OIL AND GAS INDUSTRY

Saudi Arabia is the world's most important oil producer. Given its relatively high production levels, accounting for nearly 13 percent of world output and 35 percent of total OPEC output in 1991, and, more significantly, its small domestic needs, the kingdom's dominance of international crude oil markets is unchallenged. Although reluctant to play the role, Saudi Arabia has become the "swing producer," balancing international oil demand and supply. Therefore, within limits, Saudi oil production policies can have a profound impact on international prices. Since the early 1970s, the kingdom has occasionally used this dominance to influence oil prices, usually to further its objectives of sustaining long-term oil consumption and ensuring economic stability in the industrialized world.

The oil sector is the key domestic production sector; oil revenues constituted 73 percent of total budgetary revenues in 1991. Precise statistics for expenditures on sector development were not available but some estimates placed the annual figure at US$5 billion to US$7 billion, or less than 10 percent of total budgetary expenditures. Export oil revenues accruing to Saudi Aramco, a large portion of which is allocated to the budget, accounted for 90 percent of total exports in 1991. Only in the number of jobs was the oil sector relatively unimportant to the economy; the capital-intensive nature of the oil industry required few workers--less than 2 percent of the labor force in the early 1990s.

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.

During the 1980s, the government established, virtually from scratch, a modern industrial sector. The industrialization process had two goals: first, the use of the kingdom's enormous gas production as industrial inputs to produce chemicals and petrochemicals for export and, second, the construction of energy-intensive industries, some for import-substitution purposes and others to meet infrastructural needs. The government also established state-of-the-art industrial cities and facilities to support its industrial program, including those at Al Jubayl and Yanbu.

By the early 1990s, the vast majority of these plants had been completed, and few major expansions were planned. Infrastructure requirements had largely stabilized and were adequate to meet the needs of the population and industry for much of the 1990s. Therefore, the government concentrated on maintenance and on improving productivity and efficiency. Moreover, with the onset of serious budgetary constraints, the government's role in advancing the domestic industrialization process grew more indirect. The government was forcing a number of state-owned industrial institutions to seek financing for their new capacity-expansion programs from nontraditional sources such as domestic and foreign commercial banks, stock markets, and private investors. In an ongoing attempt to encourage more private sector investment in manufacturing, particularly in light industries, local business received incentives in the form of production and consumption subsidies.

In the early 1990s, Saudi Arabia was engaged in five major programs to raise production capacity of crude oil to 10 million bpd by the mid-1990s. The overall plan was originally scheduled for completion in 1998, but accelerated activity in the wake of the gulf crisis and the allocation of additional funds has moved the projected completion date to 1994. The cost of this program has jumped from US$13 billion to between US$17 billion to US$20 billion. The needs associated with the gulf crisis largely entailed activating existing capacity, which lay unused after output fell in the mid-1980s. This requirement involved recommissioning nearly 150 wells and 12 GOSPs. By the end of 1990, that effort yielded total sustainable capacity of 8.8 million bpd. In addition to the war effort, Saudi Aramco has been involved in bringing on-line a number of GOSPs in existing and known areas such as As Saffaniyah, Al Uthmaniyah, and Abqaiq, all in the Eastern Province. Finally, Saudi Aramco began development of its new light crude oil finds in the central region, with the expectation that it could produce 150,000 bpd of Arab Super Light from Al Hawtah field, south of Riyadh. Following Saudi Aramco's mandate to conduct such activities in the entire country, it has begun exploration in nontraditional areas such as the central region and along the Red Sea coast. Prior to the gulf crisis, AOC and Getty Oil had plans to step up their exploration and development activity. These have been revised in light of the damage to existing facilities sustained during the war.