Oil Industry in the 1990S
After two decades of organizational change, the reshaping of the oil industry in Saudi Arabia reared completion by the late 1980s. During the 1970s and early 1980s, the industry was transformed from one controlled by foreign oil companies (the Aramco parent companies) to one owned and operated by the government. Decisions made directly by the ruling family increasingly became a feature of the industry in the late 1970s. Saudi Arabia's participation in the Arab oil embargo in 1973 and foreign policy goals were featives of this transition. In 1992 the government had title to all mineral resources in the country (except in the former Divided Zone, where both Kuwait and Saudi Arabia had interests in the national resources of the whole zone). Through the Supreme Oil Council, headed by the king, and the Ministry of Petroleum and Mineral Resources the government initiated, funded, and implemented all investment decisions. It also controlled daily operations related to production and pricing.
On a functional level, the industry also underwent significant transformation. By the late 1980s, the major companies established by or taken over from foreign owners by the government were required to produce a particular product. For the most part, only one company controlled a certain industrial subsector, although there was some overlap. In the upstream part of the oil industry, all exploration, development, and production decisions within Saudi Arabia were controlled by Saudi Aramco. It managed the oil fields, pipelines, crude oil export facilities, and the master gas system throughout the country. Through its subsidiary Vela Marine International, Saudi Aramco controlled Saudi Arabia's tanker fleet. Because downstream investments overseas were an integral part of Saudi Arabia's crude oil marketing strategy, these have come under the control of Saudi Aramco. These downstream investments were joint-venture operations with foreign oil refiners. Saudi Aramco also operated the kingdom's largest oil refinery. In 1992 the refinery's output largely conformed to Samarec's specifications. Saudi Aramco was managed by a board of directors headed by the minister of petroleum and mineral resources and a senior management staff headed by a president, with the Supreme Oil Council having oversight. Most operational decisions were made by the professional staff except oil output decisions, instructions for which came from the king through the minister.
The downstream subsector of the oil industry was dominated by Samarec. Operated as a wholly government-owned refining and marketing company, Samarec took over Petromin's operation in 1988. Petromin still existed on paper, legally holding title with three foreign oil companies to the export refinery joint ventures at Al Jubayl on the gulf, and Yanbu, and Rabigh on the Red Sea. In addition to managing these refineries, Samarec operated three wholly owned domestic refineries at Riyadh, Jiddah, and Yanbu. Samarec controlled the distribution of refined products within Saudi Arabia and managed the bulk plants, loading terminals, tanker fleet, and product pipelines. All export sales of refined products were also managed by the downstream company. During the Persian Gulf War, to augment domestic supplies of jet fuel and other products, Samarec bid for products in the Singapore market. The Petromin board of directors, headed by the minister of petroleum and mineral resources, set Samarec policy but operations were managed by a senior staff.
After the reorganization of Petromin, the government transferred the production and distribution of lubricating oils to two joint ventures with Mobil. Two new companies were established: Petromin Lubricating Oil Company (Petrolube) and Petromin Lubricating Oil Refining Company (Luberef). Luberef operated the kingdom's single base oil refinery (base oil is a byproduct of the refining process), while Petrolube ran three small lubricating oil blending plants. Three other smaller private sector plants also operated lubricating oil blending facilities.
Crude Oil Production and Pricing Policy
The kingdom's oil policy was based on three factors: maintaining moderate international oil prices to ensure the long- term use of crude oil as a major energy source; developing sufficient excess capacity to stabilize oil markets in the short run and maintain the importance of the kingdom and its permanence to the West as a crucial source of oil in the long term; obtaining minimum oil revenues to further the development of the economy and prevent fundamental changes in the domestic political system.
Short-term oil policy in the early 1990s has been shaped by two major sequences of events. The first was Saudi Arabia's refusal to play the role of "swing producer" in the mid-1980s, its subsequent bid to maintain its market share, and abandonment of the fixed oil price system after the 1986 price crash. The second was Iraq's invasion of Kuwait, the kingdom's replacement of most of the oil lost from these two OPEC members, and its ascendance as unchallenged leader within OPEC after August 1990. Both periods have shaped an oil policy that called for OPEC decisions to promote moderate and stable oil prices but not compromise the kingdom's demand for its market share. Before the Persian Gulf War, Saudi Arabia demanded about 25 percent of the OPEC production ceiling; after the Iraqi invasion of Kuwait the share rose to 35 percent.
