Saudi Gas
Andrew Stuttaford makes a fairly common mistake in a recent post on NRO's corner. He notes that a Saudi initiative to bring in Western E&P firms to develop gas reserves has stalled, and writes:
If true, this is good news. Investment in a country that is so deeply implicated (whether directly or indirectly) in the support, financing and inspiration of the current terrorist Jihad would be a deeply troubling move on the part of any American company. Such a decision would also be bad business. "Saudi" Arabia is now on the edge of upheaval. Investing there makes about as much sense as buying railway bonds in the Russia of 1916.Stuttaford is correct in suggesting that it is distasteful when American companies invest in onerous regimes; currently there is even a ban on E&P investment in certain regimes for that reason (although the Europeans are more than happy to be in Iran and Libya). But while it may be distasteful, that doesn't necessarily make it a bad investment. Nor does a certain amount of political risk necessarily translate into a bad investment. There are many prolific oil/gas-producing regimes with political risk that greatly exceeds the middling risk of Saudi Arabia (Nigeria, Venezuela, Indonesia, and Angola come to mind) that are very hot plays right now. Political risk itself these days is hardly an absolute disqualifier for E&P investment in a nation, if it ever was.
But a nation's fiscal terms, its cost profile, and its prospectivity certainly can be. As costs go, Saudi Arabia's are some of the lowest in the world -- which is why if the fiscal terms are decent, or even poor, Western firms will literally JUMP at any opening of the oil sector. The problem is, a partial opening of the gas sector is viewed by many firms as a goodwill measure, a way of getting a foot in the door and continuing to encourage the Kingdom to reopen to direct foreign investment in the much more lucrative oil sector. As a goodwill measure, they may even be willing endure less-than-stellar fiscal terms. But the main reason Western companies seem to be balking right now is that the fiscal terms just aren't acceptable.
Western companies do seem concerned about making a bad investment, but it has little to do with political risk in this case. Stuttaford is wrong to suggest it does.
[Posted at 20:36 CST on 04/24/02] [Link]
