Terrorism and Energy
World Affairs; Washington; Fall 2004; Gawdat Bahgat
Volume: 167, Issue: 2, Pages: 51-58, ISSN: 00438200
[Headnote]
Potential for a Strategic Realignment
In early September 2003, Saudi crown prince Abdullah led a large delegation
in a three-day visit to Russia. The visit was the first top-level contact
between the two countries since 1932, when Prince Faisal, who became king
three decades later, visited Moscow. In 1926, the Soviet Union ironically
became the first nation to establish diplomatic relations with the kingdom.1
The Soviet-Saudi relationship, however, was characterized by mutual
suspicion and antagonism. On the eve of the second World War, the Soviets
withdrew their diplomats from Riyadh. During the cold war, the Saudis led
the conservative Arab countries in resisting Soviet penetration of the
Middle East. Furthermore, Riyadh and Moscow engaged in a proxy war in East
Africa and Afghanistan. The Soviets supported socialist regimes, and the
Saudis funded conservative movements.
The Iraqi invasion of Kuwait in August 1990 opened a new chapter in the
Soviet-Saudi relationship. Diplomatic relations were resumed but remained
cool. The strategic changes that followed the terrorist attacks in the
United States on September 11 have provided a common ground for Moscow and
Riyadh. Saudi Arabia and Russia are, respectively, the world's first and
second largest oil producers and exporters. Russia holds the world's largest
natural gas reserves, followed by Iran, Qatar, and Saudi Arabia. These large
hydrocarbon reserves can be used as a basis for either cooperation or
rivalry between Moscow and Riyadh. The potential changes in the relations
between the two energy superpowers cannot be understood in isolation from
their relations with the United States. Washington is the world's largest
energy producer, consumer, and net importer.2
Unlike other Middle Eastern states, the Saudi oil industry had been
developed exclusively by American oil companies. For most of the past half
century, Washington has considered Riyadh a reliable source of oil supplies.
Given its substantial reserves, the kingdom has played a decisive role in
maintaining and reinforcing stability in global energy markets. The
September 11 terrorist attacks, in which fifteen out of the nineteen
hijackers were Saudi citizens, drastically challenged the dynamics of the
relations between Washington and Riyadh. In the aftermath of these attacks,
many policymakers, news organizations, and think tanks in the United States
have expressed skepticism toward Saudi Arabia and have called for reducing
dependence on imported oil from the kingdom. Indeed, since the early 2000s,
there has been a new determination to develop and increase oil supplies from
non-Middle Eastern suppliers in West Africa, Latin America, Canada, the
Caspian region, and Russia.
In Russia, where production and exports have risen rapidly since the late
1990s, officials moved quickly to offer an alternative reliable source of
oil. In a summit meeting in May 2002, President George W. Bush and President
Vladimir Putin signed an agreement to forge an "energy partnership" between
the two nations. Since then, American policymakers and oil executives have
met with their Russian counterparts to further consolidate their
cooperation.
Despite this growing U.S.-Russian cooperation, Saudi Arabia has maintained
its status as a major oil exporter Io the United States, along with Canada,
Mexico, and Venezuela. Still, the Saudi crown prince's visit to Moscow can
be seen as an attempt to counter any effort to sideline the kingdom and to
promote cooperation and contain rivalry with Russia. In this article, I
examine the relations between Washington and Riyadh in the aftermath of
September 11. I argue that the growing mistrust between the world's largest
oil importer (the United States) and the world's largest exporter (Saudi
Arabia) has led the former to try to forge a partnership with the world's
second largest exporter (Russia). To maintain its leading share in the U.S.
oil market and its status as the world's dominant oil power, Riyadh has
sought to coordinate its oil policy with Moscow and to explore the
opportunities for cooperation between the two nations in natural gas. The
study suggests that energy policy should not be seen in zero-sum terms. In
the final analysis, more oil and gas from Russia, Saudi Arabia, and other
producers would enhance global energy security.