Saudi Arabia's behavior in the oil market since 1986 demonstrated its attempts to ensure both goals. In the early 1980s, oil prices rose rapidly because of the breakdown of the old vertically integrated system of multinational oil companies, following nationalizations by producer governments during the 1970s. Other causes of the price rises were the disruption of Iranian exports during and after the Iranian Revolution in 1979, and the destruction of the Iranian and Iraqi oil sectors during the Iran-Iraq War of 1980-88, which exacerbated an already low level of spare production capacity. High oil prices in the early 1980s stimulated the rapid growth of non-OPEC oil supplies in the Third World, in Siberia, the North Sea, and Alaska.
As a result, oil prices began to drop in late 1982, forcing OPEC to institute a voluntary output reduction system by assigning individual quotas. The new system failed to stem the price slide, however. By 1985 spot oil prices had fallen to about US$25 per barrel from an average of US$32 per barrel in the early 1980s.
Saudi Arabia's adherence to an official price system, which most OPEC members were abandoning, rendered the kingdom the swing producer. As a result, Saudi Arabia was forced to curtail output to ever lower levels. Other members "cheated" on their quotas by offering competitive prices, effectively pushing the entire burden of adjustment onto Saudi Arabia. In 1979-80, Saudi Arabia had peaked at a production of more than 10 million bpd; by 1986, that amount had reached a low point of 3 million bpd.
In early 1986, Saudi Arabia discontinued selling its oil at official prices and switched to a market-based pricing system called netback pricing--that guaranteed purchasers a certain refining margin. In doing so, Saudi Arabia recaptured a significant market share from the rest of OPEC. The sharp rise in crude oil supplies precipitated the crash of spot prices from an average of US$28 per barrel in 1985 to US$14 per barrel in 1986. The Saudis had used their "oil weapon"--significant excess capacity combined with adequate foreign financial reserves cushioning the blow of lower oil revenues--to establish some discipline in OPEC.
It did not take long before OPEC agreed to a new set of quotas tied to a price target of US$18 per barrel. By late 1986 and early 1987, prices rose to US$15 or US$16 per barrel for the OPEC basket (from well below US$10 per barrel in early 1986). To avoid a swing producer role, the Saudis imposed an important condition on other OPEC members: a guaranteed quota of approximately 25 percent of the total output ceiling, correlated to a US$18 per barrel price objective.
The latter became the center of controversy within the organization for much of the period before the Iraqi invasion of Kuwait. A revival in oil demand growth rates in the industrialized world between 1988 and 1990, partly aided by several years of low oil prices and double-digit annual consumption growth in the newly industrializing countries of East Asia, gave OPEC the chance to induce price increases above US$18 per barrel. Some members called for expanding OPEC's overall output ceiling by a smaller factor than the growth in anticipated demand, which would in effect push oil prices up, possibly back to their early 1980s level.
Whereas Saudi Arabia has always endeavored to maintain moderate oil prices, regional political and economic concerns have also motivated the kingdom not to depress prices too far, the 1986 Saudi-induced price crash notwithstanding. In 1988 and 1989, King Fahd publicly guaranteed that Saudi Arabia would work to achieve oil price stability at US$18 per barrel. There was one overwhelming reason for this policy: with the Iran-Iraq War cease-fire in 1988, the kingdom wanted to maintain oil prices at levels that would force Saddam Husayn to be concerned with rebuilding Iraq rather than threatening his neighbors. This objective was formally registered in the 1989 Nonaggression Pact that Riyadh signed with Baghdad.
The biggest battles in OPEC prior to 1990, however, were between Saudi Arabia and two of its gulf neighbors: Kuwait and the United Arab Emirates (UAE). Both refused to restrict production to their quota levels, and by early 1990 their serious overproduction contributed to mounting international crude oil inventories. By the second quarter of 1990, the oil traders in New York were pushing oil prices down.
Saddam Husayn's envoy, Saadun Hamadi, toured the gulf in June 1990 and halted the slide in prices as Iraq unveiled its own "oil weapon": the threat to invade Kuwait. Buttressing this threat by mobilizing 30,000 troops on the Kuwaiti border, Baghdad dictated an agreement at the OPEC ministerial meeting the following month. Although respecting Saudi Arabia's 25 percent market share, and allowing the UAE to raise its quota to 1.5 million barrels per day, OPEC set an overall ceiling of almost 22.5 million bpd and a compromise price of US$21 per barrel.
