EDITOR'S NOTE:

This article originally appeared in the Middle East Economic Survey on December 6, 2004 and is reprinted here with permission.

Saudi Arabia: Economic, Oil And Mineral Restructuring And Reforms By Ali Naimi

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The following is the text of the speech delivered by Mr. Naimi, the Saudi Minister of Petroleum and Mineral Resources, at the Royal Institute of International Affairs (Chatham House), London, 29 November.   

Now is an especially opportune time to focus our attention on such issues as the economy of the Middle East, the roads to growth, and the role that hydrocarbons and the national oil companies play in the overall outlook for prosperity and growth in our region. And I can't think of a better venue than here at Chatham House to give these matters the thoughtful analysis and discussion they deserve.

Even though our conference considers the entire region, I want to talk mainly about my country, Saudi Arabia, a preeminent economic power in the region, with an economy that ranks among the top 25 largest economies in the world. Saudi Arabia accounts for fully one fifth of the GDP of the entire Middle East, including Turkey. Whatever takes place in Saudi Arabia has an enormous effect on the region and, to some extent, the global economy as well. Equally important for the future of the region, Saudi Arabia has seen a remarkable resurgence of investors confidence in the last five years, a fact which has not been sufficiently noted outside the region.

Currently the Saudi economy is charging ahead with robust GDP growth of more than 7% this year and a stock market that has increased almost three-fold on both share prices and volume traded over the last two years. In fact, with share-price growing steadily, the Saudi stock market now ranks 11^th in the world by share trading value. These gains, it should be noted, are attributed to corporate fundamentals rather than speculation. Both national and international investments have been rapidly increasing in all sectors of the economy, especially the industrial and services sectors.

Besides oil, gas, petrochemical and mineral industries, other sectors such as electricity, real estate, water desalination, communication, transportation, and the banking, insurance and financial services are all experiencing vigorous growth. At the same time exports are increasing rapidly. For example, the value of non-oil exports increased by more than 25% last year and the increase this year is expected to be higher.

This robust growth is based on two important factors. First, the oil-price increases and higher Saudi oil production during this year and last year. Second, and of even more strategic importance, are the economic reforms launched by HRH Crown Prince 'Abd Allah which started five years ago.

In addition to restructuring some government agencies such as water, electricity, labor, trade and industries, there have been many other steps already taken to advance the reform process. These include, for example, the establishment of the Supreme Economic Council in August 1999, the establishment of the Saudi Arabian General Investment Authority in April 2000 to facilitate foreign direct investment, the creation of the Saudi Telecommunication and Information Technology Authority in 2000 and the establishment of the Capital Market Authority in June 2003. Reform initiatives also include a host of new investor-friendly laws and strategies such as the Foreign Investment Act of April 2000, the Telecommunication Law of May 2000 which paved the way for the privatization and opening up of this important sector, the Capital Market Law of June 2003 which provides the legislative, institutional and regulatory framework for capital markets, the Insurance Law of July 2003, the Corporate Tax Law of January 2004, and the Privatizations Strategy of June 2002.

These reforms have created an atmosphere of improved efficiency, greater transparency, reduced governmental regulation, more opportunities for foreign investment, and significant emphasis on the highest ethical and business standards. This has resulted in major strides along our path toward stronger economic performance and enhanced our ability to increase domestic and international investments.

To illustrate the scope of investment activity, allow me to mention some of the recent projects and reforms in our hydrocarbon and mineral sectors. The Kingdom allocated new feedstock for 24 additional petrochemical and utility projects with a total investment of $30bn. These additional projects will produce 20mn metric tons of petrochemicals yearly, 3,600 mw of power, 250mn gallons of desalinated water per day plus 2.6mn t/y of steel with startups by 2006 through 2010. By the year 2010, Saudi Arabia's total petrochemical production will be about 70mn metric tons.