U.S.-SAUDI RELATIONS AFTER SEPTEMBER 11
Beginning with the revelations that Saudi citizens were involved in the
September 11 attacks, the kingdom has come under public and congressional
suspicion as a breeding ground for terrorism. Several American news
organizations, members of Congress, and influential think tanks have accused
the Saudi government of supporting terrorism and tolerating a "Jihadist"
culture. In other words, the argument goes, fiery anti-Americanism preaching
in Saudi mosques and an educational system that promotes hate against the
United States and the West are largely unopposed by the Saudi authorities.
On the other hand, Saudi officials have categorically denied any role in
supporting terrorism either directly or indirectly. Rather, they argue that
Osama bin Laden intentionally chose Saudi citizens to participate in the
terrorist attacks to sabotage and weaken the close Saudi-American relations.
In addition, the Saudis claim that their country is a victim of terrorism.
In other words, the argument continues, Saudi Arabia and the United States
are in the same boat, confronting a mutual enemy. The suicide car bombings
of residential compounds in Riyadh that killed thirty-four people, including
nine assailants, in May 2003 have further strengthened the Saudi argument.
Following these attacks, Saudi officials have become more forthcoming in
combating terrorism and cooperating with the United States. In August 2003,
Riyadh agreed to set up a joint task force with Washington that allows U.S.
law enforcement officials to be stationed in the kingdom to target
individuals suspected of funneling money to al Qaeda and other terrorist
organizations.3 The Saudi government also issued a ban on cash contributions
in local mosques and removed donation boxes for charities from shopping
malls. In addition, several hundred clerics were fired and suspended for
preaching intolerance.4 Finally, the Council of Senior Clerics, Saudi
Arabia's highest religious body, has strongly condemned violence by Islamic
militants and has deemed helping terrorists as "one of the greatest sins."
In a statement carried by the official Saudi Press Agency, the council said
that participating in terrorist acts is "a dangerous criminal act punishable
by Islamic law."^
Alienated by these accusations and the ramifications of anti-Muslim
statements made by prominent American religious leaders and concerned about
their investment in the United States and the possibility of the U.S.
government freezing their assets, some Saudis withdrew billions of dollars
from American markets. The total funds withdrawn by individual investors,
including members of the royal family, is estimated to be more than $200
billion.6 The Saudi funds are invested in private equity, stock and bond
markets, and real estate.
In addition, the long-standing military cooperation between Saudi Arabia and
the United States was affected by the strain in relations. Despite some
Saudi reservations about the United States using military bases and
facilities in the 2003 war in Iraq, the royal family eventually agreed to
every U.S. request for military and logistical support, including use of the
operations center and the staging of special operations forces from bases in
the kingdom.7 Despite this cooperation, the Saudis remained highly sensitive
about the presence of U.S. military forces in the kingdom, both before and
after the war in Iraq, which was unpopular among the Saudi people. To
relieve internal political pressure on the royal family, officials from the
two countries agreed to end military operations in Saudi Arabia and remove
almost all U.S. forces to the al-Udeid air base in neighboring Qatar. This
departure, however, does not mean a termination of security cooperation
between Washington and Riyadh; the United States is still committed to the
defense of the kingdom.
Interestingly, the mutual mistrust and skepticism that have characterized
U.S.-Saudi relations since September 11 had little, if any, impact on the
oil links between the two countries. Although the terrorist attacks did not
change the fact that Saudi Arabia holds one-fourth of the world's proven
reserves and is the world's largest producer and exporter, the attacks did
change many Americans' perceptions of the kingdom. The central concern that
has been raised in the United States is that if Saudi Arabia is unreliable
as an ally in the fight against terrorism, it also may be unreliable as an
ally in providing energy security.8 Guided by this assumption, efforts have
been made to reduce U.S. dependence on Middle Eastern oil, particularly that
of Saudi Arabia.
The record of the past half century, however, proves that the kingdom has
been a reliable supplier of oil to the United States and other importers.
Since oil was discovered in Saudi Arabia in the late 1930s, Riyadh has
participated in only one major oil disruption, the Arab oil embargo of
1973-74. The Saudis learned their lesson, and since the mid-1970s, they have
sought to promote stability and moderation in the oil markets. Saudi Arabia
noticeably took the lead in calming international markets in the early
200Os. In the past few years, there have been major political crises in and
disruption of supplies from three major oil-producing countries-Nigeria,
Venezuela, and Iraq. In response, Saudi Arabia boosted its production to
prevent any shortage of oil and rising of prices. In early 2003, the kingdom
added 1.6 million barrels per day (b/d) to its production, which reached 9.5
million b/d, the highest level in decades.9 This deliberate Saudi policy of
keeping oil markets well supplied allowed the Bush administration to avoid
releasing emergency stockpiles from the Strategic Petroleum Reserve (SPR) in
preparation for the war.
