With one-fourth of the world's proven oil reserves, Saudi Arabia is likely to remain the world's largest oil producer for the foreseeable future. For the first 8 months of 2000, Saudi Arabia supplied the United States with 1.5 million barrels per day of crude oil, or 16%, of U.S. crude oil imports during that period.
Information contained in this report is the best available as of November 2000 and is subject to change.
With oil revenues making up around 90-95% of total Saudi export earnings (and around 35-40% of the country's gross domestic product, or GDP), Saudi Arabia's economy remains, despite attempts at diversification, heavily dependent on oil (although investments in petrochemicals have increased the relative importance of the downstream petroleum sector in recent years). The sharp rebound in world oil prices since early 1999 has improved the country's economic outlook greatly, although Saudi Arabia continues to face both short- and long-term pressures to reform its economy and to open up to increased private investment. For 2000, real GDP is expected to grow by about 7.6%, and the outlook for 2001, assuming relatively strong oil prices continue, is for growth of around 4%. Saudi Arabia needs strong economic growth to keep up with a rapidly increasing (and young -- 50% under age 18) population, and to face the challenge of finding good jobs for these people (outside of the public sector, which is overstaffed and a drain on the country's budget). Over the past two decades or so, Saudi economic growth has fallen far behind population growth, resulting in sharply reduced per capita incomes and higher unemployment. Saudi Arabia also has a high level of domestic debt (around 75% of GDP) which it hopes to pay down, and is attempting to replenish foreign assets and official reserves, both of which were depleted in 1998 and early 1999. Over the next five years, Saudi Arabia is aiming for falling budget deficits, from 11% of GDP in 1999 to zero in 2005.
Saudi Arabia's government officially (in its 2000-2005 development plans) has accepted the need to reduce state involvement and increase private sector -- including foreign -- participation and investment in the economy, but has moved very slowly in this direction (largely due to fears of job losses for Saudi citizens, as well as resistance by the private sector and some members of the Saudi royal family). Currently, large state corporations, like oil firm Saudi Aramco (which has a monopoly on Saudi upstream oil development) and the Saudi Basic Industries Corporation (SABIC) dominate the Saudi economy. To date, there has not been a single sale of state assets to private control, and "privatization" largely has been limited to allowing private firms to take on certain service functions. Saudi Arabia also has moved slowly towards government subsidy cuts, tax increases, or financial sector reforms. Saudi leadership (Crown Prince Abdullah, in particular) has indicated that it sees privatization as a "strategic choice," and has created -- in August 1999 -- a "Supreme Economic Council" charged with boosting investment, creating jobs for Saudi nationals, and promoting the private sector. Changes to rules governing foreign investment, granting the same basic rights to foreign investors as to Saudi nationals, were approved earlier in 2000. Changes to the country's tax code (taxes on foreign business profits currently range as high as 45%) also are being considered.
Saudi Arabia's desire to join the World Trade Organization (WTO) is behind some of the push towards economic liberalization in the country. Saudi Arabia had hoped to be admitted to the WTO by the end of 2000, although it appears that this will be delayed by a variety of issues, including the degree to which Saudi Arabia is willing to increase market access to its banking, finance, and upstream oil sectors. Ultimately, WTO membership likely would result in significant changes to the Saudi economy, which currently is characterized by relatively high tariff rates, subsidies, and a variety of restrictions on the free market. The goal of WTO membership is in part due to Saudi Arabia's desire to attract foreign investment (up to $200 billion over the next 20 years, according to Foreign Minister Prince Saud), and in part to its push for new markets for the country's petrochemical industry. In November 1999, King Fahd stated that "the world is heading for...globalization" and that "it is no longer possible for [Saudi Arabia] to make slow progress." In the context of successfully becoming integrated into the global economy, Fahd also emphasized the importance of regional unity among Gulf states -- economically, politically, and militarily. A customs union, for instance, among Gulf Cooperation Council (GCC) countries, was agreed upon at the December 1999 GCC summit. The union is to take effect in March 2005. Currently, goods from GCC countries are exempt from all Saudi import duties, as long as 40% of their value has been added within the GCC and the producing company is owned at least 51% by GCC citizens.
Saudi Arabia also has a policy known as "Saudiisation," the goal of which is to increase employment of its own citizens by replacing 60% of the estimated 7.2 million foreign workers in the country. In order to do so, Saudi Arabia has stopped issuing work visas for certain jobs, has moved to increase training for Saudi nationals, and has set minimum requirements for the hiring of Saudi nationals by private companies. State subsidies and losses by unprofitable state-owned enterprises are large contributors to Saudi Arabia's budget deficit. The country's finance ministry has called for an increased private sector role. At present, the private sector accounts for around 40% of Saudi Arabia's GDP (and 89% of employment), but only 5%-10% of those employed in the private sector are Saudi nationals. Saudi Arabia has asked private companies to increase their Saudi staff by 25% over the coming year, and then by 5% per year after that.
