It's Good to be King

Saudi King Abdullah bin Abdulaziz Al Saud and his 30 plus wives

It's Good to be King

By Cathy Donelson, 2015

It’s good to be the king.

And it is especially rewarding to be an absolute monarch in Saudi Arabia, where the state-owned oil company has made the potentates and princes rich beyond belief. Saudi Aramco reigns as king of the global oil pool and has been pumping 9.5 million barrels per day (bpd).

President Barack Obama is embarking on a diplomatic visit to the Saudi Kingdom at an interesting time in the history of the two allies. For the first time in decades, Saudi Arabia no longer has America over the barrel.

The company has been the kingpin of world oil production for decades since striking it rich in the desert more than 60 years ago. "This makes us a power to be reckoned with both by producing and consuming countries,” former Saudi oil minister Sheik Ahmed Zaki Yamini once observed.

“To ruin the other countries of the OPEC, all we have to do is produce to our full capacity; to ruin the consumer countries, we only have to reduce our production," he boasted.

That was back in the day when the Shah was still on the throne in Iran and the VIPs in the civilized Western world were kissing up to the Saudis for their oil. Since then there have been radical changes in planetary oil production, consumption and trade, but Saudi Aramco has remained on top, providing one out of every seven barrels of oil produced around the world.

“We are the predominant economic force in Saudi Arabia,” says Aramco CEO Khalid A. Al-Falih, in a world-class understatement. Aramco is valued, conservatively, at some US$10 trillion.

Aramco is worth more than the annual GDP (gross domestic product) of any nation on Earth with the exception of the United States of America, which has the world’s highest national GDP, close to $15.8 trillion.

China is next with a fast-growing GDP of $8.2 trillion at last public count in 2012. China has 1.35 billion people while Saudi Arabia has fewer than 30 million. And of those nearly 30,000 are princes of the House of Saud government, which owns all the kingdom’s oil.

“We’ve produced more oil in our history than any other company on the planet,” said on a visit to California where he once lived and where Aramco had its beginnings in Standard Oil of California.

In 1933 SoCal got a concession to explore for oil in an area of Saudi Arabia that was mostly a sandy wilderness with no resources, roads, agriculture or electricity, and sparsely populated by nomadic Bedouin tribes. The Bedu, meaning “desert inhabitant,” moved from oasis-to-oasis seeking good water.

Americans were on the move too, migrating from family farms by the hundreds of thousands with the sands of the Dust Bowl, caused by drought and erosion, shifting them out of the Midwest. And they left in their Model T Fords. By the end of the prosperous and sophisticated Roaring Twenties most American households had a car or truck manufactured by automobile legend Henry Ford.

In 1933 President Franklin Delano Roosevelt was inaugurated in the wake of the Great Depression triggered by the stock market Crash of ‘29. The world’s financial markets were tanking due to the massive window-jumping failures of Wall Street.

For the first time the U.S. public was feeling the widespread pain of the deprivations faced by other nations. All of a sudden, there were no jobs, but years of the worst and longest economic downturn anyone living remembers did not slow American drivers.

They developed an unquenchable thirst for gasoline, along with the rest of the world. Texas wildcatters had hit the famed Spindletop gusher that gave rise to several big present day oil companies. As the world’s most productive field, it ignited a boom that made the U.S. the leading oil producer.

By the mid-1930s Spindletop had run dry, but motorists needed more gas in the new automobile age. After four years of prospecting, American geologists found the mother of all wells in Saudi Arabia in 1938. Called Lucky 7, it gave rise to Aramco.

That luck led to the discovery of the Ghawar oil field, the world’s most productive, which has provided more than 65 billion barrels of oil. The original well was taken off line in 1982 due to demand, but it is still capable of production -- and still without a pump.

That well was the beginning of Aramco, which morphed from California-Arabian Standard Oil Company to Arabian American Oil to Saudi Aramco in 1988. The Saudi kingdom now owns a hundred per cent of the company and partners manage the operations in the county’s 52 oil fields.

Aramco does not have a ticker tape symbol and information about the energy monolith is closely held. Only insiders know the true statistics and there is no profit in it for them or American oil expatriates working inside the kingdom to reveal its internal operations outside the closed company.

Accounts occasionally surface saying production is down in Aramco’s crown jewel, the Ghawar field, but reports of its demise have so far proven premature.

However, the eventual depletion of the world’s vast oil resources is a given, so what is next for Aramco? “We’re looking a hundred years in advance,” Al-Falih said, noting Aramco is diversifying into chemicals and petrochemicals and other commercial enterprises while concentrating on its original oil production.

“We are very focused,” he said. “At our core we have to operate with profitability first and foremost. We are the lowest cost and highest performers in every metric. Our business is long-term,” said the 54-year-old Saudi executive who is not a member of the ruling Al Saud royal family.

He acknowledges the oil business is the most risky and dangerous of any out there and Aramco’s moves, in tandem with Saudi politics, are carefully calculated. “Oil is a political commodity,” Al-Falih observed.

Coincidentally, the U.S., a long-time Saudi political ally, has become a leading player in global oil politics, with a surprising spurt in production. Part of a subtle sea change in Saudi-American diplomatic relationships has been a result of the United States having its own oil glut for a change, due to new drilling technology.

