Saudi Deals Pave Way for Oil Price Stability

The old Ministry of Petroleum building, once Saudi Arabia’s most powerful edifice after the Royal Palace, resembles a desert stronghold, with narrow windows set in its thick sandstone and cement walls. It now stands empty.

The new Ministry of Petroleum building, by contrast, is a dark crystal fountain, all marble and blue-black glass arching out of the earth. It is sleekly modern, airy and outward looking.

Each building reflects its time. The desert fastness stands for the years since 1973, when Saudi Arabia was a leader in sharply raising the oil price and many people said the Arabs would either rule the world or sink it into chaos.

It didn’t happen. We’ve had our ups and downs with oil, but the price today--adjusted for inflation--is lower than it was in 1974. We’ve come through war in the Gulf with minimal disruptions in supply or price, thanks particularly to Saudi Arabia and Venezuela efficiently boosting their production.

And the outlook for petroleum and the industries dependent on it is for adequate supplies and reasonable prices. It will be an era of “interdependence and cooperation between oil producers and consumers,” says Hisham Nazir, the Saudi minister of petroleum and one of the chief planners of his nation’s economy for the past 15 years.

That’s another way of saying that, in an era of oil glut, the Saudi’s need access to markets as much as consumers need their oil. So Nazir is working to give Saudi Arabia a prominent role in international industry.

He’s already making deals with oil-consuming countries that give them a call on Saudi oil and give Saudi Arabia’s growing oil industry a stake in their markets. Saudi Arabia is a partner of Texaco in U.S. refineries and gas stations. Nazir is concluding an agreement with three Japanese companies to jointly own and operate refineries in Japan and Saudi Arabia. He’s negotiating similar deals with South Korea, France and other countries.

One obvious reason for the moves is to assure Saudi access to markets in a period when oil is in oversupply. Saudi Arabia was hurt just like Texas and Oklahoma in the oil collapse of the ‘80s. All you hear around the ministry in Riyadh these days is a desire for “stability, prices neither too high nor too low.”

But Nazir, a UCLA graduate, has more than prudence in mind. He wants the Saudi oil industry, which he has organized into separate companies for producing, refining and petrochemicals, etc., to participate in all phases of the global business, just like the major companies that once owned his country’s oil.

It’s a good business decision. In a word, Nazir wants the value-added. Saudi Arabia makes a good profit selling for roughly $20 the barrel of crude oil it can produce for about $3. But when you refine that 42-gallon barrel, the revenue you can get from selling the gasoline, jet fuel, chemical feedstocks and other byproducts can amount to many times $20. Depending on how much investment and chemistry you bring to working on a barrel of oil, you can derive up to $1,400 worth of products.

That’s value-added, and Nazir is making good deals to get it. In the $4.3-billion Japanese deal, for example, the Saudi government will put up half or more of the money in low-interest loans, meaning the Japanese partners get a stake in two new refineries on terms that will yield a good profit because the capital cost is subsidized by special Saudi loans. The Saudis, whose increased oil production assures supplies at all times for its partners, count the interest subsidy as an entry fee to the industrial world.

Note what is happening here. The biggest oil power, the mainstay of the Organization of Petroleum Exporting Countries, is making an alliance with the industrial world.

But that has always been the Saudis real ambition. One of the country’s first big ventures after it took control of its oil in the 1970s was to budget $10 billion for a system to gather the natural gas it was then burning off in the desert air because the oil companies, having no chemical plants in Saudi Arabia, had no use for it.

Skeptics said Saudi Arabia was wasting its money, building castles in the sand dunes. But that gas-gathering system today is the foundation of Saudi Basic Industries (SABIC), a company that in less than 10 years has grown to $2.6 billion in revenue as supplier of 4% of the world’s petrochemicals.

SABIC has become the cornerstone of Saudi industry, inspiring hundreds of small plastics firms to crop up.

SABIC, which has built its position in basic chemicals through joint ventures with global giants like Exxon, Shell, Hoechst and others, is planning to build plants in the United States and Europe and move into intermediate chemicals “to be less vulnerable to the price swings for commodity chemicals,” says its chief executive, Ibrahim bin Salamah, who has his degree in math and economics from Stephen F. Austin College in Nacogdoches, Tex.

Technically, it is on the cutting edge, one of the world’s largest producers of methyl tertiary butyl ether, a new compound that gets more lead out of gasoline at a lower cost to the refiner.

Confrontation does not explain the current global oil industry. OPEC is a dead letter, at least for now. But Saudi Arabia remains the real oil power. It is making alliances with the industrialized world because it needs access to markets and because it needs to develop itself.

You can see both the old and the new in the sleek new buildings here. As in any developing country, surplus employees still abound, working as messengers and tea servers. But also in the big offices, behind the big desks, are the bright and talented people who are devising ways to bring to their country the magic of modernity.