In other news, in early January 2000 Saudi Arabia announced that it was establishing an 11-member Supreme Petroleum Council (SPC) to oversee oil and gas policies in the country. In mid-October 2000, the government announced that the Council would take over certain powers over Saudi Aramco. The SPC could help push Saudi Arabia's overall goal of accelerating private sector and foreign involvement in the country's oil sector, although there is opposition by conservatives.
During the past few months, Saudi Arabia resolved two long-standing border disputes, one with Yemen and the other with Kuwait. Both settlements remove sources of friction, which have flared up in the past, and opened the door to development of energy resources along the borders, including the huge (13 trillion cubic feet) Dorra gas field, which lies in waters straddling Iranian, Saudi, and Kuwaiti territories. Since its settlement with Saudi Arabia, Yemen has proposed several joint oil refinery and oil pipeline projects. In another development, on November 7, 2000, Saudi Arabia reportedly opened its land border with Iraq for the first time since the 1991 Gulf War.
Saudi Arabia (not including the Saudi-Kuwaiti "Neutral Zone") contains 261 billion barrels of proven oil reserves (more than one-fourth of the world total) and up to 1 trillion barrels of ultimately recoverable oil. Saudi Arabia is the world's leading oil producer and exporter, and its location in the politically volatile Gulf region adds an element of concern for its major customers, including the United States. As of early November 2000, Saudi Arabia was producing around 9.3 MMBD of oil (including half of the Saudi-Kuwaiti Neutral Zone's 600,000 bbl/d), compared to production capacity of 10.5 MMBD. In 1999, Saudi oil production totaled about 8.5 MMBD, of which about 7.8 MMBD was crude oil.
Although Saudi Arabia has about 77 oil and gas fields, over half of its oil reserves are contained in only eight fields, including Ghawar (the world's largest onshore oil field, with estimated remaining reserves of 70 billion barrels) and Safaniya (the world's largest offshore field, with estimated reserves of 19 billion barrels). Ghawar's main producing structures are, from north to south: Ain Dar, Shedgum, Uthmaniyah, Farzan, Ghawar, Al Udayliyah, Hawiyah, and Haradh. Overall, Ghawar alone accounts for about half of Saudi Arabia's total oil production capacity.
Saudi Arabia produces a range of crude oils, from heavy to super light. Of Saudi Arabia's total oil production capacity, about 65%-70% is considered light gravity, with the rest either medium or heavy. The lightest grades generally are produced onshore, while the medium and heavy grades come mainly from offshore. The Ghawar field is the main producer of 34o API Arabian Light crude, while Abqaiq (a super-giant field with 17 billion barrels of proven reserves) produces 37o API Arab Extra Light crude. Since 1994, the Hawtah Trend (also called the Najd fields), which includes the Hawtah field and smaller satellites (Nuayyim, Hazmiyah) south of Riyadh, has been producing around 200,000 bbl/d of 45o-50o API, 0.06% sulphur, Arab Super Light. Overall, the Najd fields are estimated to contain 30 billion barrels of liquids and major reserves of natural gas. Offshore production includes Arab Medium crude from the Zuluf (over 500,000 bbl/d capacity) and Marjan (270,000 bbl/d capacity) fields and Arab Heavy crude from the Safaniya field.
The Neutral Zone contains about 5 billion barrels of proven oil reserves. Within the Neutral Zone, Japan's Arabian Oil Co. (AOC) traditionally had operated two offshore fields (Khafji and Hout) with 300,000 bbl/d in production, but in February 2000, it lost the concession (in April 2000, however, AOC said that it had reached an agreement with Aramco's Gulf Operations Company to split output from Kafji until January 4, 2003, when AOC's concession on the Kuwaiti side of the Neutral Zone expires). The offshore Saudi Neutral Zone had represented Japan's most significant upstream oil interest, with 80% of revenues going to AOC and 10% each to Saudi Arabia and Kuwait. Texaco, meanwhile, operates three onshore fields (Wafra, South Fawaris, and South Umm Gudair) in the Neutral Zone. Saudi Arabia had stated that it wanted AOC and Japan to increase their investments in Saudi Arabia (including more than $1 billion in a railway linking remote mining areas to export terminals), as well as their purchases of Saudi oil, as a condition for renewal of AOC's drilling rights in the Neutral Zone. AOC reportedly will be asked to develop the offshore Dorra gas field, now that Saudi Arabia and Kuwait have agreed on a border demarcation.