Saudi Arabia played a largely passive role at the July 1990 OPEC meeting in Geneva and conceded to Iraq's bid for dominance. Kuwait was clearly cowed: even before the meeting it reduced its oil output and appointed a new oil minister, Rashid Salim al Amiri, an unknown chemistry professor, to replace Ali Khalifa, the architect of Kuwait's downstream projects and its aggressive oil policies.
When Iraq invaded the invasion of Kuwait, it provoked massive intervention by the United States into the gulf and ultimately lost its power within OPEC. Behind direct United States protection, the kingdom's oil production rose to 8.5 million bpd or 35 percent of OPEC's total output.
Operation Desert Storm allowed Riyadh to regain its status within OPEC. At each successive OPEC meeting until the gathering of ministers in February 1992, Saudi Arabia dictated the final agreements with virtually no opposition. The eleven active members were producing at capacity while prices remained relatively high. Between March and July 1991, both Iran and Saudi Arabia expertly sequenced the unloading of large stocks of oil in "floating storage," which had been built up as insurance during Operation Desert Shield, and prevented an anticipated crash in oil prices during the spring and summer months of 1991. Part of the harmony within OPEC resulted from the opportunity Iran saw in being more cooperative with Saudi Arabia. For the West to see Iran as a "responsible" member of OPEC could help attract investment for its oil and other industrial sectors.
Observers of OPEC, however, awaited the revival of the old dove-hawk battles. The February 12, 1992 OPEC meeting was held to discuss reinstatement of the July 1990 agreement, temporarily suspended after August 2, 1990. The hawks wanted to preserve the quota system and the reference price, which had been neglected in order to replace lost Iraqi and Kuwaiti output, pushing oil prices to about US$21 per barrel for the OPEC basket. The expected return of Kuwait and Iraq to the oil market required a return to the preinvasion rules if prices were not to fall sharply.
Saudi Arabia's aim at the February 1992 OPEC meeting was to eradicate the last vestiges of the 1990 agreement and its quota shares, especially the kingdom's share of about 25 percent. At the February 1992 meeting, OPEC members refused to blink at Saudi pressure. Iran particularly was willing to risk the improved relations it had forged with Saudi Arabia and absorb the oil price cut.
Saudi Arabia's income requirement in the wake of the Gulf War would, Tehran suspected, keep the Saudis from forcing other OPEC members into accepting its objectives as it did in 1986. Technically, the final agreement reached was essentially what the Saudis wanted in the short run: a total production ceiling of almost 23 million bpd and a temporary quota of 35 percent of the ceiling and the maintenance of price stability. They did not achieve their long-term objective: unanimous OPEC recognition of a 35 percent market share of all future OPEC output ceilings.
Longer-term Saudi policy imperatives for the 1990s were shaped by structural factors within OPEC and within the international oil market. Highest on the priority list was the decision to push domestic oil capacity to more than 105 million bpd sustainable capacity with a further 1.5 million to 2 million bpd surge capacity in times of emergency. Three factors prompted these expansion plans. Growth in world demand for oil over the preceding several years, combined with the Persian Gulf War, had pushed the kingdom and other OPEC countries to their production capacities. Expecting that demand would continue to grow and that most other exporters were constrained by diminishing oil reserves or financing problems, a rapid rise in capacity could capture any increase in demand that might occur. Second, in light of the post-1986 intra-OPEC market-share competition, oil capacity expansions have had a direct impact on the ability of individual members to jockey for quota increases. Third, the ability to raise output at will, in the event of an unforeseen price decline, helped stabilize total oil revenues, which constituted the bulk of domestic budgetary income.
Saudi Arabia's interest in moving downstream was also a priority of its oil policy. The drive to obtain overseas refining and storage facilities was designed to further two objectives related to security of supply. First, the kingdom wanted to obtain captive buyers of its crude, assuring stable prices and terms. Saudi Arabia would thus be more receptive to market conditions in consuming countries and avoid being closed out of certain countries. Gaining further profits from refining the crude was an associated reason for the move downstream overseas. Second, the kingdom sought to provide consuming countries with "reciprocal security measures," under which it would undertake to guarantee supply--through capacity additions or stocking arrangements abroad--in return for consumer countries' decisions to avoid taxes and import restrictions on oil. Few consuming countries, however, have responded favorably to such arrangements.