These strains in U.S.-Saudi relations since September 11 raise concern about
the six-decade-long unofficial alliance between the two countries. Will they
remain allies? In the long term, it seems that the main foundations of their
cooperation-oil and security-are still sound. The relation between the two
nations has always been built on mutual interests, not shared values. Riyadh
is committed to the non-interruption of oil supplies and the stability of
prices and markets. On the other hand, despite the withdrawal of U.S. troops
from Saudi Arabia, Washington is still committed to defending the kingdom
from any foreign threat. The future of the U.S.-Saudi alliance also depends
on what happens in Iraq. Given its size, population, and hydrocarbon
resources, changes in Iraq will substantially alter the strategic landscape
in the Persian Gulf and the entire Middle East.
In the short term, the marriage of convenience between Washington and Riyadh
seems to have become a dysfunctional one. The two nations continue to have
important overlapping interests on oil and regional security questions, but
they seem to disagree on how to fight terrorism. A lack of trust in Saudi
policy has convinced U.S. officials to seek an energy partnership with
Russia. Some policymakers in Washington hope that Russia can replace the
Middle East as the major source of oil supplies to global markets. Partly to
offset the American move and to protect its own economic and strategic
interests, Saudi Arabia also turned to Russia. Oil and natural gas are the
main areas of cooperation and conflict between Moscow and Riyadh.
MOSCOW AND RIYADH: RIVALRY IN OIL POLICY
In 1988, the Soviet Union's oil production reached a peak of 12.5 million
b/d, most of which came from Russia.10 Such high production levels stemmed
largely from the exploitation of new petroleum reserves discovered in
Western Siberia. With the demise of the Soviet Union in 1991 and the
collapse of the state planning system, the oil industry was thrown into
disarray, and production fell to only six million b/d in 1996." A turnaround
in Russian oil output began in 1999, partly because of rising world oil
prices and partly because of new financial policy, particularly the
devaluation of the ruble. Since then, production has surged, and major
Russian oil companies compete with Western oil companies throughout the
world as equals.
This recovery of Russia's oil industry and its impressive rising production
have given the country tremendous leverage in global oil markets. Within
this context, the Saudi crown prince visited Moscow, and the two nations
signed a five-year agreement that called for bilateral cooperation to ensure
stability in the global oil markets. This agreement is the first formal
recognition of a fragile alliance between Moscow and Riyadh, which has kept
oil prices high since the late 1990s.
Despite serious efforts to diversify their economies, both Russia and Saudi
Arabia are heavily dependent on oil revenues and, subsequently, are
dangerously vulnerable to the fluctuation of oil prices.12 oil revenues
account for critical shares in the total export earnings, government
revenues, and overall GDP in both states. The effects of oil price
fluctuations on oil-producing countries vary greatly, depending on many
factors. For instance, countries with large populations and relatively small
oil reserves tend to favor a strategy of short-term revenue maximization,
and those with small populations and large oil reserves tend to favor a
strategy of long-term revenue maximization. Similarly, for relatively
high-cost oil producers, low oil prices can turn many oil fields from
economical to uneconomical in a short period of time, and high oil prices
tend to encourage oil exploration and production in relatively expensive
areas. On the other hand, for low-cost producers the marginal cost of
producing each additional barrel of oil is relatively low, and, therefore,
it often remains economical to produce oil from these countries. They
generally are in stronger positions to weather price declines.13
Despite these differences between Moscow and Riyadh regarding their oil
strategies, the two countries benefit from keeping prices at a certain level
(roughly between twenty-five and thirty dollars). Too-high prices tend to
encourage conservation and investments in developing other sources of energy
in consuming countries.14 Saudi Arabia and Russia, however, have not found
the right mechanism to coordinate their production policies and prevent
prices from falling. Oil prices, like that of any other commodity, are
subject to the law of supply and demand. For several decades, Saudi Arabia
has viewed OPEC as the appropriate vehicle to maintain stability in global
oil markets, bringing billions of dollars in oil revenues without pushing
the world over the brink into recession. As Saudi oil minister Ali al-Naimi
argues, "OPEC still holds about two-thirds of global oil reserves, moves
half the exports, and maintains the bulk of the world's spare production
capacity."15 The Saudis, in cooperation with other OPEC members, learned
their lesson from the 1970s and have kept oil prices low enough to keep the
wheels of the world running but high enough for them to make a healthy
return.
