CONCEIVED by Crown Prince Abdullah, deputy premier and commander of the National Guard, the natural gas initiative is expected to provide a major thrust to industrialization in the energy services sector, with a new organization, based on the lines of the Saudi Arabian Basic Industries Corp. (SABIC), being set up to oversee the development of privately-funded companies manufacturing drilling equipment.
The starting point of this bold scheme, which will see eight multinational oil companies investing some $25 billion over the next five years in power generation, desalination and chemical facilities, is the establishment of a holding company by the Ministry of Petroleum and Mineral Resources. The company will undertake drilling and oil exploration as part of a comprehensive plan to extend support services to the petroleum and energy industries. The holding company, to be capitalized at SR600 million-SR800 million, will remain a government entity, structured along the same lines as SABIC where subsidiaries enter joint ventures with local or overseas partners; but it is the door to anticipated massive private investment, both foreign and local.
Prince Faisal ibn Turki, adviser to the Petroleum Ministry, says there is a definite need for an ancillary body to cater to the needs of the petroleum industry. At present, enormous sums are being spent on importing goods and services required for both the power and petrochemical industries. "By domesticating the money spent on the import of goods and services, the Kingdom could add another engine of growth to its gross national product (GNP). And it is time for the Kingdom’s major industries, private sector as well as government, to take up this challenge," Prince Faisal said at a recent seminar on developing support services in Saudi Arabia. The prince cited a feasibility study by the ministry which established the viability of setting up new factories in the Kingdom to manufacture steel products used by the Kingdom’s industries. These include such items as casings, drill pipes and structural steel products. He said the survey also looked at supplying valves, well heads, pumps and other specialized oil field equipment and energy services.
The opportunities for local manufacturers was highlighted by Saudi Aramco CEO and President Abdullah S. Jumah, when he said that in 2000, some 86 percent of the company’s purchases came from Saudi factories or Saudi importers, with local factories supplying more than $330 million worth of goods. Those opportunities cannot but expand: Saudi Aramco recently announced plans to drill 292 wells in the year ahead at a cost of $1.2 billion. Most of the drilling will be in Ghawar to support Arabian Light Crude production though 48 will be drilled in the Haradh field, 42 in Uthmaniyah, 20 in Qatif, 12 in Hawiyadh and six in the Ain Dar/Shedgum fields.
Although the Kingdom does not presently plan to export gas, the demand within the domestic market is growing rapidly, both as a feedstock for industry, particularly petrochemicals, and because of major expansion plans in gas-fired power generation and water desalination. This was revealed in the November issue of Saudi Review, which featured a special report on the energy services industry to accompany a local seminar entitled the "Role of Support Services in the Saudi Petroleum and Energy Industries."
The objective of the study behind the report, according to Prince Faisal, was to determine the feasibility of a service industry to supply key industrial products competitive with those on the international open market. The study identified four areas: The industry environment at large and the outlook for each product category; demand forecasts for such products in the Middle East; pre-feasibility investment economics; and business risk and investor return outlook in the Kingdom.
For example, the study found that this year’s valve demand in Saudi Arabia alone would be worth some $174 million, up from $121 million in 1998 when the first study was done. Among the study’s findings: "The projections also foresee a rise after 2004 through 2015 due to replacement spending for older valves. This is for Saudi Arabia alone; it does not take into account the Middle East demand for valves, which is estimated to average some $700 million annually over the next 14 years. All this means that construction and replacement cycles for key products should be factored into the long-term investment strategies. The same is true for other Saudi-produced goods."
Apart from the manufacture of energy sector components, analysts also see scope for setting up partnerships between international design contractors and local design firms. The seminar noted: "As soon as a viable contractor is ready, work opportunities become available. Portions of major projects have been specifically set aside in packages to be handled by Saudi construction contractors.
"This has allowed contractors to develop expertise and take on increasingly larger roles. Even when major projects are let as lumpsum/turnkey contracts (LSTK), we often see that the in-Kingdom portion is assigned almost entirely to a Saudi firm as a subcontractor."
Saudi Aramco holds bi-annual construction contractors’ exchange meetings to provide cooperation between the organizations. "Starting in the early 1980s, Aramco entered into a number of contracts with Saudi firms for design services. Although there are still some in-house designers working on maintenance type designs, the design for the vast majority of in-Kingdom project work is now handled by Saudi design contractors under General Engineering Service or GES contracts. The contracts are awarded to qualified firms and work is allocated according to each firm’s capabilities. At present there are 14 GES contractors," the study said. It also mentions that 12 to 14 in-Kingdom LSTK contracts have so far been awarded or are in the pipeline. The approach is to award the contract to an existing contractor with provisions that require it to establish a subcontract for a design with a GES contractor selected from the list of prequalified contractors. These contracts are awarded primarily for buildings and industrial facilities.
Saudi Aramco is thought to be exploring the possibility of bidding work to joint ventures consisting of Saudi design and construction contractors. The goal is to support the development of long-term associations and eventually see the emergence of fully capable new entities that can handle LSTK work on a competitive basis.
Other possibilities of support services for the petroleum and energy industries include information technology as a facilitator of business. According to Dr. Ibrahim S. Mishari, chief information officer at Saudi Aramco, IT solutions that support specific tasks and functions within the upstream segment of the energy chain include exploration, development, seismic technology, geological 3-D visualizations and reservoir management systems. A field-specific solution in the trading/transportation segment, he points out, might include crude supply management with capabilities such as pipeline sensor information being transmitted via satellite for virtually real-time processing.
Field-specific solutions in the downstream portion of the energy chain include supply chain management, tank management, lube plant automation and others.
IT applications also offer many options for investors interested in network connectivity, wireless services — such as radios, mobile phones, pagers and satellite-based solutions to support business. As for specific areas, good potential is seen in surveying, drilling, producing, tanker mooring and loading, plant operations, maintenance and security. Web-based solutions for Intranet services and e-commerce applications are the other strong possibilities for those looking for investment opportunities in the IT sector of the petroleum/energy industry.
All these investments would also provide employment for Saudis. Saad A. Saab, managing director of the Arabian Drilling Company, notes that there has been a gradual shift in the customer base relating to the oil industry. Market projections for the period 2003-2012 indicate that of the estimated $6 billion required for energy-related projects, one-third will be channeled through private developers. He adds that another $7 billion will be needed for smaller projects during the same period. These include oil and gas-related projects involving Saudi Aramco, SABIC and the private sector for power transmission, generation and distribution.
These projects, Saab says, offer immense potential for investors in water distribution and waste water treatment and collection. An outlay of $10 billion is anticipated in major projects, thus providing investment opportunities for the private sector in water distribution and waste water treatment/collection. With the Kingdom’s population growing annually at 3.5 percent, the ever-burgeoning needs of the energy and water desalination sectors brim with investment opportunities.