Analysis : Texaco-Saudi Deal Could Raise Hackles if Not Prices

Everyone knows you can trust your car to the man who wears the star, but what if he flies the OPEC flag over his gas station?

Most industry and government officials say Saudi Arabia’s billion-dollar-plus outlay for a chunk of Texaco’s U.S. oil refinery network and marketing business should help to stabilize oil prices and tend to ensure steady supplies of crude oil to this country.

Moreover, the fact that the Saudis and some other OPEC members are buying refineries in this country and Europe is seen as further evidence of the cartel’s weakened grip on world oil markets. Some say it could eventually drive a wedge into the already fractious cartel.

But the announcement of the long-expected transaction--even though it is not the first investment by an OPEC nation in U.S. refineries--seems likely to trigger hearings in Congress and renew concerns over U.S. energy supplies and security.

“I think there will be a great deal of interest in this in Congress. I’m certainly not prejudging this, but the consequences are so significant that Congress would be irresponsible not to look into it,” said California Rep. Mel Levine (D-Santa Monica). “A number of my colleagues feel the same way.”

The agreement calls for Saudi Arabia to buy 50% of three Texaco refineries, 1,450 owned and leased gas stations and a distribution network of more than 10,000 independently owned Texaco-brand stations in a 23-state region in the southern and eastern United States. The refineries are in Texas, Louisiana and Delaware. The joint Texaco-Saudi venture would handle up to 600,000 barrels of crude per day.

The deal, worth an estimated $1.2 billion, is the first in Saudi Arabia’s long-planned move “downstream,” in oil industry parlance. Downstream is the refining and marketing end of the oil business, a vastly different enterprise than the production and shipment of crude oil.

The Texaco-Saudi sale is easily the biggest downstream move by a member of OPEC, but it is far from the first. The trend began in 1981 and has accelerated as the cartel has seen its share of the world’s crude oil market shrink and found itself competing with growing supplies of crude from other nations.

Structural Shift

It represents a structural shift in the world industry and could eventually put OPEC nations in the position occupied by the so-called Seven Sisters--the biggest oil companies--until their oil fields in the Middle East were nationalized in the early 1970s.

“When we had stability before was when the Seven Sisters controlled the oil market,” said Scott L. Campbell, until recently the director of policy, planning and analysis for the Department of Energy. “If this is a transnational integration of the oil markets, it could be a favorable development.”

Ownership of refineries in oil-importing nations gives the oil producers a guaranteed outlet for their crude, as Venezuela established with its 50% stakes in refineries in Lake Charles, La., and Corpus Christi, Tex., acquired in 1986 and 1987 in a deal with Southland Corp. Venezuela--a founding member of OPEC--is to supply up to 390,000 barrels of crude per day to the two refineries, or one-fourth of that nation’s output.

Other such OPEC investments include those by Venezuela in West Germany and Sweden, Nigeria in Ireland, Abu Dhabi in France and Spain, and Libya in Italy. The most extensive to date is Kuwait’s European refineries and service stations, a successful, highly visible, 100%-owned network that sells gasoline under the “Q 8” name--a play on the country’s name.

Stake in British Petroleum

Kuwait has acquired 22% ownership of British Petroleum, which in turn gives the Kuwaitis part ownership of the huge crude oil reserves on Alaska’s North Slope.

Oil industry experts base their support of this phenomenon largely on the stake that it gives the OPEC nations in the economic and oil-supply stability of the nations where their refineries lie. In the process, the refiner--now a creature of the country supplying its crude--assumes the usual customer posture of haggling for lower prices for his feedstock.

This happened dramatically with Kuwait’s operations in Europe, said Fereidun Fesharaki, head of the energy program at the U.S. government-supported East-West Center in Honolulu, who has been studying the OPEC downstream transition for several years.

“You could see the transition from a crude seller to a product seller,” Fesharaki said of the emerging Kuwaiti marketing operation based in London. “It is a major lesson for the OPEC producer. It makes them understand the point of view of the consumer.”

Undermines Traditional Role

Almost by definition, that undermines the traditional OPEC role of attempting to fix or control prices. The Texaco-Saudi venture would buy crude at market prices. The more OPEC nations find themselves in the position of retailer, analysts say, the more they will be at odds with OPEC nations that rely solely on producing and selling crude oil.

Says James W. Kinnear, president and chief executive of Texaco: “I say this will increase the energy security of the United States. That’s what I would tell the Congress or the newspapers or anybody else who wants to hear about it.”

Noting that the United States now imports increasing levels of refined oil as well as crude, while hundreds of uncompetitive U.S. refineries have closed down since 1981, Kinnear said in a recent interview: “We have had a 50-year history of dealing with Saudi Arabia and Venezuela. I’d rather have their refinery investments in the United States than somewhere else.”

Unlike Kuwait’s high-profile operations in Europe, the joint Texaco-Saudi venture won’t be flying the Saudi flag. Not only would that fail to exploit the Texaco name and market position, but the Saudis want to remain low-key rather than attract opposition from U.S. protectionists or other interests. That is said to be the main reason they only want a 50% stake in the Texaco units.

‘Broader Issues’ Predicted

Fesharaki says one Saudi concern is the Israeli lobby in Congress, but Levine says that concern is misplaced. “There will be much broader issues raised, with regard to American energy security,” the California congressman said.

Levine also noted that OPEC-owned refineries in this country will lock in reliance on certain levels of OPEC crude oil: “For 15 years we’ve been trying to reduce our reliance on OPEC. To what extent would this inhibit American independence in the energy area?”

However, there appears to be little prospect of reducing that reliance in the next several years. Dependence on imported oil has risen sharply since 1985, to 44% of U.S. consumption from about 30%, and many expect that share to hit 50% by the early 1990s because of declining U.S. production and rising demand.

How much of the imported oil would come from OPEC nations is uncertain, but that level has been rising sharply too. OPEC countries, especially Venezuela and Saudi Arabia, supplied 46% of U.S. oil imports last year.