Saudi Oil Crown Slipping Away?
By Peter Zeihan
Summary
Attacks against expatriates working in the Saudi Arabian oil
patch have accelerated in tempo and intensity during the past
several months. If this trend is not reversed -- which is not
likely -- Riyadh will slowly fall from its current position as
the kingpin of global energy markets. Oil prices will be both
higher and more volatile, Saudi social stability far less
guaranteed and OPEC less a force to be reckoned with.
Analysis
The Saudi Energy Complex
Like many energy sectors outside the West, the Saudi energy
complex is run by a state monopoly, Saudi Aramco. Locals run most
of the business, but much of the technical work is done by a much
smaller cadre of expatriates who are either directly employed by
Saudi Aramco or work in a consultant-type relationship. In Saudi
Arabia, that "smaller cadre" is a group of approximately 100,000
Japanese and Western workers, about 65,000 of them citizens of
either the United States or the United Kingdom.
Most of our Saudi sources maintain that the Saudis themselves
manage the day-to-day tasks of pumping oil, collecting it for
shipment via pipelines and loading it into tankers. Meanwhile,
the expatriates are the brain trust of Saudi Aramco, handling
most relations with foreign customers, legal matters,
exploration, repairs to critical systems, expansion projects and
other advanced work. The expatriates also are the mechanism
through which new Western technology flows into the kingdom. The
hybridized system is thick with job redundancies because bringing
new expatriates up to speed can take about six months.
Sources within the Saudi Aramco expatriate community indicate
that if they were to depart, production would not suffer in the
short term. Instead, Saudi Aramco's operational efficiency would
plummet, recovery rates would drop and it would become very
difficult to add new fields to its roster of productive assets.
As one energy expert affiliated with another state oil firm in
the developing world put it: Think of the expatriates as the
architects at a construction site. They do not do all the work by
any stretch of the imagination, but should they leave, the
remaining construction workers lack the vision and expertise to
care the project to fruition.
The expatriates employed by or affiliated with Saudi Aramco are
not skittish people by nature. They live and work in a country
whose state religion defines them as the worst sort of infidels.
A large proportion of them are veterans of the days of Desert
Storm, which saw Iraqi missiles landing in and around cities with
high expatriate populations.
The reason is not so much bravery, as benefits. Most expats work
in Saudi Arabia for the money (which is exceedingly good) and the
perks. Educational opportunities abound for the expatriates and
their dependents, the living is lavish and being surrounded by an
exotic culture provides an extra thrill.
These things are not all that attractive if someone is trying to
kill you.
Al-Muqrin's Crusade
Al Qaeda's local military commander, Abdel Aziz al-Muqrin, has
decided to target the expatriates. He has selected his target
well.
First, al-Muqrin's choice is logistical -- and based on more than
the simple fact that the network of fields, pipelines, refineries
and ports that comprise the Saudi energy industry are heavily
guarded. The compounds that the expatriates live and work in are
just as easy to locate as the country's oil assets -- and easier
to access. The compounds are nearly always in populated areas;
most of the oil fields are deep in the deserts of the Arabian
Peninsula. Both the oil infrastructure and the expatriate
compounds are stationary, but the residential compounds are
easier to study without detection in anticipation of an attack.
Second, al-Muqrin is well aware of the average Saudi's attachment
to the country's oil.
Attacking oil assets also attacks the Saudi gravy train -- oil is
the source of more than 90 percent of Saudi Arabia's export
revenues -- which would elicit a far stronger reaction from the
ruling House of Saud and the general population than attacks on
resident "infidels." Saudi sentiment embraces the oil complex as
the property of the people, not simply the House of Saud's
feeding trough. Attacking energy assets would threaten to dull al
Qaeda's reputation locally, just as the Nov. 9, 2003, as did the
attack against Riyadh's al-Muhaya residential compound. That
attack targeted predominately Arab Muslims who happened to work
with Western expatriates, and not the expatriates themselves.
In contrast, attacking expatriates appears to be broadly popular
with the Saudi population. Stratfor sources on both sides of the
issue within the kingdom indicate that there is little love lost
between the expatriates and the government, which has never made
great efforts to integrate the expatriates or make them feel
welcome or secure. There is even less of a connection between
Saudi citizens and the expatriates, who live and work in heavily
guarded compounds.