Crude Oil Reserves and Production Capacity
Saudi Arabia has been described as the world "mother lode" of oil and gas reserves. Estimates for 1990 placed total oil reserves of the kingdom at 261 billion barrels. Saudi Aramco controlled all the reserves within the country's borders with the exception of reserves in the Divided Zone, which were controlled by Getty Oil Company and the Arabian Oil Company. Total oil reserves have risen steadily since oil was discovered in 1938. During the 1970s and 1980s, estimates of total oil reserves grew by nearly 91 percent from 137 billion barrels in 1972. The comprehensive reassessment of existing reserves boosted Saudi Arabia's share of world reserves to 25.8 percent. At 1992 production levels, these oil reserves would allow oil production for almost eight-four years.
Until the mid-1980s, all the oil that had been discovered had been found in the Eastern Province. Aramco had found forty-seven oil fields, including some during the 1970s in the Rub al Khali. The world's largest oil field, Al Ghawar, located in the Al Ahsa region of the Eastern Province, is 250 kilometers long and 35 kilometers wide at its greatest extent. The field is so vast that names have been given to separate subsections such as Ain Dar, Shadqam, Al Hawiyah, Al Uthmaniyah, and Harad. Discovered in 1948, the field began output in 1951. By 1990 Al Ghawar had 219 flowing wells. Saudi Arabia also possessed the world's largest offshore field, As Saffaniyah, located in the gulf near Kuwait and the Divided Zone. As Saffaniyah was discovered in 1951, began output in 1957, and by 1990 had 223 flowing wells. Of the four fields discovered before Al Ghawar--Ad Dammam, Abu Hadriyah, Abqaiq (also seen as Buqayq), and Al Qatif--only Abqaiq and Al Qatif were still producing in 1990. Abqaiq had forty-seven flowing wells. The major producing fields discovered after Al Ghawar, mainly in the 1960s and early 1970s, are offshore and include Manifah, Abu Safah, Al Barri, Az Zuluf, Al Marjan, and Al Khafji in the Divided Zone. Saudi Arabia had a total of 789 flowing wells during 1990, up from 555 producing wells in 1983.
The quality of crude oil flowing from these wells is based on density (measured by gravity standards established by the American Petroleum Institute--API) and the amount of sulfur and wax it contains. Light crude oil is generally more desirable and commands a higher price because it yields more high-value products such as gasoline and jet fuel. Several Saudi fields, including those in the Divided Zone, contain heavier grades by international standards. Al Ghawar field produces crude ranging from API gravity 33 degrees to 40 degrees, which is considered light crude oil in the kingdom but is generally heavier than most international light crude oils. As Saffaniyah produces heavy crude oil with API gravity ranging from 27 degrees to 32 degrees.
The historical production pattern until the early 1980s contained greater proportions of light and very light crude oils. By the mid-1980s, government policy sought to adjust output between heavy and light crude oils to reflect actual users of each, so that the kingdom would not exhaust its supply of light crude oils. Estimates for 1991 showed that this balance was not achieved, however; Extra Light (from Al Barri field) and Arab Light (crudes from Abqaiq, Al Ghawar, Abu Hadriyah, Al Qatif, and others) recorded production levels close to 70 percent of total output of 8.2 million bpd, whereas Arab Medium (from Az Zuluf, Al Marjan, Al Kharsaniyah, and other fields) and Arab Heavy (from As Saffaniyah, Manifah, and other fields) production levels approached 11 percent and 19 percent, respectively. In the early 1990s, the consensus was that after capacity was expanded, the split between light and heavy grades would shift to 10 percent more heavy crude oils, despite recent discoveries of very light grades south of Riyadh. During the 1980s, technological developments in refining narrowed the differentials between light and heavy crudes. Therefore, the traditional price disadvantage that the Saudis faced was steadily being erased because of the more sophisticated refineries being brought on line.
Saudi crude oils also contain high sulfur levels. Crude from Al Ghawar has sulfur content ranging from about 1.9 percent to close to 2.2 percent by weight, which is generally considered high. As Saffaniyah crude's sulfur content is even higher at above 2.9 percent by weight. Sulfur compounds are undesirable, often contaminating crude oils and corroding processing facilities.
