[A-List] US/Saudi tensions: WP special 3

["Michael Keaney" <michael.keaney@xxxxxx>]

Viewing Oil as a Bonding Agent
Saudi Initiative Allowed U.S. Oil Firms' Return

Washington Post
Tuesday, February 12, 2002; Page A11

In September 1998, Crown Prince Abdullah ibn Abdulaziz came to Washington on
his first visit as de facto ruler of the Saudi kingdom. His priority was to
reinvigorate the U.S.-Saudi relationship, which had atrophied since the 1991
Persian Gulf War.

What better way than a return to the bedrock of the Saudi-American
partnership -- oil?

On Sept. 26, Abdullah met at the sprawling McLean residence of the Saudi
ambassador, Prince Bandar bin Sultan, with the senior executives of seven
U.S. oil companies: Exxon, Mobil, Chevron, Texaco, Phillips, Conoco and
Arco. (Exxon and Mobil have since merged; Chevron has bought Texaco and
British Petroleum has absorbed Arco.)

The choice of guests was grounded in history. Chevron's corporate ancestor,
Standard Oil Co. of California, had founded the Arabian-American Oil Co.
(Aramco) in the mid-1930s and subsequently brought in Texaco, Exxon and
Mobil to explore and develop the kingdom's vast oil reservoirs. Then, in
1975, the Saudi government showed the companies the door, nationalizing
their shares in Aramco. Now Abdullah was preparing to invite them back.

The crown prince surprised the oil executives by announcing that the kingdom
would consider proposals for their reinvolvement in its energy sector. Even
access to Saudi Arabia's vast oil and gas fields was a possibility.

"It fit the crown prince's style. He wanted to 'smash the icons' and put his
stamp on the kingdom's new style of rule," said one U.S. oil consultant who
was at the meeting.

Inviting American companies back into Saudi Arabia's oil and gas fields was
politically sensitive, but Abdullah was ready to take the risk. He wanted to
demonstrate his desire to renew a bond with Saudi Arabia's oldest and most
important ally, according to several senior Saudi officials.

"We hope that this will be another indication that the news of the demise of
the relationship between Saudi Arabia and the United States is premature,"
said the Saudi foreign minister, Prince Saud Faisal, in an interview.

For years, the Saudis had sold oil destined for the U.S. market at discounts
amounting to hundreds of millions of dollars annually to protect their place
as primary foreign supplier, and thus to ensure their political influence
and access in Washington.

"America and oil are too strategic to be left for just pure economic
decisions or cost-effectiveness," said Bandar, the Saudi ambassador. "Hence
we go out of our way, sometimes at a cost for prices, to stay the number one
exporter of oil to the United States."

But the Saudi share of U.S. imports fell from 24 percent in 1991 to 14
percent in 1997, while Venezuela's share climbed to 17 percent that year.

It was that reality that spurred Abdullah to consider new strategies to
attract Washington's economic and political interest as his 1998 visit to
the United States approached. Bandar was given the assignment of exploring
possible new initiatives with U.S. oil companies. He proposed that the crown
prince meet with oil industry executives in Washington and invite them to
make proposals for re-entering Saudi Arabia.

After considering a score of multibillion-dollar proposals from U.S. and
European companies, the Saudis announced the eight winners on June 3 of last
year. ExxonMobil, the biggest American bidder, was chosen to lead two of the
three "core ventures," huge projects that would require an initial $20
billion -- and later as much as $100 billion -- in investments to develop
gas fields, transmission lines, gas-fueled electric power plants and
desalinization plants.

The Saudis also accepted proposals from four other U.S. companies --
Phillips, Marathon, Conoco and Occidental -- and from Royal Dutch/Shell,
British Petroleum and France's TotalFinaElf.

"This is a pretty historic departure for Saudi Arabia. It's the first time
since the 1970s they allowed foreign companies back," said Larry Meriage,
spokesman for Occidental. "They have made it clear this is a long-term
partnership."

The announcement last June was supposed to lead to the signing of final
contracts by March of this year, but the negotiations have proved complex
and final deals are still months away, according to oil industry sources.

The Saudi government remains divided on whether these gas deals should be
followed by oil deals in the future. Saud, the Saudi foreign minister, who
heads the special ministerial commission responsible for negotiating the
deals, said his group had rejected allowing foreign companies back into the
oil fields because they would end up taking markets away from Aramco. Other
senior Saudis said they thought oil deals were possible, not least because
of their political appeal.

The gas deal, said one, can "lock in more connection between the two
nations, secure it, and then it gives both leaderships a chance to play
games politically, differ, et cetera, but still tie down [the relationship]
with mutual interest." Future oil deals could be even more effective, he
added.

Adel Jubeir, foreign policy adviser to Abdullah, was more specific: Tens of
billions of dollars in new U.S. investment in the Saudi gas sector, with
more to follow, "will ensure that our relationship with the United States
will be solid for the next 50 years."

-- David B. Ottaway