Wednesday, Dec 12, 2007

 
   (From THE WALL STREET JOURNAL)  
   By Neil King Jr. 

RIYADH, Saudi Arabia -- Long the biggest spigot for crude oil, Saudi Arabia now has broader ambitions. It wants to become a big exporter of chemicals, aluminum and plastic, and in the process to create jobs.

So Saudi Arabia is on a building binge. In the works are new seaports, an extended railroad system, a series of new industrial cities and a score of refineries, power stations and smelters. Over the next dozen years, such Saudi investments are expected to consume $600 billion.

But they'll also consume something else: large quantities of Saudi oil -- oil that otherwise could help slake other countries' growing thirst.

Much as China leveraged its asset of cheap labor to make an industrial leap, the Saudis and their oil-rich neighbors are tapping their own prime asset to fuel development. "The region is looking to the future by turning to industries that rely on oil, a lot of oil," says John Sfakianakis, chief economist at Saudi investment bankSaudi investment bank SABB, an affiliate of HSBC. "That means more oil stays here."

The problem is that with output slumping in places like the North Sea and Mexico, the world is counting on increased oil supplies from the Middle East, and above all from Saudi Arabia. Global oil demand, now just over 85 million barrels a day, is expected to exceed 100 million barrels a day within 10 years. So the question arises: Can the kingdom continue to satisfy the world's growing oil needs at the same time as its own economic engine demands ever more crude?

Within Saudi Arabia, there's heated debate over the wisdom of staking development on industries that use so much energy. A big aluminum smelter being built on the Persian Gulf coast, for instance, will consume upwards of 60,000 barrels of oil a day -- because the Saudis are turning to crude oil to make electricity. Yet the smelter will create fewer than 10,000 jobs.

Some boosters want to build 10 smelters. They'd devour nearly 7% of the Saudis' current oil production.

Abdallah Dabbagh is a proponent of the industrialization push, as head of Saudi Arabian Mining CoSaudi Arabian Mining Co., which is building the east coast smelter. Yet even he says, "I think the Saudi government will have to stop and think at some point if this is the best utilization of Saudi's crude."

The Saudi industrial leap, which is mirrored in neighboring states like Qatar, Bahrain and the United Arab Emirates, has helped make the Middle East one of the world's fastest-growing consumers of oil. Saudi Arabia last year used more than two million barrels a day, up 6.2% from 2005, at a time when Saudi oil production actually slumped by 2.3%. The whole of the region saw its demand jump 3.5%, while total world demand was growing just 0.7%.

Saudis also are guzzling oil in more traditional ways. They're clogging highways with shiny Hummers and Chevy Suburbans. Saudis are now the world's biggest oil consumers per capita, at more than 32 barrels a year per person. That's twice the rate of South Korea and well ahead of the U.S., which consumes 25 barrels a year per person.

The result is that 22 barrels of every 100 the Saudis produce stay at home, compared with under 16 of 100 seven years ago. Forecasts from the U.S. Energy Department and the International Energy Agency say that by 2020, Saudi Arabia will be consuming more than a third of its own oil -- leaving a lesser share for American cars, Indian airliners and Chinese factories.

The Middle East remains awash in oil, with more than 60% of the world's proven reserves. Saudi Arabia says it has 264 billion barrels, which would be enough to supply the entire world's needs, at today's rate of demand, for almost nine years.

But bringing fresh batches of oil to market has become harder, even here. Average daily output in the kingdom, at just over nine million barrels, is almost identical to what it was 10 years ago, or, for that matter, 30. As some wells decline, the Saudis must bring on line an additional 600,000 barrels a day in production capacity each year, according to various estimates.

Their maximum capacity is about 10.8 million barrels a day. They're aiming to lift that to 12.5 million by 2009. A large chunk of the new capacity, some 250,000 barrels a day, is to come from a three-year expansion under way at the big Shaybah field, on the edge of a vast sand-dune region known as Rub al Khali, or the Empty Quarter.

Many of these extra barrels will never leave the Middle East. A Lehman Brothers report predicts that oil needs in Saudi Arabia, Kuwait, the UAE, Qatar and Bahrain will jump by almost 200,000 barrels a day next year alone.

Saudi leaders had a different model in mind when they launched their bid to remake their economy a decade ago. The plan was to fuel the industrial boom -- from new power stations to petrochemical plants -- with fresh stocks of natural gas. Saudi Arabia is thought to sit on the world's fourth-largest gas reserves, after Russia, Iran and Qatar. Geologists spent years in the mid-1990s identifying deep pockets of gas below giant oil fields.

But AramcoAramco has been slow in bringing this gas on line. Saudi Arabia broke with longstanding practice starting in 2003 by signing deals with foreign oil companies to prospect for gas in the Empty Quarter. Despite more than $1 billion spent, the companies haven't found commercial quantities of gas.

So the Saudis switched course. Last year, King Abdullah mandated that crude oil be used to fire nearly all of the kingdom's soaring electricity needs. Natural gas, the government said, would be reserved increasingly for the booming petrochemical sector.

Perhaps no one is more daunted by the kingdom's mounting thirst for energy than Ali Saleh al-Barrak, the soft-spoken head of Saudi Electricity CoSaudi Electricity Co. From his 22nd-story corner office in Riyadh, he gazes across a tangle of cranes and skyscrapers to the city's widening sprawl. What he sees "is more people, which means more houses, which means more appliances and more air conditioning."

