Doing Business in Saudi Arabia

It can be said that the largest holder of oil concessions and the main oil producer in the Saudi Arabia is the “Arabian American Oil Company”¯ (ARAMCO). Since the beginning of 1970-ies, this company is under the control of the government of Saudi Arabia, but before that it belonged to a consortium of American companies. The company received a concession in 1933 and began exporting oil in 1938. The Second World War interrupted the development of the petroleum industry, which was renewed in 1943, with the construction of a refinery in the oil port of Ras-Tanura. As a fact, oil production has gradually increased from 2.7 tons per day in 1944 to 33.5 tons per day in 1947 and 68.1 tons per day in 1949. By 1977 daily oil production in Saudi Arabia rose to 1.25 million tons and remained high throughout 1980, until it started to decline as a result of reduced demand for oil on the world market. However, crude oil production is also maintained to other smaller companies, such as Japan’s “Arabian Oil Company”¯, which operates in coastal waters near the border with Kuwait, and the Getty Oil Company – a leading mining company, which operates in the same area. In 2001 the quota of Saudi Arabia in OPEC was amounted to approximately 1.17 million tons per day. In 2006 the average production volume amounted to 8.6 billion barrels / day (460 billion tons / year). In addition, it uses the reserves located in the so-called “neutral zone”¯ on the border with Kuwait, which give the country another 600 thousand barrels of oil per day. The largest oil fields are located in the eastern part of the country, in the Persian Gulf on the shelf, according to Doing Business in Saudi Arabia – The Benefits (2010).
Also, it is important to note that Saudi Arabia has excellent refineries industry, which allow the country to export not only crude oil, but also refined petroleum products. Among the largest refine factories are: Aramco – Ras Tanura (capacity 300 thousand barrels / day), Rabiga (325 thousand barrels / day), Yanbu (190 thousand barrels / day), Riyadh (140 thousand barrels / day), Jeddah ( 42 thousand barrels / day), Aramco Mobil – Yanbu (332 thousand barrels / day), Petromin / Shell – al-Jubail (292 thousand barrels / day), Arabian Oil Company – Ras al-Khafji (30 thousand barrels / day). The most important factor in the development of the oil industry is a close and mutually beneficial relationship developed between ARAMCO and Saudi Arabia. As a fact, activities of ARAMCO contributed to the rapid influx of skilled and creative work force into the country. It should be noted that significant changes in the relationship between oil companies and the Government of Saudi Arabia began in 1972. In accordance with the signed agreement of the parties, the government got 25% of the ARAMCO property. It was found that the proportion of Saudi Arabia is gradually increased to 51% by 1982. However, in 1974 the government accelerated the process and purchased a 60% share in the ARAMCO. In 1976, oil companies have promised to convey all ARAMCO property to Saudi Arabia. In 1980 the entire property of ARAMCO was transferred to the government of Saudi Arabia. In 1984 the president of the company first became a citizen of Saudi Arabia. Since 1980 the government of Saudi Arabia itself determines the price of oil and the volume of its production, and oil companies received rights to develop oil fields as subcontractors of the government, according to Peter Hann (2011).
Growth in oil production was accompanied by significant increases in revenues from its sale, especially after a fourfold jump in oil prices in 1973-1974, which led to a giant increase in government revenue, which increased from $ 334 million in 1960 to $ 2.7 billion in 1972, $ 30 billion in 1974, 33.5 billion dollars in 1976 and $ 102 billion in 1981. In the future demand for oil in the world market began to decline and by 1989 revenues of Saudi Arabia’s oil exports fell to $ 24 billion in crisis, which began after Iraq invaded Kuwait in 1990. However, revenues from Saudi Arabia oil exports increased in 1991 to nearly $ 43.5 billion in 1998, as a consequence of a sharp fall in world oil prices, according to Doing Business in Saudi Arabia (2009).
Further I would like to characterize the industry of Saudi Arabia. The share of industry in GDP is 47% (2006). Industrial production growth in 2006 was 1%. In the past, industry in Saudi Arabia was poorly developed, especially industry, which was not associated with oil production. In 1962 a special government organization of the General Petroleum and Mineral Resources was created (Petromin), whose task is to develop oil and mining industries, as well as the creation of new oil, mining and metallurgical enterprises. In 1975 Ministry of Industry and Energy was formed, which took over responsibility for the company Petromin not associated with oil production. The largest projects of Petromin were steel plant in Jeddah, which was built in 1968, and refineries in Jeddah and Riyadh, which were built in the late 1960-ies and early 1970-ies. Petromin also provided 51% of funds for the construction of nitrogen fertilizer plant in Dammam, completed in 1970. In 1976 a government corporation of heavy industry of Saudi Arabia (SABIC) was created – a holding company with initial capital of $ 2.66 billion, by 1994 SABIC owned 15 major companies in Jubail, Yanbu and Jeddah, which produced chemicals, plastics, industrial gas, steel and other metals. Saudi Arabia has well-developed food processing and glass industries, handicrafts and construction materials, particularly cement. In 1996 industrial production volume amounted up to 55% of GDP. Describing the industry of Saudi Arabia it can be said that 25% of workers in the Kingdom of employed in the industrial sector. The most important industry is the petroleum refinery, followed by the gas refinery. In addition, basic petrochemical products, fertilizers, cement, steel, textiles are important export products for the country. It is essential to note that Saudi Arabia also avoids political dependence, which would bring the water imported from other countries like Iraq. The strong population growth and political plans for further expansion of industrial and agricultural equipment increases the consumption of water and electricity about 8% annually. It is estimated that by 2025, the country needs $ 250 billion investments to meet the rising consumption in the future. The bulk of these costs will raise the Saudi government. Part of the investment comes from the private sector, according to Saudi Arabia Business Guide.

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