Cheap Crude Oil May Turn Out to Be a Blessing in Disguise for Industry
The curse of cheap crude may turn out to be a blessing of sorts for the oil industry if the yearlong crash in prices forces the reopening of the Persian Gulf to foreign investors.
Although still only a distant vision prompted by a vague request in September by Saudi Crown Prince Abdullah for investment ideas, the prospect that outsiders might be allowed to produce oil and gas in a region closed to them for nearly three decades could be the most important and long-lasting result of the 30% decline in oil prices, industry watchers contend.
Such a move would represent a tectonic shift for Saudi Arabia, which began nationalizing its oil industry in the early 1970s, limiting foreign companies to investments in such things as refining, marketing and petrochemical ventures--that is, everything except so-called upstream development, or oil and gas exploration and production.
Depressed oil prices have prompted the invitations by Saudi Arabia and other gulf producers, including Kuwait, Iran and Iraq, although sanctions prevent U.S. companies from investing in the latter two countries. Saudi Arabia’s oil-based economy has been hurt by the price plunge, and the country’s leaders are attracted to U.S. capital and expertise.
“All the Middle East producers are feeling great pressure on their national budgets, which are dependent on oil,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of “The Prize,” a Pulitzer Prize-winning history of the oil industry. “They’ve seen how much investment Venezuela is bringing in.”
The potential for new business in the gulf has generated such excitement in the U.S. oil industry that several companies have quickly developed proposals and top American oil executives have flown to the Saudi capital of Riyadh to present them.
The latest travelers include Chevron Corp. Chairman and Chief Executive Kenneth Derr, who will meet Monday with Abdullah and oil officials to discuss the San Francisco company’s ideas for developing their energy industry. Mike R. Bowlin, chairman and chief executive of Los Angeles-based Atlantic Richfield Co., will get his chance Tuesday.
“Longer-term we don’t know what Saudi Arabia intends to do, in light of the overture the crown prince has made regarding a possible role for U.S. companies in their oil and gas business,” Bowlin told employees last month during a speech in Anchorage.
Bowlin was referring to an extraordinary meeting in September at the Virginia home of the Saudi ambassador to the United States. There, Crown Prince Abdullah asked the heads of several U.S. oil companies for suggestions for investment in his country.
“If that nation were reopened to us in the upstream, it would create a sea change in the global market,” Bowlin said in his speech. “That could represent a structural change in our industry.”
U.S. firms are eager to share the windfall that access to Saudi and other Persian Gulf reserves would represent, even with crude oil selling at the lowest prices in decades when adjusted for inflation. The March contract for West Texas intermediate crude, the U.S. benchmark, settled at $12.75 a barrel Friday on the New York Mercantile Exchange. Saudi Arabia produces a crude that sells for a few dollars less per barrel.
Derr’s and Bowlin’s trips come after an early December visit by Texaco Inc. Chairman Peter Bijur and will be followed by that of U.S. Energy Secretary Bill Richardson. Phillips Petroleum and Conoco, as well as Exxon and Mobil, which are trying to pull off the industry’s biggest merger ever, have all expressed interest in increased investment in the Middle East.
Saudi Arabia is the world’s largest oil producer at 8 million barrels a day, and for every $1 drop in the price of crude, the kingdom loses an estimated $2.7 billion a year. The Saudis were expected to earn $29.4 billion in 1998 from oil exports, a 35% decline from 1997, the U.S. Energy Information Administration has estimated.
Oil Firms Finding New Reserves Elsewhere
In addition, Persian Gulf countries have seen their share of world oil production decrease sharply since the oil embargoes of the 1970s because oil companies have been investing elsewhere, discovering new reserves in places such as Latin America, the North Sea, Africa and Alaska.
The lure of Saudi Arabia lies not only in its huge reserves--261.5 billion barrels, more than 25% of the world’s proven oil reserves--but also in the nature of its crude. The relatively light oil is easy to find, easy to extract and, given the extensive infrastructure in place, easy to get to market, resulting in a recovery cost that is less than half the world average.
Oil companies, not surprisingly, would prefer to channel their investments into a region where oil costs slightly more than $2 a barrel to develop and produce, rather than about $4.50 a barrel as in the United States and Western Europe.
Just how far Saudi Arabia is willing to go is not known, given internal political pressures from fundamentalists to continue limiting outside investment.
“Nothing is guaranteed at this point,” Yergin said.
Richardson said in a statement that he will use his visit to Saudi Arabia, the first since 1990 by an energy secretary, to continue discussions begun last year that “underscore the importance of the kingdom and our bilateral relationship to energy security and stability worldwide.” Richardson is scheduled to meet Saudi officials Friday and Feb. 6 and to stop in Kuwait on Feb. 7.
Chevron spokesman Mike Libbey said the firm, one of the original investors in Saudi Arabia’s oil industry, is hoping that historic alliances count for something.
“We have a long and good relationship with them,” he said, “because we discovered the oil.”
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Fields of Plenty
U.S. firms have had limited access to Saudi Arabia’s oil fields since the country nationalized its oil industry in the ‘70s. Countries with the largest proven oil reserves, in billions of barrels*
Saudi Arabia: 261.5
Iraq: 112.0
United Arab Emirates: 97.8
Kuwait: 96.5
Iran: 93.0
Venezuela: 64.9
Former USSR: 57.0
Mexico: 48.8
Libya: 29.5
China: 24.0
United States: 22.0
* As of Jan. 1, 1997
Sources: Energy Information Administration, Oil & Gas Journal