The "right" price for a barrel of oil is seen as a balance between two
opposing factors: maximizing the profit and defending the market share. To
maintain this balance and prevent a decline in oil prices, OPEC members, led
by Saudi Arabia, have sought to avoid Hooding the market with their oil.
Russia, a non-OPEC producer, has produced and exported more of its oil since
the late 1990s. This surge in Russia's share in global oil markets is at the
expense of OPEC. In other words, OPEC's deliberate policy of reduced
production benefits Russia by keeping prices high and enabling Moscow to
sell more of its oil. Thus, the Russians stand to gain the most if they
remain separate from OPEC but sell oil at OPEC-boosted prices. It is no
wonder that a Russian analyst wrote, "The Russian oil companies should be
praying for the survival of OPEC in order to avoid the supply free-for-all
and the price collapse that would be [the] inevitable legacy of its
destruction."16
As a non-OPEC oil producer, Russia is not obligated to abide by any quota
system. Indeed, since (he late 1990s, most of the increase in non-OPEC
production has come from Russia. This expansion of Russia's share in global
oil markets has posed a serious challenge to OPEC's ability to raise oil
prices through production cuts by increasing the overall float of crude oil
available in the oil markets. In response, Saudi Arabia and other OPEC
members have sought Moscow's cooperation. The goal was to restrain
production to a certain level to prevent a collapse of oil prices. In late
2001, Russian producers argued against cooperating with OPEC. Their argument
was based on two reasons. First, they could not simply turn their spigots on
and off like Saudi Arabia because of their investments in frozen Siberian
oil fields. second, they wanted to recover market shares lost since the
demise of the Soviet Union. This disagreement between OPEC and Russia led to
threats of a price war. In the end, the Russian government decided to make a
show of cooperation by offering to match OPEC actions with what was supposed
to be a 5 percent curb on exports. In other words, the Russian government
agreed to an oil export cut of 150,000 b/d in the first quarter of 2002,
following suit with other non-OPEC members such as Mexico, Oman, Norway, and
Angola. Despite the Russian government's pledged oil output cut, Russian oil
exports actually increased in the first quarter of 2002. Government-imposed
export tariffs caused a glut of crude oil on the Russian market, causing a
price collapse. Russian oil companies then sent their crude oil to Russian
refineries, which led to an increase in oil product exports and a surplus of
refined products on the market. Furthermore, Russian oil companies increased
their crude oil exports as world oil prices climbed, and Russia formally
abandoned its stated export cuts as of July 1, 2002.17
It is important to point out that even if the Russian government wanted to
cooperate with OPEC, it would have had to overcome several hurdles. First,
Russia's oil industry has been largely privatized since the early 1990s. In
2003, two major mergers were announced: Tyumen oil Company (TNK) with
British Petroleum (BP) and Yukos with Sibneft.18 Prior to these mergers, the
Russian oil industry was dominated by five companies: Yukos, LUKoil,
Surgutneftegaz, TNK, and Sibneft. Combined, these companies accounted for
roughly 70 percent of the country's oil production. The other 30 percent
belonged to the country's roughly one hundred fifty small- to medium-size
oil producers.19 second, unless Russian companies add to their reserves,
further production increases may prove harder to achieve. Russian oil fields
have been rapidly depleted. Indeed, Russia's rate of oil production is
exceeding its rate of discovery of new reserves by a significant margin.
