Investing in Saudi Arabia Market: Oil and Gas Services
Dissertation Proposal
Rationale of the Study
The rationale of the study is stipulated by the necessity to extend the analysis of the investment opportunities in Saudi Arabia market, the greatest oil, and gas supplier on the Arab Peninsula. The role of Saudi Arabia in the global economy is determined by the significant amounts of raw hydrocarbon deposits – the explored volumes of oil and gas equal to 40,3% and 22,7% of the world deposit accordingly. The experts estimate the financial assets of public and private Saudi Arabian structures in around $4 trillion. Economic and political processes taking place in the country immediately affect the major global problems – the rate of economic growth, geopolitics, civilizational relations, etc. This country serves the financial donor of the US and Western Europe .
This Arabian monarchy constantly makes active attempts to ease the oil and gas dependency as the main source of economic growth, development, and social welfare . The primary task promoted by the Saudi Arabian government is economic diversification, development of the manufacturing industry and wise utilization of new investment opportunities. Fortunately, the country’s government prefers to invest the petrodollars not in the western banks and risky securities but in the new economy branches. The experience of the catch-up development of Saudi Arabia has a practical significance for all oil dependent countries worldwide because this Kingdom managed to create highly competitive economy branches, especially in the oil and gas sphere for a short period of time .
If a couple of decades ago the country’s economy structure had no major components of the national financial sphere (central banks, stock exchange, insurance companies), then today Saudi Arabian financial sector, which controls a wise utilization of oil and gas resources turn it into the leading global power (McKinsey Global Institute, 2015). The Saudi Arabian new vision 2030 project claimed that the country has to turn into a hub connecting the three worlds (The Council of Economic and Development Affairs, 2015). It should be noted that Saudi Arabia becomes probably an only world region, which made the oil and gas sector profitable while financial system stable despite the current global oil and gas crisis. It becomes possible due to the significant economy’s safety margin even at the oil price of 40 USD per barrel and insufficient governmental investments in risky fiduciary issues (McKinsey Global Institute, 2015).
The energy policy of the Saudi Arabian monarchy has internal and external components basing on two major factors: suppressing the power of the oil and gas services in the country’s economy and possibility to influence the world market by means of the unique hydrocarbon deposits and significant volumes of oil export . The internal component is directed on the usage of oil profits for diversification of the national economy and increase of the population welfare. External component is utilized to support the significance of the “black gold” in the global energy balance, the formation of demand on the energy producing materials while keeping the high share of Saudi Arabia in the global oil supply .
The issues with the hydrocarbons are managed by the Oil and Mineral Resources Ministry. The Supreme Petroleum Council performs the coordination of the country’s energy policy, including all its international aspects. The King and the members of the Royal family, as well as the key ministers, control this Council, which performs the country’s strategic planning, approves the conditions of all oil contracts and chooses the best investment options (The Council of Economic and Development Affairs, 2015). In this extent, the role of oil corporations is extremely important. The Saudi Aramco plays the first tune in the oil and gas sector being one of the largest global companies covering around 98% of hydrocarbon resources in Saudi Arabia, dominating in all spheres linked with oil quarrying, transportation, processing, distribution, and export (Saudi Aramco Report, 2014). The current crisis of the oil market, oil price volatility and significant decrease in export revenues forced Saudi Arabia to look for efficient investment opportunities discussed further in this proposal.
Context of the Study
The Council of Economic and Development Affairs being the powerful governmental body controlling the economic planning of the country aims to make the state-owned oil corporation Saudi Aramco go public. The IPO of Saudi Aramco can be performed in the forthcoming year with the immediate sales of minimum 5% of the company’s shares (Saudi Arabia Monetary Agency, 2016). Bloomberg (2015), claims that even if the oil price drops down to $10 per barrel, the market cost of the company will make no less than $2,5 trillion. Performing the IPO of the company transferring its shares to public investment funds will actually mean that the Saudi Arabia will gain access to efficient investment sources getting rid of the oil-dependency . Presently only 5% of the fund’s assets are accounted for by foreign investments. However, the government plans to increase this figure to 50% by 2020. The government transfers to public investment funds a large share of governmental assets, lands and companies (Bloomberg, 2015). The diversifying of investments is the priority for the county, which enables to escape from the crude oil export economy of the last decades.