Saudi Arabia is a key oil supplier for the United States, Europe, and Japan; however, in recent years, Western Hemisphere producers (Venezuela, Canada, and Mexico) have challenged Saudi Arabia's dominance in the U.S. market. Asia now takes over half of Saudi Arabia's crude oil exports, as well as the majority of its refined petroleum product exports. The United States is Saudi Arabia's second largest oil export market, followed by OECD Europe. Saudi Arabia also reportedly provides around 150,000 bbl/d in oil to Pakistan and Afghanistan as foreign aid in lieu of cash (although this oil does not appear to be officially counted in Saudi export figures) Through the first 8 months of 2000, Saudi Arabia exported 1.51 MMBD of oil (1.46 MMBD of crude) to the United States. For this time period, Saudi Arabia ranked second (after Canada, and just ahead of Venezuela) as a source of total (crude plus refined products) U.S. oil imports, and first for crude only (ahead of Canada and Mexico). Saudi Arabia is eager to maintain and even expand its market share in the United States for a variety of economic and strategic reasons. For the first 8 months of 2000, Saudi Arabia's share of U.S. crude oil imports was 16.3%.
In October 1999, Oil Minister Naimi stated that Saudi oil policy was based on four facts: 1) the largest oil reserves and among the lowest production costs -- around $1.50 per barrel -- in the world; 2) maintenance of significant spare oil production capacity; 3) a national economy closely linked to the oil industry; and 4) a stable political and economic system. Naimi also stressed the importance of "a stable international oil market" where "wide and rapid swings in prices are undesirable." Reportedly, the SPC has approved Aramco spending of $15 billion per year between 2000 and 2004, in order to boost oil production capacity as well as to increase gas output.
Saudi Arabia reportedly is seriously considering a "shortlist" of companies for downstream (i.e., refining, petrochemicals) oil projects, plus -- possibly -- upstream and integrated gas projects as well. These companies reportedly include: original Aramco partners Chevron, Exxon Mobil, and Texaco; plus Shell, and TotalFinaElf). These companies, along with others including BP, Conoco, ENI, Enron, Marathon Oil, Occidental, and Phillips Petroleum, were first asked to submit proposals for possible projects in these sectors in 1998 -- the first such invitation since these industries were nationalized in the mid-1970s, and potentially a major policy shift. Possible projects include: upgrading the Rabigh oil refinery; and developing the Kidan, Shayba, and Haradh gas fields. Some reports indicate that Saudi Arabia would like to sign memoranda of understanding (MOU) by the end of 2000. TotalFinaElf reportedly has proposed $8 billion worth of investment in Saudi Arabia's energy sector, including $1.5 billion to develop gas fields (including Huta) in the center of the country.
Saudi Arabia is continuing to invest in the development of lighter crude reserves. Priority has been given to developing the Shaybah field in the remote Empty Quarter area bordering the United Arab Emirates. Shaybah contains an estimated 7 billion barrels of premium grade 40-42o API sweet crude oil, and ultimately is slated to produce 500,000 bbl/d of crude oil and 870 million cubic feet/day of natural gas. Shaybah began production in July 1998 at around 250,000 bbl/d. Overall, the Shaybah project will cost $2-$2.5 billion, and will include three gas/oil separation plants (GOSPs) and a 395-mile pipeline to connect the field to Abqaiq, Saudi Arabia's closest gathering center, for blending with Arabian Extra Light crude (Berri and Abqaiq streams). As Shaybah light crude production increases (to 500,000 bbl/d), Saudi Arabia likely will cut production of Arab Light from overworked parts (water content is rising) of the Ghawar reservoir, as well as Arab Heavy from offshore. Two U.S. companies are playing a major role in the Shaybah project: Parsons Corporation (project management) and Bechtel (construction). Another project, the $200-million Haradh-2 gas-oil separation plant for the Ghawar field, appears to be back on track as part of Saudi Arabia's effort to increase production of Arab Light oil by 600,000 bbl/d.
Ports and Pipelines
Most of Saudi Arabia's crude oil is exported via the Arabian Gulf through the Abqaiq processing facility. Saudi Arabia's primary oil export terminals are located at Ras Tanura (5 million bbl/d capacity) and Juaymah (3 million bbl/d) on the Arabian Gulf, plus Yanbu (3 million bbl/d) on the Red Sea.
Saudi Arabia operates two major oil pipelines. The 4.8-million bbl/d capacity East-West Crude Oil Pipeline (Petroline) is used mainly to transport Arabian Light and Super Light to refineries in the Western Province and to Red Sea terminals for export to European markets. Running parallel to the Petroline is the 270,000 bbl/d Abqaiq-Yanbu natural gas liquids pipeline, which serves Yanbu's petrochemical plants. The Trans-Arabian Pipeline (Tapline) to Lebanon is mothballed, and the 1.65 million bbl/d Iraqi-Saudi Pipeline (IPSA-2) was closed indefinitely following the 1990 Iraqi invasion of Kuwait. According to Saudi Oil Minister Naimi, Saudi Arabia has "surplus oil export and pipelines capacity....(including the) East-West oil pipeline system [which] can carry and deliver 5 million bbl/d" but is being run at "only half capacity."
