The Saudi Approach to Directing Foreign Oil Investment and its Effect on Saudi Economic Development and the Oil Market

Abstract

Oil is the world's most important source of energy. Saudi Arabia, through its national oil company Aramco, is the world's largest oil producer. Saudi Arabia depends on oil to finance its budget and to develop its infrastructure. But the Saudi government has a flawed approach to investing in oil nationally and internationally.

Nationally, the Saudi government still views oil as key to its sovereignty. That view is appropriate to a certain extent. But since the Saudi government bought the last foreign owned share of Aramco in the late 1970s, it has focused on a policy that gives Aramco the exclusive control of oil exploration and development in Saudi Arabia. Internationally, Aramco has engaged in downstream transactions world-wide, such as supply and distribution, but has never engaged outside its home country in exploration, drilling, or producing oil.

The world oil market has changed rapidly over the last two decades. New players have entered with great capacity for oil production. The Saudi government has not accustomed itself to the fact that new rich oilfields have been developed outside Saudi Arabia. In the long run, supply competition, particularly from Russia and the countries of the former Soviet Union, might cause Saudi Arabia to lose its preeminence in the oil market. Such competition has the potential to deprive the Saudi economy of capital investment it needs to overcome its social, economic and political challenges. The Saudi government needs to reevaluate its foreign-investment law regarding exploring, drilling, and producing oil and gas. The best long-term economic interest of the Saudi government is to revise its current policy in response to changes in the world's oil markets. First, Saudi Arabia should open its upstream oil sector to investment by international oil companies. To do so, it will need to regulate the domestic oil market and to relinquish part of its interest in Aramco. The Saudi government must retain a controlling interest in Aramco because oil is the government's only financial resource. The Saudi government should permit some foreign ownership, however, as well as partial administrative control over the corporation. Alternatively, the Saudi government could create domestic joint ventures in Saudi Arabia with international oil companies.

Foreign ownership and involvement in management of oil production in Saudi Arabia would bring corporate transparency, enhance the market economically and result in a more skilled and productive domestic labor force. It should also increase the stability of the Saudi regime, because international oil companies, which have a great influence on their home governments, would support existing government to protect their interests.

Second, Aramco should expand its international activities to include joint ventures for upstream production and exploration in other countries. Aramco's international expansion would marshal the interests of Aramco's partners and the host countries behind Aramco's economic stability and Saudi Arabia's political stability. Doing business in other markets should enhance Aramco's efficiency over the long term. Also, Aramco's internationalization would diversify Aramco's economic interests; Aramco will be partly shielded from any particular market's downturn as a result of political or economic changes. This approach, too, would present challenges. Aramco would need to engage national players who know their local markets. A detailed and comprehensive legal framework will be required for the joint ventures. Finally, trade barriers could cost the companies more than any benefit that may be gained from the joint venture. Antitrust fears will force a balancing of the joint venture on one hand and a potential monopoly by the major companies on the other. But these problems can be solved.

Subject Area

Law

Degree Date

2005

Document Type

Dissertation

Degree Name

S.J.D.

Department

Dedman School of Law

Advisor

Joseph J. Norton

Second Advisor

John S. Lowe

Third Advisor

Owen L. Anderson

Number of Pages

viii, 217

Creative Commons License

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License

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