Furthermore, the country's share of the world's proven reserves (5.7
percent) is limited compared with that of Saudi Arabia (25.0 percent).20
Third, the continuation of the resurgence in oil production and exports
depends on huge exploration and development projects in arctic and far
eastern frontiers. Although Russia has attracted domestic and foreign
investment to rich opportunities in existing fields, its record with larger
and riskier frontier projects is spotty.21 Moscow is much more hospitable
than Riyadh to foreign capital, but relatively little foreign investment in
the Russian oil industry has been made. Fourth, one of the largest factors
preventing the rapid development of Russian energy exports is its
transportation network. This network was largely built during the Soviet era
to supply Soviet republics with their oil and natural gas needs. Shipments
to new markets require the construction of huge pipelines and terminals,
which will take several years and billions of dollars. Export pipelines are
currently operating at full capacity. In addition, the continuing feud
between independent oil producers and the Russian state pipeline monopoly
Transneft needs to be resolved to expand the country's export capacity.
Fifth, most Russian crude deliveries currently go to European refineries
from ports on the Black or Baltic seas. Indeed, Russia, along with Norway
and Saudi Arabia, is a major oil supplier to European markets. In the early
2000s, Russian oil companies sought to ship oil to North America. The
country, however, has no deepwater ports capable of loading the type of
large tanker that would be required to make the long journey across the
Atlantic. In 2003, major Russian oil companies agreed to conduct feasibility
studies for a new pipeline and deepwater tanker terminal in Murmansk on the
Barents Sea. For geographic reasons, Europe is more likely than the United
States to remain an important energy partner for Russia, at least in the
foreseeable future.
To sum up, since the late 1990s, Russia has benefited significantly from
OPEC's policy of keeping its production restrained. The trouble is that
although OPEC's power to hold prices up may be limited, its power to push
prices lower remains awesome. Production costs are much higher in Russia
than in Saudi Arabia and most other OPEC member countries. Saudi Arabia can
make money at twelve dollars per barrel, but production becomes unprofitable
for Russian companies at this low price, and private-sector Russian firms
are unlikely to want to get that close to the margin.22 Cooperation in
oil-pricing policy would serve the interests of both giant producers.
MOSCOW AND RIYADH: POTENTIAL COOPERATION IN NATURAL GAS POLICY
For the past several years, natural gas has been the fastest growing source
of primary energy in the world because of its environmental and economic
advantages.23 For several decades, the Saudi authority has focused its
attention on developing the kingdom's huge oil reserves, paying little
attention to its natural gas deposits. Since the early 1980s, however, there
has been a growing interest in gas exploration and development. Saudi
Arabia's Master Gas System, which started in 1982, has sought to increase
domestic and foreign investment to meet the country's growing demand.24
Since the 1990s, natural gas production and consumption have risen to meet
the kingdom's growing needs in power generation, petrochemicals manufacture,
and seawater desalination. In line with this interest in natural gas, Saudi
Arabia's proven reserves of the fuel have increased by more than 94 percent
over the past two decades.25 Furthermore, many experts believe that the full
potential of the kingdom's gas resources remains underexplored and unused.
Vast reserves of gas are likely to be discovered in many parts of the
kingdom.
The increasing official interest in boosting the kingdom's natural gas
production was a major reason for an important policy dubbed the Saudi Gas
Initiative (SGI). In September 1998, Crown Prince Abdullah met with senior
executives from several American oil companies and asked them to submit
recommendations and suggestions to him about the role that their companies
could play in the exploration and development of both existing and new oil
and gas fields. In the following years, the Saudi government and
representatives of international companies negotiated the conditions and
shape of their cooperation. In May 2001, the two sides signed a preliminary
agreement to develop three "core ventures." These were:
core venture 1, South Ghawar: ExxonMobil (35 percent), Shell (25 percent),
BP (25 percent), and Phillips (15 percent);
core venture 2, Red Sea: ExxonMobil (60 percent), Marathon (20 percent), and
Occidental (20 percent); and
core venture 3, Shaybah: Shell (40 percent), Total (30 percent), and Conoco
(30 percent).26
The SGI had promised to be the first major reopening of Saudi Arabia's
upstream hydrocarbon sector to foreign investment since nationalization in
the 1970s. However, after two years of intense negotiations, the two sides
could not reach an agreement, and the whole scheme was canceled in June
2003. A major breaking point was the disagreement over the rates of return:
International companies wanted a much higher rate than the Saudi government
was willing to offer.
