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The Guardian: Boom fuels new Saudi spending spree

Terry Macalister of The Guardian 

Terry Macalister

Annual revenues of $165bn are funding six new cities to create jobs – but can it last?
 
Terry Macalister
Wednesday November 28 2007

As the tiny ball of burning crimson drops behind the sand dunes it leaves a dark, almost silent landscape worthy of its name: Rub’ al-Khali, the Empty Quarter.

No sooner has the sun gone down than a long necklace of golden lights flickers on in the valley below and the improbable sound of an Islamic preacher can be heard calling the faithful to prayer.

This Saudi Arabian desert is one of the most isolated places in the world but it is also home to a huge oil production plant and the 700 staff needed to run it.

Hussain al-Obaid, a slightly greying petroleum engineer, has been watching the same “son et lumiere” since 1994 when his employer, the state-owned Saudi Aramco, started to pump oil out of the ground. “I can think of no better place to work,” he says and smiles.

The Shaybah facility in the south-west corner of the country is not so much oilfield as gold mine. It pumps 500,000 barrels of high quality crude a day, each barrel currently worth not far off $100. That is $50m (£24m) every 24 hours, all produced by al-Obaid and his other “family” members – as he calls his colleagues. They are already helping to drill more wells so they can crank output up to 750,000 barrels a day by the end of next year.

If the planners back at headquarters in Dhahran get their way, Shaybah will eventually be producing 1m barrels a day of this top quality Arab crude.

The soaring oil price has meant Saudi export revenues have more than tripled over the past six years. They are expected to reach $165bn this year.

Upgrading this Empty Quarter facility is one of a number of schemes to raise Saudi output from 11m barrels a day, already 13% of the world’s total and 30% of Opec’s, to 12.5m by the end of 2009. The eventual target is 15m barrels a day. Foreign firms, including Shell, France’s Total and China’s Sinopec, have been given unprecedented access to explore for gas in the hope that new supplies will feed industrial production and help conserve the oil. Saudi Aramco has also signed joint ventures with Total and America’s ConocoPhilips to establish refineries on the east and west coasts to boost exports of oil products.

The exact volume of crude that could be tapped in future is a matter of conjecture. Although the country claims to have 260bn barrels of reserves, many western sceptics feel these numbers are unreliable. They are often the same people who fear the world is past “peak production” and on its way to running out.

Whether it is because the oil is going to run out soon or because it makes sense to diversify an economy that is based almost entirely on one commodity, the Saudi ruling family is spreading its spending around.

Much of the country’s oil windfall is going abroad, with the Saudi Arabian Monetary Agency investing more than $4bn a month mainly in government bonds issued by the G7 western nations. It owns $265bn of foreign debt.

State-owned Saudi companies have also been flexing their muscles abroad this year. Saudi Basic Industries bought General Electric’s plastics business for $11.6bn, Saad Investment Company took a 3% stake in HSBC bank for $6.6bn and Saudi Telecom bought a 25% stake in Malaysia’s mobile phone group Maxis for $3bn.

Enormous amounts of Saudi money are to be poured into six new “economic cities” dotted around the country, which will, crucially, create jobs.

Reliable statistics are hard to come by but external political commentators believe the jobless figure could be as high as 20%, potentially leaving the young Saudi jobless susceptible to extremist Islamist agitators.

The largest construction project is King Abdullah Economic City, or KAEC, on the coast between the cities of Mecca and Jeddah, which is designed to cover 168 sq km, create 1m new jobs and become home to 2 million residents.

The scheme was envisaged to cost $26bn and take two decades to build. The government has decided to fast-track the project for 2016 and the latest projections for all six city schemes suggest the cost could reach $111bn, driven up by competition for raw materials from construction hotspots such as Dubai and China.

The port alone at KAEC will cover 14 sq km and will be the fifth biggest container port in the world.

The second of the six schemes is to be Knowledge Economic City in the Madinah area at a cost of $6.7bn and with a target to create 20,000 jobs. There will be an IT institute and a centre for Islamic studies, this being the birthplace of the prophet Muhammad.

A third development, the Prince Abdulaziz Mousaed Economic City in Hail, is to be the Gulf’s biggest agricultural hub.

These huge projects seem to echo the 1970s oil price boom, when the industrial cities of Jubail and Yanbu were created out of the desert and rich Arabs bought up swaths of Mayfair.

Allegations in London court documents that the Saudi ambassador to Britain spent £3m on an array of luxuries including two top-of-the-range Chevrolet 4x4s, a thermal night vision kit for his Hummer H2, dozens of designer watches and one takeaway meal costing almost £400 have also brought back memories of excess.

The future of such spending depends on whether $100 oil is here to stay and whether Saudi Arabia really has those 260bn barrels of reserves.

Back in the shadows of the Shaybah evening, Al-Obaid is in no doubt there is oil and gas to be found: “We have huge areas that have not been looked at.”

http://www.guardian.co.uk/business/2007/nov/28/oil

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