim. Were the regime to change in Baghdad or its ruler to unexpectedly agree to admit UN weapons inspectors, billions of dollars would quickly flow into Iraq’s oil industry. And millions of barrels of oil would flow out.
It would flatten the oil price, change the political balance of Opec and represent a disaster for the rulers of the Arabian peninsula. It helps to explain why they have little stomach for an attack on Iraq. In such circumstances, Exxon’s 15 per cent looks cheap.