The Saudis are certainly capable of orchestrating an overflow of global liquids, should they so choose, or choking the kingdom's prolific oil wells to cause world chaos. But that is not the scenario in the U.S. where the energy majors and independent wildcatters are blowing and going in new oil fields in its Western states, fueling the domestic oil stream with near-record production.

Americans, enamoured with their gas-guzzling automobiles, are no longer Aramco's best customers. U.S. crude oil production increased to an estimated 7.7 million barrels a day (bpd) last year and the U.S. Energy Information Administration predicts domestic crude oil production will reach 9.3 million bpd next year. That is an optimistic, but anticipated, increase of another million bpd this year.

If so, that is edging into rivaling production at state-owned Aramco, the world’s biggest oil company, with the highest yearly level of crude oil production in the U.S. since 1972. It also changes the game in the global energy field, with the States contributing close to half of the planet’s non-OPEC oil supply next year.

The new production figures may have surprised the Americans, but probably not the Saudis. “I like to size up the competition,” said Al-Falih, who is familiar with American oil fields, having graduated from Texas A&M University with a mechanical engineering degree in 1982. Located in College Station, which is home home of the George Bush Presidential Library, the school is about 70 miles from the Houston oil center.

In 2010 the City of Houston honored the Aramco CEO by proclaiming May 1 as Khalid Al-Falih Day. He spoke at the Texas agricultural and mechanical college gathering honoring him by referring to the university motto “Once an Aggie, always an Aggie” by saying, “Setting foot back in Aggieland is like slipping on a comfortable boot.”

Later he joined a celebration at Stanford of Aramco’s endowment of a Max Steineke professorship. He is an icon in the history of the global petroleum industry, Aramco pioneer and former chief geologist.

In the mid-1930s after five years of drilling dry holes Standard of California directed its field crews in the Kingdom to stop drilling. But after Steineke ordered his men to “drill a little deeper” they made the first oil strike there with well No. 7. Lucky 7 was the first gusher and is now capped until needed.

Like many other Saudi leaders in the world oil patch, Al-Falih is Westernized and well-educated, holding an MBA from the King Fahd University of Petroleum and Minerals. The king of Saudi Arabia, on the other hand, is old school. King Abdullah bin Abdulaziz Al Saud is the country’s absolute monarch and head of the House of Saud.

There are monarchies and there are absolute monarchies where the ruler has absolute power over his people. And King Abdullah is one of a handful of remaining supreme sovereigns in a world which is seeing more representative government.

In Texas terms, the 90-year-old potentate is older than dirt and richer than God. He’s one of the few leaders who can say off with their heads and it’s done. One of the world’s oldest and richest royals, Abdullah is one of 45 sons of Ibn Saud, the founder of modern Saudi Arabia who saw its rise to a planetary oil power.

Also called the Custodian of the Two Holy Mosques, the king and his plenipotentiary dignitaries are put out because the U.S. will not play their politics in dealing with Iran and Syria. Some of the Arabian ambassadors also have expressed displeasure with U.S. domestic oil policy and its failure to sell them the advanced weaponry they want fast enough.

They want us to buy their oil. As the world’s biggest energy company, Aramco generates more than $1 billion a day in revenues. The state-owned operations are overseen by the Petroleum and Mineral Resources Ministry. The Supreme Petroleum Council, an executive group, also has a role. Royalties and dividends flow into the kingdom’s coffers through its Finance Ministry, but the amounts are not publicized.

Russia’s Gazprom, the world’s second largest energy company, and also the biggest natural gas producer, provides about 9.7 million bpd of oil with total profits estimated at more than $40 billion annually. Production at state-owned Gazprom is mostly controlled by the Kremlin. Gazprom has a monopoly on gas deliveries across much of Europe, serving 25 countries, with the exception of Spain and Portugal.

It has been the exclusive provider to ten countries, including Finland, and delivers about a quarter of all the European Union’s gas supplies, with Germany getting an estimated 36 percent of its natural gas from Gazprom. The state-controlled Russian group Rosneft participates in joint ventures with several private big oil companies such as ExxonMobil and has formed other international partnerships.

The National Iranian Oil Company, producing about 6.4 million bpd, is the third largest energy company behind Aramco. The fourth biggest is ExxonMobil pumping and selling about 5.3 million bpd worldwide.

Demand for oil in China and Brazil is up more than 30 percent in the past seven years while India’s consumption is 17 percent higher. The U.S, which is the largest energy consumer, is moving up on Saudi Arabia and Russia as world's largest oil producer, aiming to boost production by a million bpd, which would be its third annual increase in a row. That could change the global oil balance.

All major producers including Aramco are courting Asian customers and seeking strategic partners. At the same time, the companies are aware a worldwide oil glut will drive down prices, so they do not want an oversupply either.

As an OPEC leader, Saudi Arabia has ties with emerging Asian powers like China and is the biggest crude oil supplier to India, delivering about a fifth of that country’s imports. Japan was the largest global oil export market in 2012, but China may take that slot in coming decades, with India becoming the second largest market followed by the U.S. and South Korea being the third and fourth largest export destinations.

