Saudis to privatize oil sector?

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Saudi Oil Minister Ali Ibrahim Naimi said in Houston that his government is considering privatizing some of the operations of state-owned Saudi Aramco, the biggest oil-producing company in the world, the daily Arab News reported.

Saudi Aramco controls the country's production of 10 million barrels of oil per day.

A rigorous privatization plan would be a watershed for Saudi Arabia's energy sector. But it is difficult to imagine an agreement that would satisfy foreign partners, the Saudi government and conservative factions within the country. Instead, Riyadh appears to be using the offer to try to gain political leverage with Washington.

Saudi Aramco is the end result of a 1933 agreement between the Saudi government and Standard Oil. The joint enterprise eventually became known as the Arabian American Oil Company (Aramco), and it received exclusive rights to mine, produce and export oil from the eastern part of the country, free of Saudi taxes and duties.

A series of deals between 1973 and 1980 resulted in the Saudis' regaining full control of the company. In 1988, King Fahd issued a royal decree establishing the Saudi Arabian Oil Company, known as Saudi Aramco, to replace the original Aramco.

The Saudi government did relax its investment rules last year, when it announced it would allow eight foreign firms to participate in natural-gas production – the first foreign direct investment in exploration and production in decades. The firms, including ExxonMobil, Royal Dutch Shell and British Petroleum, planned to spend about $25 billion in direct project costs and $75 billion in tertiary projects such as water desalination, power generation, broadcasting and petroleum refining.

However, the privatization idea floated by the oil minister doesn't seem feasible at first glance. There is simply not enough common ground between the three big players: foreign oil companies, which are likely skittish about being taken advantage of; the Saudi government, which uses massive government spending to buy domestic support; and conservative factions within Saudi Arabia, which oppose any greater involvement with Western firms.

The Saudi government needs cash, and needs it fast. Economic growth has not kept up with population growth over the last decade. The result is plummeting per capita income, around $7,000 today compared to $25,000 in the mid-1970s. Unemployment has grown along with social discontent.

Oil revenues supply more than 75 percent of the Saudi budget – which is focused on placating the public with jobs and services – and the government issues debt to cover any shortfalls. Over 55 percent, or $114 million, of the 2000 budget was spent on salaries for government employees. Millions more are spent on health care, infrastructure and free education. The Saudi government must also spend tens of millions to buy support from the scheming uncles and power-hungry cousins within the fractious royal family.

Foreign oil firms are less likely to offer a sweetheart deal to the royal family given recent difficulty doing business in Saudi Arabia. The gas deals following the government's relaxation of investment rules last year are behind schedule and have not been officially signed off yet amid wrangling over price and other critical issues. The 30 percent part-privatization of another Saudi industrial firm, Sabic, went ahead as expected, but the anticipated sale of the remaining 70 percent never happened.

It is unclear how the oil minister's privatization scheme would be structured, but payment for services to foreign companies means an even bigger upfront outflow of cash, which in turn means even less money to placate the masses and buy off royal rivals. Revenue sharing might be more affordable in the short term, but it will be vehemently opposed by Saudi Arabia's conservative elements.

The royal family took power in part due to the credibility gained by their alliance with fundamentalist Wahhabi sects and the custodianship of the holy cities of Mecca and Medina. That power base is under severe strain now, as many conservative factions in the country see the royal family as sellouts and appeasers to the West. And selling the nation's resources would only strengthen that perception.

The royal family's power – both domestically and internationally – is based on its control of the country's oil industry. Giving up a share of that control would strike at the very heart of the regime.

So why float the idea? At the base level, the government is dangling the opportunity of greater Western involvement in its oil sector in order to ensure continued support for the royal family. Tying the business interests of Western oil companies with the fate of the regime forces Western governments to take a more direct interest in Saudi stability. But the idea has a number of obvious holes in it and appears hastily thrown together.

It appears that the Saudi government is flailing, attempting to find an issue or a leverage point upon which to defend its interests against the United States. Washington is demanding that the Saudis assist it against al-Qaida, and the Saudis are trying to find a way to gain some breathing room. Over the past quarter the Saudis tried to become the linchpin in the Israeli-Palestinian peace process and establish a relationship with Russia. Both actions were meant to allow Riyadh a certain amount of leverage vis-?-vis Washington, but both failed.

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