As you know, we have opened the upstream gas sector to international investors last year. The government is restructuring its investment sector to encourage the inflow of foreign capital. To accomplish this objective the gas supply and pricing regulations together with the Rules for Implementations were issued. The goal is to regulate all the various stages of this vital sector and to guarantee investor�s and producer's rights. A dedicated tax code was also issued which applied exclusively to natural gas investors with the objective of encouraging investments. The tax code allows the investor to make attractive returns and bring equitable revenue to the Kingdom. As part of that initiative, four major exploration areas have been awarded to international companies in a highly transparent manner. These companies have already commenced their exploration activities. The opening of the upstream natural gas business to international investment is also expected to lead to further expansion of petrochemical industries in Saudi Arabia. Total natural gas processing capacity had doubled in recent years and now amounts to about 7.5bn cfd of processed sales gas. The demand for natural gas in power generation, as industrial fuel and feedstock, and for water desalination projects is expected to grow at around 4% annually. By the year 2025 Saudi Arabia will need between 12 to 14bn cfd of gas to meet the growing demand.

On the oil side, this year we developed the Qatif and Abu Sa'fah fields, which brought on-stream production of some 800,000 b/d. These mega-projects were completed ahead of schedule and increased our total production capacity from 10.5 to 11.0mn b/d, net of natural decline elsewhere.

We have also recently developed plants to increase gradually Saudi Arabia's sustainable production capacity to 12.5mn b/d. These plans call for a substantial amount of work in both new and old oilfields over the next few years. Fields and reservoirs for the expansion program have already been identified. The decision to invest in added production capacity on this scale reflects our belief that demand for Saudi oil will continue to increase through the coming years. It also demonstrates our desire, at the same time, to maintain a reasonable spare capacity of no less than 1.5mn b/d. As in the past, the spare capacity helps assure the continuity of stable oil markets by making more oil available in times of supply dislocations or any unusual surge in demand.

For the longer term, scenarios to raise the capacity to 15mn b/d have also been studied and can be set in motion if the global demand requires it.

Looking beyond upstream oil activities, Saudi Arabia is placing greater emphasis on utilizing its hydrocarbon resources to create higher value products and to help accelerate industrial growth and create more jobs. Consistent with this policy, a world class downstream project is being undertaken at Rabigh Refinery on the Kingdom's Red Sea Coast. A memorandum of understanding (MOU) was recently signed between Sumitomo of Japan and Saudi Aramco to transform this basic refinery into an integrated refinery and massive petrochemical complex producing both high-end refined products and petrochemicals. Investments in this project will total more than $4bn and we expect this project to be completed before the end of the decade.

We are also encouraging downstream conversion as well as service industries to cluster around these mega projects, thus adding even more value and creating jobs. Such industrial clusters could be repeated at other major refining centers across the Kingdom.

Along with growing the petrochemical industries, which utilize Saudi Arabia's hydrocarbon resources, we are also welcoming new national and international investments in the Kingdom's refining business. We encourage investors to build new refineries on either the East or West coast and offer any needed assistance, including full access to steady oil supply at international market prices.

On the mineral side, much is being done by the Saudi Arabian Mining Company (Ma'aden), which has been taking the leading role in the development of Saudi Arabia's mineral resources. Its paid-up capital amounts to over $1bn, and it is involved in mining precious metals, basic metals, and industrial minerals such as phosphate and bauxite. Furthermore, and as part of our economic reform, we established the Saudi Geological Survey four years ago to provide detailed information about the mineral wealth in Saudi Arabia and just three months ago the Saudi Council of Ministers passed the new Mining Code, which is based on comprehensive studies of the experience of other countries and their mining codes. Besides being comprehensive, the new code provides for transparency and will encourage investment in minerals with clear and specific rules and regulations. We expect nothing less than a big boom in this area as national and international investment flows into the sector, where the expected growth rate will be between 8% to 10% annually.

Early next year we will open the bidding for construction of a new railroad linking the far North of Saudi Arabia to Riyadh and the Gulf area, a 1,500 km project to cost about $1.5bn. This project and other related projects will make major contributions to Saudi Arabia's economy. They will utilize the massive phosphate and bauxite deposits in the North of the country along with our abundant resources of oil, gas and sulfur to create new industries. The expected investments in these mineral projects will total some $7bn. To support these projects we have already started construction work on a brand-new industrial zone at Ras Al-Zawr located north of Jubail on the Arabian Gulf. By the end of the decade, Saudi Arabia will become one of the world's leading producers of phosphate fertilizers, alumina and aluminum.