Since 1999, dramatically higher oil prices and, consequently, an improved Saudi financial situation, has revived plans for investment in refinery upgrades and expansions. These include a $1.2-billion upgrade of the 300,000-bbl/d Ras Tanura refinery (apparently still on schedule). Also slated for upgrading is the Rabigh refinery on the Red Sea coast. Plans call for boosting capacity at Rabigh, Saudi Arabia's largest domestic refinery, to as high as 400,000 bbl/d, as well as upgrading the refinery's product slate away from low-value heavy products towards gasoline and kerosene at an estimated cost of $2 billion. Due to Saudi Arabia's financial difficulties in 1998/1999, the Rabigh project was scaled back by 60% or so.
Saudi Arabia has ambitious plans for expanding petrochemical production using natural gas as a feedstock. State-owned (70%) SABIC accounts for 5% of world petrochemical production, and is pushing ahead with the third stage of an ambitious expansion plan. It is uncertain at the present time whether or not the government will sell off more of its stake in SABIC in the near future. SABIC, the Middle East's largest non-oil industrial company, has been soliciting foreign investors in private petrochemical projects, such as a proposed $800-million plant proposed for Jubail. In February 1997, Saudi Petrochemical Company (Sadaf), a joint venture between SABIC and Shell Oil, launched a $1-billion expansion program that includes a new 700,000-metric-ton/year plant for methyl tertiary butyl ether (MTBE).
Saudi Arabia's proven gas reserves are estimated at 204.5 trillion cubic feet (Tcf), ranking fifth in the world (after Russia, Iran, Qatar, and the UAE). Most (around 2/3) of Saudi Arabia's currently proven gas reserves consist of associated gas, mainly from the onshore Ghawar field and the offshore Safaniya and Zuluf fields. The Ghawar oil field alone accounts for one-third of the country's total gas reserves. Most new associated gas reserves discovered in the 1990s have been in fields which contain light crude oil, especially in the Najd region south of Riyadh. Most of Saudi Arabia's non-associated gas reserves are located in the deep Khuff reservoir, which underlies the Ghawar oil field. Another gas field, called Dorra, is located near the Khafji oil field in the Saudi-Kuwaiti Neutral Zone and may be developed by Japan's AOC. Gas also is located in the countries extreme northwest, at Midyan. In early 2000, Saudi Arabia reportedly decided not to move ahead with development of Midyan, which included provision of gas to the Tabuk power station.
With domestic gas demand growing rapidly, increasing gas production is a priority for the Saudi government, with gas development slated to consume a large share of Aramco's budget (in late 1999, Aramco decided to invest $45 billion over 25 years on upstream gas development and processing facilities). Saudi Arabia is considering allowing foreign investment in the natural gas sector. Additional gas production is being encouraged as a feedstock for the country's growing petrochemical industry, as well as for electricity generation, desalination plants and other industrial establishments, and as a replacement for direct oil burning. Using gas instead of oil domestically will help free up additional crude oil for export. To date, Saudi Arabia has not expressed great interest in liquefied natural gas due mainly to doubts regarding economic viability. In September 2000, tests at Ghazal No. 1, located on the southern tip of the giant Ghawar oil field and west of the Haradh gas field, indicated a significant gas discovery, and represented the eighth gas or condensate discovery in the area under Saudi Arabia's stepped-up gas exploration program.
Domestic demand is driving a $4.5-billion expansion of Saudi Arabia's Master Gas System (MGS), which started up in 1982. Previously, all of the country's natural gas was flared. In November 1996, a project management contract was signed with U.S.-based Parsons Corp. for construction of a $1.9-billion, 2.4-billion-cubic-feet (Bcf)-per-day gas processing plant at Hawiyah. Others involved at Hawiyah, located south of Dhahran and east of Riyadh, include Japan's JGC, Argentina's Techint, and Italy's Technip. Hawiyah represents the largest Saudi gas project in more than 10 years, and is to be completed by 2002. The Hawiyah plant plus the debottlenecking of three other existing plants (Berri, Haradh, Ras Tanura) is to boost Saudi Arabia's gas processing capacity to 6.3 Bcf per day by 2002. In other news, a key pipeline project was completed in June 2000 to extend the MGS from the Eastern Province (which contains large potential gas and condensate reserves) to the capital, Riyadh, in the Central Province.