In the past 15 years Aramco’s exports to China have gone from nothing to more than a million bpd. The organization’s global petroleum operations across the globe have been augmented by the establishment of Saudi Aramco Asia Company Ltd. Known as Aramco Asia, it strengthens economic and commercial ties between the kingdom and one of the world’s fastest growing regions. The new Aramco Asia regional headquarters officially opened in Beijing in 2012.

Aramco also is concentrating on developing its gas resources, building state-of-the-art refineries and investing in petrochemicals. “By 2020, Saudi Aramco aims to be the world’s leading integrated energy and chemicals company, focused on maximizing income, facilitating the sustainable and diversified expansion of the kingdom’s economy, and enabling a globally competitive and vibrant Saudi energy sector,” Aramco president Al-Falih said.

Approaching the 80th anniversary of the big Lucky 7 oil strike in the desert, Aramco is looking ahead to a major shift in its business and corporate culture, according to the CEO. “This is a transformation that will build upon our foundation of capability, leadership and innovation, and enable us of becoming the world’s leading integrated energy and chemical company ahead of our 90th anniversary,” Al-Falih said.

In line with its goal of economic diversification, Aramco has joined with the Dow Chemical Company, the leading specialty materials company, in a joint venture to form the Sadara Chemical Company to build, own and operate a world-scale integrated chemicals complex in the Eastern Province of Saudi Arabia.

Meanwhile, America is looking after its own interests. Early in his annual State of the Union speech in late January, U.S. President Barack Obama addressed the issue of the U.S. weaning itself off foreign oil. “More oil is produced at home than we buy from the rest of the world — the first time that’s happened in nearly 20 years,” the President said.

The policy is to shift more cars and trucks to American natural gas to keep driving down oil imports and prices at the gasoline pump, while taking advantage of the record output from the new shale-oil production.

Obama is vocal about America’s stance on foreign oil, while the nonagenarian Saudi king is rarely heard or seen publically these days. However, U.S. Secretary of State John Kerry, reportedly has learned in royal audiences that the king’s “wits and tongue are as sharp as ever” despite his age.

The U.S. and Saudi Arabia have had their ups and downs, from being cordial symbiotic business partners to the Arab oil embargo in the early 1970s in retaliation for America’s position in the Arab-israeli War. Today there are deep divisions over positions on Iran and Syria.

But that is a Sunni-Shia religious divide between sheiks unrelated to the geo-politics of big oil and the current body politic of the planet. Saudis no longer hold America over a barrel. Still, the Saudi spokesmen have not held back in scolding their old American ally for failing to fall into line.

Last fall Prince Turki Al-Faisal Al-Saud, the former director-general of the Kingdom’s General Intelligence Directorate, said  ‘There is definitely, from a public opinion point of view in the kingdom, and I think in all of the Muslim world, a high level of disappointment in the US government’s dealings, not just with Palestine, but equally with Syria.”

He noted his country never acts impulsively. “It’s a hallmark of Saudi character,” the prince said. “We were patient for a long time, but when we need to take action, we take it quickly.”

In other scimitar rattling, Prince Mohammed Bin Nawaf Bin Abdulaziz Al Saud, Saudi Arabia's ambassador to Britain, contributed an editorial column titled “Saudi Arabia Will Go It Alone” to the New York Times last December.

“We expected to be standing shoulder to shoulder with our friends and partners who have previously talked so much about the importance of moral values in foreign policy,” he wrote. “But this year, for all their talk of “red lines,” when it counted, our partners have seemed all too ready to concede our safety and risk our region’s stability.”

Strange comments by a diplomat prince from a country accused of moral abuses of its own in a city still recovering from the September 11 attacks a decade before when 15 of the 19 hijackers were from Saudi Arabia.

Despite expressing their displeasure with the President, the Saudi ruler gifted Obama’s heir apparent in the Democratic party, former Secretary of State Hillary Clinton, with a $500,000 white gold jewelry set encrusted with diamonds and teardrop rubies as a token of appreciation of her tenure.

The President received a gold-plated clock worth $60,000. The subtle message could have meant that time is ticking or wake up. However, for the nonce, the Middle Eastern oil regime no longer has the means to alarm Americans with the prospect of petroleum shortages and the long gasoline lines of the 1970s.

Coincidentally, in concert with the announcement of the President’s visit to Saudi Arabia to see the king, the architect of the OPEC oil embargo that crippled America announced he was closing shop.

The London-based Centre for Global Energy Studies founded nearly a quarter century ago by the kingdom’s former oil minister Zaki Yamani issued a statement that it was closing March 31, without giving a reason.

So, on the eve of Obama’s visit to the Saudi king and also the Pope, will he kiss the Pope’s ring and kiss the king?

“The President looks forward to his trip and will greet both leaders with appropriate courtesies,” said Jonathan Lalley, a press spokesman for the National Security Council at the White House.

He will be the first President in many administrations, however, who doesn’t have to kiss up to the Saudis for their oil.

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NOTE: This was written for a European energy magazine a few years ago and while the names have changed, the players and stakes remain pretty much the same.