June 2000 Vol. 221 No. 6  International Politics

A.F. Alhajji,  Contributing Editor

Investment in Saudi Arabia needs patience and more patience

The Saudis are trying to build a bridge to the "other side," but the oil companies want them to jump – a move that could be disastrous for both parties. Readers may think that the Saudis are slow in opening their economy, but the fact is, given Middle Eastern realties, they actually are going too fast in a country known for its conservative attitude toward change. Just think about it – what has changed in the region in the last 20 years? In fact, a prime source of stagnation in the Saudi economy is the rigidity of the economic, legal, social and educational systems.

While current policymakers push for a change, some traditional elements still have enough power to slow this process and promote contradictory policies. During the meeting between 12 CEOs of various oil companies and the Petroleum Ministerial Committee to discuss new foreign investment and labor laws, the Saudi government issued a decree prohibiting foreign workers from laboring in the agriculture (farm) market – a move designed to create jobs for native Saudis and ensure 100% Saudization of that market. At the same time, the Saudis are shopping for home workers and private drivers in Viet Nam. Call it domestic politics, double standard, dualism or whatever, the fact is that the current atmosphere does not allow for radical change.

Saudi officials understand the Kingdom’s realties and the need to create more links with the world economy. They are trying to build a bridge to the other side, but the oil companies are disappointed, because they want them to jump now. Yet, that could be a move that would be disastrous for both parties. By now, the message is clear: the Saudis never jumped, they do not jump, and they do not like being pushed to jump. The pressure to join the World Trade Organization (WTO) is already taking its toll. Altering current laws did not match changes in people’s attitudes. You may change the law in a day or two, but it will take years to change people’s attitudes to match. Therefore, the Saudis deserve credit for their recent moves, and a break from the WTO.

Opening the gas sector. Cautious but confident, the Saudis plan to open their natural gas sector to foreign investment. It is not a matter of whether to open it, but rather when and how fast. It was obvious from the beginning, that the Saudis will open the gas sector but not their lucrative, upstream oil operation. The Kingdom plays a strategic role in world oil markets – it would be naive to think that the Saudis are willing to give up any sovereignty that would impact this role.

Countries tend to open their upstream oil sectors to foreign investment because of lack of capital, experience, technology and profitability. The Saudi oil sector, on the other hand, does not lack any of these attributes. Foreign investment in the oil sector will not benefit the Saudis, because it will not add much to GDP, improve technology or reduce unemployment. In addition, foreign investment in the oil sector could force Saudi Arabia to violate its OPEC quota – a situation that happened in Venezuela.

Current Kingdom realties, including strong energy demand, necessitate foreign investment in the gas sector. For the last 20 years, Saudi Arabia experienced one of the world’s highest population growth rates and massive migration to urban areas. As a result, energy demand grew rapidly to unsustainable levels that electric companies cannot meet. Current electrical demand is projected to increase 5% annually for the next few years. Since all Saudi electric utilities use oil as feedstock, domestic crude demand has increased substantially at the expense of exports. As demand increases, more and more oil is diverted to domestic use. In addition, the establishment and expansion of two industrial cities – Aljubial and Yanbu – has increased gas demand, which is growing at an estimated 8% per year. So, it only makes sense to further utilize the Kingdom’s gas resources.

While Saudi refused foreign participation in its oil sector for the reasons mentioned above, it allowed such a role in the gas sector for the very same reasons. The country lacks the massive amount of capital, experience and technology needed for LNG projects. Unlike oil projects, there is uncertainty about LNG and associated projects (which take time to pay off) that may prove to be less profitable than oil. Since gas production is not part of OPEC’s quota, it was logical for the Kingdom to invite companies to invest in the gas sector. The expected, $100-billion foreign investment should boost economic growth, reduce unemployment, diversify income, reduce pollution and meet growing energy demand.

Oil companies do like these projects for their vast gas reserves and strong domestic demand. However, they are also courting the Saudis on these deals in hopes of gaining access to future oil projects. Nevertheless, it is expected that the Saudis will award the most lucrative contracts to Texaco, with whom they have an ownership stake. They also may award contracts to companies of various nationalities, for strategic and marketing reasons.

Skilled human resources are still a concern. One of the problems that companies will face in the first few years of their investment is the availability of skilled workers. Despite 20 years of industrialization, more than 75% of university graduates in Saudi Arabia are in social sciences, not technology. According to recent estimates by UNIDO, productivity in the Gulf region is one of the lowest among developing nations. One of the reasons is the "artificial education" in various schools and universities. Also, current attitudes toward work and work ethics still reflect those of the old days. These obstacles, in addition to others, indicate that foreign investment in Saudi Arabia will continue to require patience, patience and more patience.

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 is a regular contributor to this column.