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If Big Oil Pumps In Cash, Will It Solve Saudi Woes?

International Outlook


American policymakers have long seen Crown Prince Abdullah as a dark horse in the solidly pro-American ranks of senior Saudi princes. Abdullah has tougher Arab nationalist views and is the point man with hard-line Arab leaders such as Syrian strongman Hafiz al-Assad. But his two-week visit to the U.S. through Oct. 13 dispelled any lingering notion that he could be a threat to U.S. interests in the Middle East.

Abdullah, a born economic conservative, has good reasons to pay court to Washington. The Saudi economy is slumping badly, and he needs huge investment from global oil giants to get it back on track. Abdullah needs to shore up public finances, reeling from the 60% collapse in oil prices since 1996. Recent government measures, such as the unprecedented public-sector hiring freeze and the across-the-board budget cutbacks, have done little to stem the mushrooming public deficit, which could reach $8 billion this year. The economy, on the other hand, says Jeddah-based National Commercial Bank, could shrink by as much as 5%.

Ever since he started taking over day-to-day responsibility for government from his half-brother King Fahd, who suffered a stroke in 1995, the buck stops with Abdullah. So far, Saudi Arabia has avoided an Asian-style panic. An August speculative attack on the Saudi riyal, pegged for decades to the U.S. dollar, was quashed through the swift intervention of the Saudi Arabian Monetary Agency. While the counterattack worked, it carried a hefty price tag: Riyadh is awash with rumors that the country quietly took out an emergency $5 billion loan with its tiny but cash-rich neighbor Abu Dhabi.POWER SHIFT. Saudi Arabia's tightening financial vise explains why Abdullah is putting out the welcome mat to foreign oil companies and their vast investment budgets. In an extraordinary Sept. 26 meeting in Washington with seven U.S. oil companies--Mobil, Texaco, Exxon, Chevron, Arco, Philips Petroleum, and Conoco--he unexpectedly invited them to propose how they could help develop the 260 billion barrels of crude oil reserves under Saudi sands, fully a quarter of the world's total. Now the seven are racing to meet a Nov. 10 deadline to present schemes for Saudi hydrocarbons, from tapping enormous natural gas pools to enhancing oil recovery from aging giant oil fields.

The move could herald an epochal shift of power back to Big Oil--even if Abdullah and the Saudi leadership accept only a fraction of what the companies may propose. Ever since Saudi Arabia, along with other Organization of Petroleum Exporting Countries members, nationalized its oil business in the early 1970s, it has jealously reserved all rights to oil exploration and production for its state-owned oil company, Saudi Aramco.

Although Saudi Aramco is the world's biggest oil company in reserves and production, it has not escaped global economic turmoil. Exploration has ground to a halt, while several top executives have recently quit. One problem: forced-pace "Saudization"--replacement of foreigners by Saudi nationals--of Aramco's workforce after the Gulf War may have left the company both overstaffed and ill-equipped to use the latest technology.

Without fresh investment, the Saudi oil industry could be left out in the cold. Policymakers in Riyadh are already nervously eyeing production deals being cut in Iraq by French oil companies such as Total as well as by Italian interests. They will become operational as soon as international sanctions are lifted. Similarly, Iran is edging toward granting foreign companies access to its massive oil and gas reserves. "Given that scenario, what the Saudis are doing is decent forward planning," says Peter Gignoux, senior oil specialist at Salomon Smith Barney in London.

Allowing foreign, especially U.S., oil companies to tap Saudi Arabia's oil riches is political dynamite. A committee of senior princes and ministers has already been formed to review policy changes and allow Abdullah to take the pulse of Saudi opinion. U.S. Energy Secretary Bill Richardson is expected to press Abdullah further during a trip to Riyadh in December, the first visit by such an official since 1992. "What Abdullah really wants is options right now," says a Western diplomat in Riyadh.

Down the road, that could be good news for the U.S. oil industry--and Saudi Arabia. Provided he can steer through the present crisis, a determined Abdullah could eventually push through much needed reforms, from cutting high spending on military hardware to speeding privatization.EDITED BY JOHN TEMPLEMAN

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