It is important to highlight three factors that might have influenced the
negotiation, particularly in the final months. First, the SGI was initially
proposed under conditions of economic and financial crisis because of low
oil prices in 1998. The recourse to foreign investors was meant to free some
scarce capital in government hands for alternative uses. Since then, oil
prices have recovered, and the Saudi government's sense of a cash crisis has
consequently faded. second, some analysts have speculated that the Saudis
were worried about the political fallout they might have suffered at home
and with Arab neighbors if the contracts, mainly with U.S.-based oil
companies, were approved amid the current heightened diplomatic and military
tensions in the Middle East.27 Third, some analysts argued that
international companies might have been emboldened by the potential
investment opportunities in neighboring Iraq and, as a result, refused to
compromise and accept the Saudi offers. This argument, however, is flawed
for two reasons: First, the negotiations between the Saudis and
international companies were in trouble long before the war in Iraq; second,
the current security situation and political instability in Iraq suggest
that it will be many years before large investment opportunities can
materialize in that country.
The cancellation of these three core ventures, however, has not stopped the
Saudis from pursuing foreign investment to develop their natural gas
reserves. In July 2003, Royal Dutch/Shell, the Anglo-Dutch energy group, and
Total, of France, signed a deal with Saudi Arabia28 to search and develop
gas reserves in two hundred thousand square kilometers in the southeast of
the Empty Quarter desert.29 The project, expected to involve an investment
of about $2 billion, is a scaled-down version of an earlier plan for the
companies to develop gas in Shaybah (core venture 3).3<) This project is
smaller than the vast deals often associated with Shell and Total, two of
the world's top oil companies, but it gives them a key foothold in the
kingdom with its vast hydrocarbon resources.
This deal with Shell and Total is considered the first step in an ambitious
Saudi plan to forge a partnership with international companies. Several days
after signing the agreement with the two European firms, the kingdom invited
forty energy companies to a meeting in London to hear the terms and
conditions that it offered in exchange for exploring, extracting, and
producing its natural gas. Al-Naimi promised a progressive fiscal regime and
confirmed his government's commitment to creating an attractive environment
for private and foreign investment.31 In line with this policy, Saudi Arabia
awarded an additional three contracts to international oil companies to
explore for natural gas in January 2004. The contracts were awarded to
Russia's OAO LUKoil, China's Sinopec International Petroleum Exploration and
Production Corp, and Italy's ENI SPA.32 Any commercial quantities of gas
found will be used in Saudi Arabian petrochemical plants and for power
generation and water desalination.
These opportunities to invest in Saudi Arabia's natural gas sector provide a
sound foundation for a partnership with Russia, which contains almost
one-third of the world's natural-gas proven reserves and is the world's
largest producer and exporter. Gazprom, the state-run natural-gas monopoly,
produces most of Russia's natural gas and contributes a significant share of
public revenues. Unlike oil, Russia's natural gas production has not surged
in recent years. Gazprom, which has larger gas reserves and production than
any other company in the world, faces a major problem. Much of its huge gas
reserves are in extremely hostile environments, such as Siberia, or beneath
the frozen waters of the Arctic oceans,33 which lack the infrastructure to
deliver the natural gas to consumers and will require much higher levels of
investment. These harsh conditions make it more difficult to expand domestic
production. Thus, Gazprom and other Russian oil companies have been active
in working with other natural gas producers to develop their deposits. In
the past several years, the Russian giants have been involved in gas
projects in Turkmenistan, Iran, and many other gas-producing countries.
Partnership with Russian oil and natural gas companies is particularly
attractive given these companies' extensive expertise in natural gas
industry. Cooperation between Russia and Saudi Arabia in developing the
kingdom's gas deposits will serve the interests of the two countries.
CONCLUSION: TERRORISM AND ENERGY
The summit meeting between the de facto ruler of Saudi Arabia and the
Russian president in early September 2003 has opened a new chapter in the
relations between the two energy superpowers. It will take some time to
fully assess the implications of a Russian-Saudi dialogue on the geopolitics
of energy. Still, preliminary conclusions can be drawn. First, opening the
lines of communication between Russia and Saudi Arabia at the highest level
will serve the political interests of the two nations. Moscow is eager to
regain the influence it had in the Middle East during the Soviet era.