Thirty years ago, Saudi Arabia had fewer than eight million people. Now it has over 24 million. In 2000, the national power company had capacity to generate 21,000 megawatts of power. That's now up to 31,000. Over seven years, Mr. Barrak says, the company will have to build six huge power plants to raise generating capacity to 55,000 megawatts -- roughly that of the far more industrialized United Kingdom. "By any standard, that is an unnatural growth rate," he laments.

Saudis consume vast quantities of electricity because the government holds the price unusually low to keep the populace happy, as it does with gasoline. Nearly two-thirds of power goes to air conditioning. Saudis routinely keep their air-conditioners on full blast even when on vacation. The average Saudi power bill, Mr. Barrak says, weighs in at one-fifth the cheapest tab in the U.S. "You try getting people to conserve at that cost," he says. "It's impossible."

Even oil-rich countries normally scramble to avoid burning oil in their power plants, because oil is so easily sold and transported on the international market, while gas isn't. But Mr. Barrak estimates that by 2012, petroleum will fire nearly 60% of Saudi's mounting electricity needs.

This has made him a vocal proponent of nuclear power. That's a notion gaining momentum across the Middle East as countries wrestle with the wisdom of burning oil to generate power to make cement or cool offices. "Nuclear is definitely the future," Mr. Barrak says. "Future generations are going to think we were stupid to burn oil for power when we could have done it by other means."

The natural-gas crunch is creating bizarre scenarios in the region. Cement makers in the UAE, lacking sufficient gas this summer, began firing their furnaces with South African coal. Building booms in the UAE and Oman have led both states to turn to Qatar for extra gas. Bahrain, home to a gigantic aluminum smelter that drains more than a third of the country's electricity supply, is relying increasingly on Saudi oil for its refineries.

Saudi Arabia, however, faces a more immediate challenge. Oil has given it great wealth, with an expected budget surplus of nearly $48 billion this year. What oil hasn't done is create many jobs -- at least of the nonmenial variety that Saudi men will accept. Official unemployment runs over 12%, and some economists say the real figure, particularly among the kingdom's restive youth, is at least twice as high. For the ruling royal family, boosting employment and revamping education to put more emphasis on practical job skills are seen as key to Saudi Arabia's long-term stability.

The government's aim is to convert oil into jobs. "We want to use our oil to move beyond oil," says Fahd al-Rasheed, a former AramcoAramco finance officer. As deputy director of the Saudi Arabia General Investment AuthoritySaudi Arabia General Investment Authority, he is championing the creation of four new economic cities.

The goal of the cities plan is to create 1.3 million jobs over a dozen years. The projects are at the heart of an investment push with an even higher employment goal: more than four million jobs, to be created at a cost of over $600 billion. "We want to create jobs. That's what the whole plan is about," Mr. Rasheed says.

The first of the new cities, the King Abdullah Economic City, is being built along a barren strip of Red Sea coastline about an hour's drive north of Jidda. For now, it's little more than an ornate stone entryway opening onto a network of roads lined by tall palm trees, with the Red Sea shimmering in the distance. Mr. Rasheed insists the city will open, at least in skeletal form, by early 2009. The king, he notes, "wouldn't have given his name to something that isn't going to happen."

The plans are nothing if not ambitious. The residential area will feature 108,000 apartments and 14,000 villas scattered in enclaves surrounded by factories. Construction is under way on a seaport, billed as the biggest on the Red Sea. Also in the works is a rail line to carry freight from the new port some 900 miles across the desert to a Persian Gulf port, Dammam.

(MORE TO FOLLOW) Dow Jones Newswires

December 11, 2007 23:06 ET (04:06 GMT)

Wednesday, Dec 12, 2007

A 3,000-megawatt power plant will provide electricity for King Abdullah Economic City. The plant will burn oil.

The government has broken ground on a similar city about 500 miles to the south, at the port of Jazan. There, the emphasis will be on heavy industries such as petrochemicals, copper refining and aluminum smelting, all big huge consumers of energy.

Aluminum Corp. of China Ltd. has signed a $3 billion deal with a Saudi consortium to build one of the region's largest aluminum smelters at the Jazan economic city. The smelter's proposed $2 billion power plant, by one estimate, could require more than 70,000 barrels a day of crude oil.

The country's mining giant, called Ma'aden, recently plunged into a vast mining enterprise deep in the northern interior. Ma'aden's Mr. Dabbagh, standing in front of a big map of the kingdom in his Riyadh office, traces how a new railroad line under construction will bring tons of bauxite, phosphates and magnesite from the mine to the Persian Gulf city of Ras az Zwar. "Here," he says, jabbing the map, "we are going to have the largest sulfuric-acid plant in the world, the largest phosphoric plant and the largest ammonium plant." The factories, he says, "will make Saudi Arabia a major player in fertilizer in the same way we are already a major player in energy."

The coup de grace is the $7.6 billion aluminum smelter, which Ma'aden is building in partnership with Rio Tinto Alcan, a unit of Rio Tinto Group. The smelter will mark Saudi Arabia's first plunge into one of the most energy-intensive industries, with others sure to follow. And similar smelting projects are in the works for the UAE, Qatar and Oman.

"Eventually," Mr. Dabbagh says, "everybody is going to come to the Gulf to make aluminum because this is where the energy is."

(END) Dow Jones Newswires

December 11, 2007 23:06 ET (04:06 GMT)