This separation is al-Muqrin's third rationale for targeting
expatriates.
Nearly all expatriates live in guarded, reinforced, walled
compounds, where they are exempt from the strict Wahhabi laws
that rule Saudi Arabia. Within the walls, alcohol can flow
freely, U.S. cable networks and the Internet are easily
accessible and women act as they do in the West. The Saudis, who
live in one of the world's most socially repressive states, know
-- and resent -- this.
Fourth, attacking expatriates instead of energy infrastructure is
advantageous because it leaves the infrastructure in place. One
of the end goals of al Qaeda is to resurrect the Islamic
caliphate. Osama bin Laden has often referred to Saudi oil as the
birthright of all Muslims; destroying that birthright is not high
on his agenda.
Fifth, Saudi security forces and internal intelligence are not
particularly competent when it comes to guarding expatriates.
Like the Pakistani Inter-Services Intelligence, which remains
shot through with Taliban and al Qaeda sympathizers despite
several purges, U.S. intelligence sources suspect the Saudi
intelligence service is most likely similarly compromised.
In the attacks in Khobar on May 29, the militants only took over
a small portion of the Oasis compound, but the Saudi forces did
not move in to protect the other expatriates. When the final
"rescue" raid occurred, the militants had already left, and three
of the four attackers subsequently were able to escape,
demonstrating at best an inability -- or at worst, refusal -- of
the security forces to act with the expatriates' safety in mind.
In subsequent statements, al-Muqrin has said explicitly that his
groups have received direct cooperation from Saudi security
services. Although the veracity and depth of such connections is
up for discussion and is the subject of ongoing Stratfor
investigations, the immediate point is that al-Muqrin is
advertising the possibility of such cooperation. This will
contribute to the climate of fear, encourage independent anti-
expatriate actions among the Saudis and place enormous pressure
on expatriates to quit the kingdom.
Finally, security at the expatriate compounds is both
insufficient and degrading. The first to leave the country in the
aftermath of the May 1 attacks in Yanbu were dependents and
foreign security personnel assigned to guard the compounds. Such
security guards were -- by dint of Saudi policy -- not allowed to
carry weapons. Stratfor sources living within the compounds
indicate that after attacks on the compounds began, the security
guards simply left the country.
Sources within U.S. intelligence and the expatriate communities
indicate that Riyadh has recruited locals -- mostly from the
Saudi National Guard -- to pick up the slack. Many of these
replacement security personnel are both ideologically sympathetic
to the militants and stationed far from home. The result can be
unmotivated -- or worse -- security at the most sensitive sites.
This has placed a rather anti-expatriate force in a position to
"guard the infidels," as one Saudi Aramco source succinctly said.
Their morale appears low and the amount of effort they put into
securing access to expatriate compounds is minimal, according to
sources living inside the compounds.
The bottom line is: Despite the drastic change in circumstances
since the May 1 Yanbu attack, and particularly since the May 29
Khobar attack, expatriate security is far weaker than it was and
is steadily getting worse.
This does not mean that Islamic militants will not attack fixed
oil assets or that attacks will be limited to expatriates. Far
from it. U.S. diplomatic personal, for example, are and will
remain viable targets in the eyes of militants.
What it does mean is that the bulk of al Qaeda's -- and likely
al-Muqrin's -- efforts will be focused on the people who make
Saudi Aramco go -- the expatriates -- as opposed to Saudi Aramco
itself. Such operations pose lower operational and political risk
to the militants -- and offer the morale boost of cutting down
people they see as interlopers.
Al Qaeda is also all about leverage. It is not that the oil
assets are beyond their reach -- the Sept. 11 attacks proved
nothing is -- but instead that the oil assets are potentially a
future target. Attacks against expatriates are akin to slowly
turning the screws on both Washington and Riyadh, while attacking
the infrastructure directly is a sledgehammer blow that al Qaeda
can only use once.
The primary threat to the facilities is not from al Qaeda, but
from affiliated and copycat groups. These groups might attempt to
take the fight to critical assets such as the trans-Arabian
Peninsula Petroline, which shuttles crude across the country, or
the tanker loading facilities at Yanbu, Ras al-Juaymah or Ras
Turana -- which collectively load all of Saudi Arabia's oil
exports.
