Just a few years back, the business relationship between the United States and Saudi Arabia was pretty simple: the Americans bought oil, and the Saudis spent much of what they earned on equipment to keep the crude flowing and on planes, tanks and missiles to protect their borders.
With crude prices down by half over the past three years, US domestic oil production went up dramatically, and the kingdom embarking on unprecedented economic reforms — including the sale of a stake in its state-owned oil company — the leverage is shifting toward the Americans as the United States emerges as a rival energy exporter. The changing relationship will come into sharp focus this weekend, as American corporate titans visit Riyadh for an investment summit scheduled to coincide with Donald Trump’s first foreign trip as US president.
“At this point, the Saudis need the United States more than the reverse,” said Philippe Dauba-Pantanacce, global geopolitical strategist at Standard Chartered Plc in the United Kingdom. “They need foreign direct investment to transform the economy, and the United States doesn’t need oil anymore.”
For Trump, the visit could provide a welcome respite from the turmoil he has unleashed in Washington over his firing of FBI Director James Comey and the investigation into Russian meddling in the presidential campaign. Saudi King Salman bin Abdulaziz wants backing for a plan to reduce the role of the state and wean the economy off of oil -- without stoking popular discontent.
The American executives will want deals. Some, like Jamie Dimon, chief executive officer of JPMorgan Chase & Co, and Morgan Stanley boss James Gorman, already have agreements to advise oil giant Saudi Aramco on its initial public offering, which may be the largest ever. JPMorgan and Citigroup helped arrange a $17.5 billion Saudi bond sale last year and a $9bn Islamic bond issue in April. This weekend the banks will aim for more contracts as the Saudis prepare to sell other state assets.
Boeing CEO Dennis Muilenburg and Lockheed Martin head Marillyn Hewson will be looking to cement defence sales. Aramco could sign at least 10 deals with companies, including General Electric and oil field-service businesses Schlumberger and Halliburton Co, to open manufacturing plants in the kingdom, people familiar with the plans say.
The US executives are expected to meet the Saudi ministers of finance, energy and commerce and the head of the kingdom’s sovereign wealth fund, according to a draft agenda for the conference, which was hastily arranged after the Trump visit was announced just two weeks ago. They’ll discuss privatisations, investment opportunities and the role of the Saudi sovereign fund, then they’ll travel to the Royal Court to sign agreements totalling billions of dollars as Trump and King Salman look on.
“Though ties have historically been strong, nothing of this scale and depth has ever happened before,” said John Sfakianakis, a director at the Gulf Research Centre in Riyadh. “The relationship with the United States is entering a new phase.”
In March, King Salman returned from a tour of Asia with agreements potentially worth tens of billions of dollars, including $65bn from China, $13bn from Malaysia and Indonesia, and 43 potential projects with Japanese companies. Contracts unveiled this weekend could well eclipse those deals, Sfakianakis said.
The Saudis have been enthusiastic about Trump after a lukewarm relationship with Barack Obama. The kingdom claimed relations had reached a “historic turning point” in March when Trump met Deputy Crown Prince Mohammed bin Salman at the White House. After the meeting, Trump offered his support for a new US-Saudi programme in energy, industry, infrastructure and technology that could lead to more than $200bn in investments over the next four years.
That’s not to say the Saudis, who have cash reserves topping $500bn, are no longer looking for investment opportunities. The country’s Public Investment Fund is expected to announce plans to plough $40bn into US infrastructure, and it’s seeking partners in the defence industry to help develop domestic arms production.
The goal is to create jobs. The government’s reform plan has so far focused largely on trimming generous fuel and energy subsidies, and scrapping bloated infrastructure projects -- moves that have helped slow economic growth from 10pc in 2011 to just 0.4pc this year, the International Monetary Fund predicts.
“A big part of Saudi Arabia’s message is that the reform programme is not all about austerity,’’ said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “They will be keen to show some concrete commitments from US companies and that this is a two-way street.’’
Some analysts caution that while the executives may announce billions of dollars worth of agreements, many of those will have long been in the works. And some newer deals announced with great fanfare will simply be agreements to explore investment opportunities, which can later be quietly dropped with few repercussions, said Peter Salisbury, a fellow at Chatham House, an international affairs research group in London.
“I expect to see a flurry of exciting-sounding deals with some large figures attached,” Salisbury said. “When you dig into them, they will be largely pre-existing agreements or early agreements that may or may not actually translate into action.”
Bloomberg-The Washington Post Service
Published in Dawn, May 20th, 2017