1999 Vol. 220 No. 12
Will Gulf states open their upstream to foreign investment?
The idea of introducing "foreign" investment into
Persian Gulf states appears to be motivated more by politics than economics. Mixed signals,
Saudi Arabias slow response, and the limits put on foreign investment in Kuwait
suggest that the Gulf countries are unsure of the benefits that foreign investment brings to
their oil sectors.
Oil companies were overly optimistic when Saudi Crown Prince
Abdulla met with the CEOs of seven U.S. majors in September 1998, during a visit to the US.
The prince hinted that Saudi Arabia might open its upstream sector to foreign investment and
asked oil companies for proposals. Many U.S. firms submitted proposals, including Arco,
Chevron, Conoco, Exxon, Mobil, Phillips and Texaco.
A few months later, Saudi Oil Minister Ali Al-Naimi declared
that the kingdom has no interest in allowing foreign companies to produce its oil. However,
he stated that the kingdom would allow foreign investment in "integrated projects"
that are "mutually beneficial."
Some analysts attributed this change in attitude to changes
in oil prices. Saudi Arabia was considering foreign investment seriously when oil prices
were below $10/bbl. After the recent increase in prices, this interest evaporated. Others
see no change in attitude and blame the oil companies for misreading the Saudis
After lengthy debates in parliament, Kuwait allowed foreign
investment in the upstream. Since Kuwaits constitution prohibits foreign ownership of
crude, the oil companies cannot sign "lucrative" sharing contracts. Foreign
companies will operate the oil fields and provide technical advice, in return for a fixed
payment per barrel extracted. However, new reports indicate that some payments are linked to
profitability. Serious limitations are imposed on these firms. For example, they are allowed
to invest up to $7 billion, but only in relatively poor, politically sensitive fields of
northern Kuwait. Some of these fields, such as Al-Rumaila, are shared with Iraq. Allowing
companies to invest only in Kuwaits northern fields may amount to establishing a "security
zone" between Kuwait and Iraq that would be "manned" by foreign capital.
Again, however, any introduction of foreign investment into some Gulf states appears to be
politically motivated, not economically induced.
In fact, the Gulf countries have no
interest in such investments, because they do not need additional capacity,
especially at a time when they are cutting production to increase oil prices. In addition,
the Gulf countries do not lack investment capital. Even as Kuwait is allowing foreign
companies to invest up to $7 billion, the countrys oil minister declared that Kuwait
Petroleum Company, which he heads, has $10 billion in cash that is looking for investment.
Because all the Gulf countries are OPEC members, foreign
upstream investment creates serious problems for the group. It increases the supply of oil,
and countries may have no choice but to violate their OPEC quotas.
While Gulf countries may not open their oil sectors to
foreign investment, they are likely to open their natural gas and
petrochemical sectors soon. The national oil companies of the Gulf states are
highly experienced with all aspects of the oil sector, but this is not so for natural gas
and petrochemicals. In addition, unlike oil investments, natural gas and petrochemical
projects require massive amounts of capital. Construction of these projects also may take a
long period of time. Oil projects involve less capital, less time and less risk.
However, individual governments may not be willing to open
their economies to even this form of foreign investment, because such situations require a
skilled labor force that does not exist. If they were to go down this path,
more expatriates would have to return to the region at the very
time when governments are trying to lower the number of foreign workers.
Yemen looks for dollars. The
Yemeni government is conducting an aggressive promotion campaign to attract investment in
new blocks, by publicly lobbying foreign capital in London and Houston. The intent is to
change Yemens image as a risky place for investment. This risk involves political
and economic factors. Political factors include civil
war, killing, kidnapping, and the bombing of pipelines and various oil facilities. Economic
factors include a low success rate for new discoveries, unattractive contracts and heavy
The government is reducing political risk by cracking down
on the opposition and executing killers. Economic risk will be reduced by instituting new
investment laws that encourage foreign capital. Yemens new foreign investment laws are
hampered by the areas political turmoil. During the past six years, Yemeni tribesmen
have abducted more than 100 Westerners and oil workers. The main export pipeline has been
bombed more than 18 times in the past year. Indeed, the most recent blast occurred on
October 23, when tribesmen cut off a communications station used by Hunt Oil.
While the "majors" are not showing strong interest
in Yemen, small oil companies are pouring in, despite the political risk. Their interest is
explained by improved investment terms, proximity to oil giants in the Gulf and by low
production costs. It costs $1.70/bbl to produce oil in Yemen, while it costs $4 in
neighboring Sudan and $10 in the North Sea.
Investment incentives include a reduction in signature
payments, to $250,000 to 500,000, from previous production sharing agreement terms that were
between $2 million and $10 million. Royalties are on a sliding scale of 3% to 10%, instead
of a fixed 10% rate. Investment in political stability should be the governments main
priority, in order to attract major operators. Only then will
investment incentives work.
The importance of Yemeni oil stems from the countrys
strategic location. Yemeni oil is more accessible than other Gulf crudes, because those
flows are influenced by the status of two politically unstable waterways, the Strait of
Hormuz and Bab Almandeb. Finally, it is worth mentioning that Yemen produces 400,000 bopd,
and its estimated reserves are around 4 billion bbl.
Dr. A. F. Alhajji is
an award-winning assistant professor at Colorado School of Mines Division of Mineral
Economics and author of the upcoming book, OPEC and the World Oil
Market: An Alternative View. He will be a regular contributor to this column,
which now features oil-and-gas-related political news from various world regions, in
addition to quarterly U.S. governmental reports.
Copyright © 1999 World
1999 Gulf Publishing Company