The last two are of particular note. Ras Turana is the world's
largest offshore oil loading platform with a throughput capacity
of 5 million barrels per day. Both it and Ras al-Juaymah are in
the Shiite majority regions of Saudi Arabia. Many al Qaeda
sympathizers, such as Abu Musab al-Zarqawi, who is active in
Iraq, have gone out of their way to attack locations of
importance to the Shia.
Such attacks are unlikely to be as coordinated, professional or
effective as al-Muqrin's crusade against the expatriates. Anti-
infrastructure attacks will wreak havoc in the short-term oil
markets even if they are unsuccessful. It is difficult to
underestimate the importance of Saudi oil to the world economy,
and even clumsy and botched attacks will have an impact.
Expat Exodus
Stopgap measures are failing. The expatriates tell us that they
are demanding -- and not receiving -- foreign security. Riyadh is
not allowing the import of armed security workers for two
reasons. First, the House of Saud is sensitive to the fact that
the Islamic world disapproves of the thousands of private
security contract workers operating in Iraq, and does not want to
be put in a position of introducing such forces into the kingdom.
Second, Riyadh fears running gun battles between the former Delta
Force members, Navy Seals, and MI6 agents -- the preferred
backgrounds for security guards -- and Saudi fundamentalists.
These developments would create a more hostile environment -- and
one which al-Muqrin could quite legitimately place at the feet of
the House of Saud.
Many expatriates have been trying to get the U.S. government to
pressure the Saudis to let foreign security into the country, but
since this would just put more Western targets in the kingdom,
the State Department is likely to try and let the matter drop.
Instead, at security briefings in the U.S. Embassy, government
officials are simply warning the expatriates that they "should
get the [expletive deleted] out of here."
After the May 1 Yanbu attack there was a general flood of
dependents out of the kingdom for safety reasons. Khobar took
things to a new level. Unlike Yanbu, where expatriates were
attacked at work, at Khobar they were attacked at home. The
combination of the Saudi non-response and the subsequent failure
to upgrade security has led many expatriates to the (correct)
conclusion that the Saudi security services are either incapable
or unwilling to protect them. It is not helping that the Saudi
state is also engaging in some rather shoddy information
suppression.
Sources within the expatriate community, and the local hospital
and morgue indicate that Khobar fatalities were far in excess of
the 22 reported. A source at the morgue reported receiving 50
fatalities in the immediate aftermath of the attack. Meanwhile,
the attacks continue -- but are largely kept out of the press --
with hostilities registered by our sources in cities such as
Dammam, Khobar, Qasim and Jubail.
The net result, according to an array of sources either within or
associated with Saudi Aramco, is that expatriates are beginning
to leave the kingdom. Some are relocating to more expatriate-
friendly locations such as Kuwait, Qatar and the United Arab
Emirates and then commuting to work via jetliner; but most are
simply leaving. Unlike the dependents or security personnel who
already have left, many of these new departures are career Saudi
Aramco officials with 15 or more years of experience in fields
such as exploration, finance, geology, law, training and project
management. Simply put, these are the people that make Saudi
Aramco go.
Saudi Aramco: Locked Into Decline
At this point there is no reason whatsoever to expect al-Muqrin
and others to change their tactics. With a handful of attacks,
al-Muqrin already has started a steady flow of expatriates from
Saudi Aramco -- without sparking a severe government crackdown or
a general rejection of the militants' ideology by the Saudi
people. Oil prices -- as al-Muqrin has proudly noted -- hit a
non-inflation-adjusted record of $42 a barrel. Al-Muqrin's four-
man teams have proven remarkably successful at achieving their
desired goals, and Saudi Aramco, the Saudi government and the
expatriates themselves seem helpless to turn the tide.
Perhaps the most dangerous implication of this for the oil
markets is that -- barring attacks against actual oil assets --
the immediate effect of an expatriate outflow will be minimal.
Remember that the Saudis are competent in managing the day-to-day
operations of the oil complex. The problem will come down the
line as fields reach maturity, accidents (common when the
operators lack high technical skills) occur and take months to
address and logistics weaken in general.
Like all oil producers, Saudi Aramco must continue to drill new
wells, bring new fields on line and engage in ever more
technically sophisticated recovery techniques to maintain steady
production. The expatriates' departure will not result in an
acute production shutdown, but instead in a slow steady
degradation in capability that will be measured in months and
years.