Furthermore, close ties with Saudi Arabia would improve Russia's standing in
the Islamic world.34 Meanwhile, given the American allegations against the
kingdom and the talks by some in Washington about the need for a "regime
change" in Riyadh, Saudi Arabia has shown a greater interest in energizing
and developing its relations with other global powers such as Russia.
second, an important outcome of the Russian-Saudi summit was the agreement
to set up a working group to coordinate their efforts against terrorism. For
several years, some Russian officials have suspected that the Chechen rebels
receive funding from Saudi charities.35 Saudi leaders are eager to assure
Russia and the rest of the world that the kingdom has no ties with the war
in Chechnya and that it does not fund or endorse terrorism. An important
step in this direction was a visit to Saudi Arabia by Ahmad Kadyrov, the
pro-Moscow president of Chechnya, in January 2004. The trip boosted
Kadyrov's standing in the Muslim world. In addition to holding talks on
building up Chechnya's oil sector and hosting an Islamic conference in
Moscow, Kadyrov36 secured a pledge from Riyadh to sever suspected financial
links between Saudi charitable groups and rebel fighters in Chechnya. The
business climate between Moscow and Riyadh is likely to improve with their
joint efforts to eradicate terrorism.
Third, given Russia's huge natural gas reserves and its status as the
world's largest producer and exporter, its greatest influence would be in
gas rather than oil. Gas exploration and development can serve as the
foundation for a Russian-Saudi partnership. The kingdom has huge
underexplored and unused gas deposits, and Russia has the technological
skills and expertise to develop them. The renewed Saudi efforts to invite
foreign investment to the natural gas sector suggest that there are many
business opportunities for Gazprom and other Russian companies in the
kingdom.
Fourth, the possibility of Russian-Saudi cooperation in the oil sector is
remote. The two countries compete with each other. Moscow's expanding market
share in recent years has been at the expense of Saudi Arabia and other OPEC
members. Furthermore, since the early 200Os, Russian oil companies have
sought a share of the U.S. market, again in competition with Saudi Arabia.
In the short term, the surge of Russian production gives Moscow substantial
leverage. But, in the long term, Russia's large production is unsustainable.
The country simply does not have the reserves to sustain such high levels of
production and export. At the end of the day, oil has to come from where it
is available. Saudi Arabia has about onefourth of the world's reserves,
Saudi oil is the cheapest to produce, and the kingdom enjoys
well-established access to global markets. Finally, the kingdom has the
world's largest spare capacity, which Riyadh has used effectively to counter
any possibility of disruption.
Fifth, global energy security should not be seen as importing more oil from
Russia and reducing dependence on Saudi Arabia. The 2003 war in Iraq has
demonstrated that the risks of oil dependence on the Middle East have been
exaggerated; there was no oil disruption. The region's vast oil holdings
overshadow its history of political instability. Diversification is the
first principle of energy security. More oil from Russia, the Caspian Sea,
Latin America, and West Africa would enhance global energy security.
[Sidebar]
OPEC's deliberate policy of reduced production benefits Russia by keeping
prices high and enabling Moscow to sell more of its oil.
[Footnote]
NOTES
1. William B. Quandt, Saudi Arabia in the 1980s: Foreign Policy, security,
and oil (Washington, DC: Brookings Institution, 1981), 65.
2. Energy Information Administration, "Country Profile: United States of
America,"
http://www.eia. doe.gov/.
3. Philip Shenon, "U.S. Agents to Join Saudis in Terror Financing Inquiry,"
New York Times, August 27, 2003,
http://www.nytimes.com/.
4. James Dao, "Saudis Fire Clerics Who Preached Intolerance," New York
Times, June 13, 2003,
http://www.nytimes.com/.
5. Associated Press, "Senior Saudi Clerics Condemn Terrorists," Washington
Post, August 17, 2003,
http://www.washingtonpost.com/.
6. Roula Khalaf, "Saudis Withdraw Billions of Dollars from US," Financial
Times, August 20, 2002,
http://www.ft.com/.