The heavy dependency on oil and gas makes any economy extremely volatile. The current oil and gas crisis collapsing the oil prices below $40 per barrel is a serious challenge for the Saudi economy, which forced the country to cut the budgets (Saudi Arabia Ministry of Economy and Planning, 2015). Despite the financial forecasts that cheap oil may push the global GDP up by 0,2%, oil-dependent countries as Saudi Arabia should be prepared to face the consequences (IMF, 2016). The Saudi government challenges enormous expenses stabilizing the financial system, keeping inflation in check and supporting all social projects on the accustomed level .
Therefore, the Saudi Aramco made a decision to launch the In-Kingdom Total Value Add (IKTVA) Program, which is aimed to boost the local job market, localize products and services, train and develop the Saudi citizens. What does it mean in terms of investments effectiveness? Primarily, investors will gain access to attractive opportunities in the rapidly developing manufacturing sphere (Saudi Aramco Report, 2015). The Saudi government plans to enhance the capacity, cost effectiveness and capabilities of the manufacturing process especially in oil and gas sphere. Besides, it will help to increase the quality of produced goods and services, technically advance them stimulating the cost competitiveness on regional and international markets (Saudi Aramco Report, 2014, 2015).
The plans to boost manufacturing via IKTVA program comes along with the strategic planning of the country’s future outlined in the Saudi Arabia new vision 2030. The successful visions demand fundamental pillars. One of such pillars is the concept of Saudi Arabia being the center of the Islamic world. The country has the Two Holy Mosques and Kaaba, uniting the Muslims all over the world . These sacred symbols may serve a good basis attracting investments from Islamic and Arab regions. The next pillar is the determination of the country’s government to become the largest investment center, accumulating and diversifying revenues. However, the main pillar is concluded in the concept of Saudi Arabia being the global hub in the center of the three worlds: Asia, Africa, and Europe (The Council of Economic and Development Affairs, 2015).
A favorable geographic position in the middle of the major waterways opens for Saudi Arabia the enormous trade and business opportunities. Besides, the country is endowed with the significant volumes of natural resources: gold, uranium and various phosphates, which may represent a good substitution for fossil energy sources. However, the most precious investment source of Saudi Arabia is the human resource potential, well-educated and highly skilled professionals. Investing in human capital is of utmost importance for the future development of Saudi economy while the new vision 2030 program makes this point a priority issue (The Council of Economic and Development Affairs, 2015). This Vision includes numerous transformation programs such as significant reforms in the public sector, an increase of business transparency, rebalancing of the fiscal system, providing the performance and project management programs, etc.
In order to capture all the investment opportunities in Saudi Arabia, it is important to analyze the scope of business. The oil and gas service sector being of primary importance promote rapid development of technical advancements related to oil/gas quarrying equipment, wells technology, chemical injection systems and pressure test equipment (Mitchell, et al., 2012; Munawar & Llewellyn, 2002). Saudi Arabia is a large producer of highly specialized oil and gas products and services. The giant manufacturing sector allows offering attractive investment opportunities such as producing, maintenance and leasing of:
Wellhead control panels;
Hydro-test units;
Oil and gas PVT cylinders;
Spools or adapter flanges;
Crossovers;
Spacer and drilling spools;
Fishing equipment;
Threading oil lubricants/Thread cutting oil production
The Saudi Arabian government aims to broaden the investments into the drilling and production branches . The adjacent manufacturing sectors servicing oil and gas industry include pipeline building, storage, power generation and petrochemicals production may serve well to attract additional financial resources to the economy’s diversification. Saudi Arabia’s government takes pains to boost the competition in oil and gas service sector. However, the competitors should meet the requirements of the Saudi Aramco giant (The Council of Economic and Development Affairs, 2015). It should be taken into consideration that the American Petroleum Institute (API) has its own specifications on the territory of the country and the successful competitors meet the requirement. Saudi Aramco and governmental structures controlling oil and gas export issue premium licenses for threading. Thus, in order to gain access to the local market, projects or manufacturing the pre-qualified companies (foreign or domestic) has to participate in the bidding process organized by Saudi Aramco .
This procedure ensures that only the best suitable companies are allowed to operate in the country. Investors, interested in entering the Saudi economy have to pay attention to the 12 pine plants, 7 heat exchanger manufacturers, 5 valve and drilling plants, which produce high standard equipment for oil/gas facilities. It should be noted that American and British global engineering and project management corporations also have a strong presence in the country. Among them are such companies as Exxon-Mobile, Lockwood Green, Halliburton Energy Services, Technoserve, MTQ, and others . The companies meeting the ISO standards and API requirements registered with Saudi Aramco have a good reputation and reliability among the consumers as well as investors.