The recent Venezuelan experience is perhaps the best guide. In
the aftermath of the late 2002, early 2003 strike at Petroleos de
Venezuela (PDVSA), the government of Venezuelan President Hugo
Chavez fired nearly half of the firm's staff. Chavez's purge
resulted in huge holes in technical, managerial and
administrative capabilities that the company has since been
incapable of filling. Daily production and capacity have dropped
to 2.45 million bpd as of May 2004, from just more than 3 million
bpd before the strike, according to the U.S. Energy Information
Administration.
For Saudi Arabia, the result will be that swing production will
gradually disappear. Considering that Saudi Arabia is trying to
bring most of that swing production online, this is a process
that the world might well miss. The next time oil prices dip,
Riyadh's production reduction will likely be disguised as a
reduction in OPEC's official quotas. The world will not know what
Saudi Arabia's true maximum production levels are until the next
bout of high prices.
Life After Saudi Arabia
Stratfor sources associated with a number of oil firms and
finance houses indicate that there is approximately an $8
"terror" premium factored into the price of each barrel of oil.
Between that and the normal tightness in oil markets, there is no
reason to expect crude to drop below $30 a barrel before the end
of the Northern Hemisphere's summer, if then.
The core problem facing the oil markets is that Saudi Arabia's
ability to add new production -- even to replace falling
production at existing fields -- is severely in doubt. Saudi
Arabia's spare capacity is what has made it the center of the oil
world for the past generation.
The example of Venezuela is instructive in other ways. One factor
that helped mitigate the sharp drop in Venezuelan exports during
the PDVSA strike was the rapid increase in exports from OPEC,
particularly from Iraq and Saudi Arabia. These two countries,
along with Kuwait, were able to quickly respond to the Venezuela
crisis, while other OPEC producer countries were not, because
they already were pumping at full capacity.
Should Saudi Arabian production drop off, Venezuela is not in a
position to return the favor, nor can Iraq repeat its
performance, mired as it is in its own problems.
Beyond OPEC, most producers typically pump every drop of crude
they can, leaving no wiggle room. Russia is constrained by
limitations on its export infrastructure; Norway's capacity is
declining; ethnic unrest still plagues Nigeria's delta region;
Mexico's expansion is still constrained by politics. Simply put,
there is no one to step into the breach, should Saudi production
begin to slide off the map.
Without its spare capacity, Saudi Arabia will lack the ability to
act as OPEC's -- and the world's -- swing producer. Normally,
Riyadh tightens its taps when oil prices drop and loosens them as
prices rise. With a national debt in excess of the country's
gross domestic product and slowly degrading production levels,
Riyadh will have no choice but to pump every barrel it can.
Without swing production, the oil market will loose the cushion
that has kept prices relatively stable for the past 23 years,
with price spikes and plunges becoming far more common. No swing
production also means no OPEC for all practical purposes. After
all, if Saudi Arabia, the founder -- and de facto leader -- of
OPEC cannot cut its production from time to time, there will be
little incentive for others to sacrifice their own income.
Should the attacks on expatriates continue, as is extremely
likely, this state of affairs will come about. It is only a
question of time. The world cannot be sure of what Saudi Arabia's
maximum pumping capacity will be in the future until it is
tested, and tests will not come until the global economy
experiences an energy crunch akin to the winter of 1990-1991
(Desert Shield/Desert Storm), the summer of 2000 (the bursting of
the dot.com bubble), the winter of 2002-2003 (Venezuelan crisis),
spring of 2003 (the Iraq war), or the summer of 2004 (the current
economic boom). It will likely be at least a few years until the
world has a clear read on just how far Saudi Arabia can fall.
As the world shifts into the post-OPEC era of volatile prices,
both companies and countries will be forced to stockpile
emergency supplies. This increase -- albeit temporary -- in
demand will disproportionately raise prices for all because there
will be no wiggle room on the supply side.
Of course, the combination of unreliable income and high debt
spells a murky future for the Saudi state itself. The Saudi
social contract is one that is built upon steady subsidization of
all walks of life. As Saudi production has decreased vis-a-vis
the total amount of global oil production -- Saudi production has
been roughly steady since 1980 -- that contract has frayed. While
Saudi production begins to decrease in absolute, as well as
relative, terms, the likelihood of social explosion looms large.
THE STRATFOR WEEKLY
08 June 2004 |