7. Vernon Loeb, "U.S. Withdrawing Forces from Saudi Arabia," Washington
Post, April 29, 2003,
http://www.washingtonpost.com/.
8. Vahan Zanoyan, "Global Energy security," Middle East Economic Survey 46,
no. 15 (April 14, 2003),
http://www.mees.com/.
9. Energy Information Administration, "Country Analysis Briefs: OPEC,"
http://www.eia.doe.gov/.
10. Energy Information Administration, "Country Profile: Russia,"
http://www.eia.doe.gov/.
11. Dougla Stinemetz, "Russian oil sector Rebound under Full Swing," oil and
Gas Journal 101, no. 22 (June 2, 2003): 20-31; see p. 20.
12. Generally, the Russian economy is more diversified than that of Saudi
Arabia.
13. Energy Information Administration, "oil Prices and Revenues: An Economic
Analysis,"
http://www.eia.doe.gov/.
14. As the famous saying goes, "Keeping prices high is like killing the
goose laying the golden eggs for its meat."
15. AIi al-Naimi, "Producer-Consumer Dialogue," Middle East Economic Survey
45, no. 39 (September 30, 2002),
http://www.mees.com/.
16. Chris Weafer, "OPEC, Russia and Iraq," Moscow Times, September 25, 2002,
http://www. thcmoscowtimes.com/.
17. Energy Information Administration, "Russia: Oil and Natural Gas
Exports,"
http://www.eia.doc. gov/.
18. The proposed merger between Yukos and Sibneft was derailed in late 2003
following the arrest of Yukos ehief executive Mikhail Khodorkovsky.
19. Energy Information Administration, "Country Profile: Russia,"
http://www.eia.doe.gov/.
20. British Petroleum, BP Statistical Review of World Energy (London:
British Petroleum, 2003), 4.
21. "Editorial: The oil Superpowers," oil and Gas Journal 100, no. 42
(October 14, 2002): 17.
22. "Russian Roulette," Petroleum. Economist 68, no. 12 (December 2001):
2-3.
23. Energy Information Administration, International Energy Outlook
(Washington, DC: U.S. Government Printing Office, 2003), 3.
24. Gawdat Bahgat, "The Geopolitics of Natural Gas in Asia," OPEC Review 25,
no. 3 (September 2001): 273-90; see p. 278.
25. Abdullah M. Aitani, "Big Growth Ahead seen for Saudi Gas Utilization,"
oil and Gas Journal \ 00, no. 30 (July 29, 2002): 20-27; see p. 21.
26. Energy Information Administration, "Country Profile: Saudi Arabia,"
http://www.eia.doe.gov/.
27. Maureen Lorenzetti, "US Companies: Saudi Gas Negotiations at Critical
Stage," oil and Gas Journal 100, no. 38 (September 16, 2002): 26-28; see p.
26.
28. Shell will have 40 percent of the project, and Total and the state firm
Saudi Aramco will have 30 percent each.
29. Carola Hoyos, "oil States to Unlock Doors for Foreigners," Financial
Times, July 22, 2003,
http://www.ft.com/.
30. BBC News, "oil Firms Win Landmark Saudi Deal," July 16, 2003,
http://news.bbc.co.uk/.
31. Carola Hoyos, "Saudis to Open Energy sector," Financial Times, July 23,
2003,
http://www.ft.com/.
32. "Saudi Arabia," oil and Gas Journal 102, no. 5 (February 2, 2004): 8-9.
33. Isabel Gorst, "Nice Reserves-Shame About the Location," Petroleum
Economist 69, no. 9 (September 2002): 16-17; see p. 16.
34. In mid-2003, some Russian officials talked about joining the
Organization of Islamic Conference as observers.
35. Some allegations were made that the Chechen gunmen who seized a Moscow
theater in October 2002 made telephone calls to Saudi Arabia during the
siege.
36. In May 2004, Kadyrov was assassinated.
[Author note]
Gawdat Baligat is a professor of political science and the director of the
Center for Middle Eastern Studies at Indiana University of Pennsylvania.
Copyright HELDREF PUBLICATIONS Fall 2004
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