Crude Oil Production and Exports
During the 1980s, crude oil production fell from a peak of 9.9 million bpd in 1980, as Saudi Arabia boosted output to offset shortfalls in supply resulting from the beginning of the IranIraq War, to 3.3 million bpd in 1985. Thereafter, and until the Iraqi invasion of Kuwait, a combination of moves by the kingdom and developments in international oil markets allowed for a steady increase in supply. Production rose to 4.9 million bpd in 1986 and reached in excess of 5.8 million bpd on the eve of the Iraqi invasion. To replace most of the 4.5 million bpd of embargoed Kuwaiti and Iraqi oil, Saudi Arabia raised output to 8.5 million bpd within three months. After the Persian Gulf War, market conditions and maintenance projects required modest declines in output to below 8 million bpd, but the kingdom's output in 1991 and 1992 averaged 8.4 million bpd. Divided Zone output, which was included in this figure, fell to zero immediately after the Persian Gulf War as a result of the war damage, but the Arabian Oil Company facilities resumed pumping at levels close to 350,000 bpd within a few months. Half of this output was attributed to Saudi Arabia. Getty Oil facilities in the Divided Zone did not resume pumping oil after the Persian Gulf War.
The bulk of Saudi Arabia's crude oil production was exported. In 1980, for example, crude oil exports totaled about 9.2 million bpd or 93 percent of production. By 1985, with lower production, exports fell to below 2.2 million bpd. Over the latter half of the 1980s, exports have risen steadily to average 3.3 million bpd in 1989, 4.8 million bpd in 1990, and 6.8 million bpd in 1991 and 1992. Direction of exports has also varied during the 1980s. In the early 1980s, the United States and, to a lesser extent, Canada accounted for 15 percent of Saudi exports; by 1985 they accounted for only 6 percent. Lower oil prices and more aggressive pricing structures enabled Saudi Arabia to place greater quantities of oil in North America by the early 1990s when this market constituted almost one-third of Saudi crude oil sales overseas. By contrast, Western Europe's importance to Saudi Arabia as an importer of crude fell during the 1980s from 41 percent in 1981 to about 18 percent by 1990. Saudi Arabia has maintained its market presence in Asia, although the high levels of dependence of the mid-1980s have been reduced. Asia received 37 percent of Saudi crude oil exports in 1981, expanded its share to 68 percent by mid-decade, but with the kingdom's attempts to capture a greater share of the United States market, Asia imported a somewhat reduced 47 percent of Saudi crude oil exports by the early 1990s.
Petroleum Refining Capacity, Production, Consumption, and Exports
Total refining capacity in the kingdom grew from fewer than 700,000 bpd in 1980 to roughly 1.9 million bpd in 1990. The significant capacity expansions during the 1980s were associated with the construction of three refineries: the Petromin/Mobil plant at Yanbu, which added 250,000 bpd; the 250,000 bpd Petromin/Shell plant at Al Jubayl; and the 325,000 bpd refinery at Rabigh. An 80,000-bpd increase to Saudi Arabia's largest refinery at Eas Tanura (530,000-bpd capacity after the increase), completed by 1987, also contributed to the overall increase. Damage to Saudi Arabia's refineries during the Persian Gulf War reduced capacity at Saudi Aramco's Ras Tanura refinery and at the AOC and Getty refineries in the Divided Zone. Total refining capacity during 1991 averaged 1.6 million bpd, but repairs during 1992 helped restore overall refinery capacity to 1.8 million bpd.
Domestic refined output grew steadily with the capacity expansions during the 1980s and early 1990s. Total production of refined petroleum averaged 1.2 million bpd in 1985, growing to more than 1.7 million bpd by 1990, representing an average capacity use of 84 percent in 1985 and 93 percent in 1990. The bulk of refined product output was naphtha and diesel oil; however, output of gasoline and lighter product grades grew more rapidly during the 1980s. This trend indicated both the construction of more sophisticated refineries and the upgrade of existing plants. Nonetheless, Saudi Arabia's refining capacity was of fairly low quality.
Domestic consumption of refined products grew rapidly in the first half of the 1980s. With economic retrenchment, however, consumption growth slowed markedly in the latter half of the 1980s. From 460,000 bpd in 1980, domestic consumption rose to 630,000 bpd by 1985 and stagnated at that level until military consumption during the Persian Gulf War boosted domestic demand to 840,000 bpd during 1991. A fall in consumption to 700,000 bpd was anticipated in 1992. Saudi Arabia became a major exporter of refined products after 1985. From a modest level of exports of 290,000 bpd in 1985, refined product sales reached 734,000 bpd in 1990 before falling to 610,000 bpd as a result of output retained domestically to fuel the foreign forces in the kingdom. A large proportion of exports have been directed to Asian markets, of which Japan alone accounted for one-third of Samarec's overseas sales.
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