I would like now to discuss the role of national oil companies and their contributions to both the hydrocarbon industry and the national economies at large. Today one-half of the world's top 50 oil companies are fully or majority-owned government enterprises, and together they hold more than 70% of the world's proven oil reserves. Moreover, their combined oil production provides about 50% of the total global oil consumption.

Saudi Aramco, the national oil company of Saudi Arabia, is a true example of the capability of national oil companies to provide the world with the needed oil. Its performance during the last two decades speaks volumes. Saudi Aramco was able to increase production after the Iraq invasion in Kuwait in August 1990, from 5.4mn b/d to 8.6mn b/d within three months. It was able to advance its production capacity on a sustainable basis from 7 to 10mn b/d during the first half of the 1990s, a permanent increase of some 3mn b/d, all the while finding new reserves to replace its production.

The company regularly develops and brings onstream major new crude oil increments such as the Arabian Super Light crude from fields south of Riyadh and the massive Shaybah field in the Kingdom's Empty Quarter with its 500,000 b/d production increments. As mentioned before, the Qatif and Abu Sa'fah development brought 800,000 b/d onstream and allowed Saudi Arabia to advance its production capacity to 11mn b/d level.

Saudi Aramco's success goes beyond adding oil reserves and increasing production. The national oil company of Saudi Arabia is also deep into refining joint ventures all over the world -- North America, Europe and Asia -- and with more to come. It has built a major tanker fleet able to carry a large portion of our crude and products to markets around the globe.

I will try to be brief with just this additional note on the company's gas program which has added 54 tcf to our non-associated gas reserves in the past decade alone, more than doubling proven non-associated gas reserves to 97 tcf and bringing the total gas resource base to 235 tcf. These gas reserves are the fourth largest in the world. We have also more than doubled our marketed gas capacity to 7.5bn cfd within the past five years, with our per capita gas consumption among the highest in the world.

I have said all this to give you the necessary comfort that our oil and gas resources are in good hands and to make a point about the role that oil and gas plays in the economy of Saudi Arabia. The story goes well beyond generating a revenue stream from the Kingdom's hydrocarbon resources to benefit the nation. I have already cited examples of mega-projects to grow the industries which will drive economic development in all parts of the Kingdom. The comparative advantage we have is abundant, low-cost hydrocarbon resources to drive other energy-intensive businesses such as metals smelting, steel-rolling and many others.

In sum, national oil companies such as Saudi Aramco are major sources of revenue for the national economy and for the government. They are providers of all types of energy for local and international markets -- energy which, in turn, is one of the main engines of economic growth. They are also making major contributions to national economies through increasing industrialization and diversification of the economy. National oil companies are also taking a leading role in human development and the transfer of technologies.

Before I conclude, I would like to mention that today some people are wondering if the current high oil-price situation will cause us to slow down the pace of reform and diversification of our economy and simply enjoy the extra income. I must say that the answer to this is a resounding. NO! We have had considerable experience riding the oil-price rollercoaster for many years and know fully well the importance of expanding and diversifying the economy.

The outlook for economic reform and restructuring is more promising than at any time in the past. In this context, I would be remiss if I did not highlight a related area which is receiving special attention: it involves the nurturing of our human resources through intensive programs of education and training. We intend to grow the Saudi professional workforce which we will need for the future. Therefore, we will increase the capacity by more than 250% vocational centers and colleges during the next seven years.

Another indication of the structural reform underway is the ongoing privatization of government-owned enterprises and equity investments through public share offerings. The total number of such offerings through the Saudi stock market will show a continuous increase over the coming years.

Certainly we intend to make maximum use of additional revenues coming our way to make major improvements in infrastructure, particularly transportation, and to promote the widespread growth of small and medium size businesses in all parts of the Kingdom. The government has already allocated about $11bn this year to projects such as healthcare, education and housing.

Let me conclude my remarks now by restating that Saudi Arabia and its economy are vastly more dynamic than is generally known or appreciated. We live in a very competitive world and have consistently worked on keeping both our country and our economy healthy and fit. There is no better example of this fitness than our petroleum policy and the industries which carry it out.