Considering the context of the study and analyzing all investment opportunities offered by Saudi Arabia, I state the following research questions for this dissertation proposal:
What is the effectiveness of investing into the program adopted by Saudi Arabia new vision 2030?
What is the effectiveness of investments into the IKTVA project launched by Saudi Aramco, the world’s largest oil company?
How the current world oil and gas crisis affect the investment opportunities in Saudi Arabia in terms of competition and country’s attractiveness?
The answer to these questions will require empirical evidence and meticulous analysis of the business scope, technical issues, public policies concerning certification and licensing on the market as well as serious consideration of the competitive environment in the county.
Aim and Objectives
The aim of this research is concluded in the attempt to outline the major tendencies and perspectives of investment opportunities in oil and gas services sphere in Saudi Arabia. Achievement of the research aim requires the statement and solution of the interdependent dissertation objectives:
Employing the theoretical concepts the peculiar characteristics of the Saudi financial system will be revealed. This knowledge is indispensable for the actualization of the long-term investments into Saudi Arabia’s economy;
Systematize the major participants of the Saudi market and outline their role in the implementation of the Saudi Arabia new vision 2030 and IKTVA programs;
Determine the major factors influencing the evolvement of investment opportunities in the country;
Reveal the tendencies of the vested capital movement in the country with regard to their total worth and volumes;
Suggest recommendations and justify the perspectives of efficient investments in the country’s economy.
The condition, tendencies and development perspectives of the investment opportunities represent the objects of the research. The subject of research is the integrity of economic relations, programs and initiatives affecting the process of investments flow within the country. The elements of scientific novelty include the research of investment cooperation between various economic agents. In order to complete the analysis of the issue information from case studies, reports and secondary sources will be gathered. The facts given in scientific literature describing the oil sector peculiarities in Saudi Arabia will help to reveal the best investment opportunities. The information will be accessed via Internet and electronic library applications. This proposal is strongly related to the project management area of studies, which perfectly defines the aims and objectives as well as all investment projects components.
Proposed Methodology
The methodological and theoretical basis of the research is represented by the diversified methods of empirical study, which best suit the dissertation aim and objectives: a case study and exploratory data analysis (EDA) . Both instruments utilize rigorous secondary sources analysis. The current dissertation proposal will examine numerous related reports, analytical articles, and scholarly sources. Besides, case study and EDA help the researcher to pass from narrow knowledge to the broader concept description considering the data obtained from secondary sources .
The combination of these two methodological instruments allows obtaining a comprehensive review of the study answering the research questions. This dissertation proposal is an outline of the dissertation research, which will utilize both qualitative and quantitative data focusing on investment efficiency indicators and empirical analysis. The case study and EDA enable summarizing the macroeconomic data and gain insight into the empirical data .
The timespan for analysis is the last decade, which is especially important for estimation of the Saudi Arabia investment policies. No econometric models will be used for the research. The qualitative and quantitative data will be taken from various secondary sources including the Saudi Arabia Monetary Agency, the Council of Economic and Development Affairs and Saudi Aramco reports. These sources represent scholarly articles, journals, publications, reports and scientific reviews, which help to suggest a number of recommendations for improvement of investment climate in Saudi Arabia.
Limitations of the Study
Saudi Arabia has all the chances to occupy the leading role as the major global exporter of energy resources and the powerful player on the financial market. The framework idea is to attract investments from the largest world financial companies directing their resources to various domestic projects. In this extent, the role of the so-called Islamic organizations will significantly increase in the world economy. Moreover, the investment rules concerning non-Islamic states dictate limiting/restrictive procedures to making business .
According to the norms of Islamic faith, the pillars of all life aspects are represented by equality and fairness. Any business operation including investment by foreigners should follow the Sharia law. It means that some investment forms extremely profitable to the Kingdom are prohibited by faith such as gambling, alcohol or interest charging investments (Almahmood, 2010; Agil, 2013). The Sharia law demands that the profits between the public and investors should be shared equally. Besides, Saudi Arabia citizens receive preferential treatment in doing investments while foreigners may be restricted from investing in certain sectors (Agil, 2013). This purely Islamic perception of investment activities and a quite large prohibition list for potential investors shrink the investment potential in oil and gas spheres because the most of the restricted investments may be of national importance. Such a situation lowers the efficiency of the investment potential.
Delimitations of the Study
Delimitations of the study analyzing the scope of the research allow the writer to explain why certain research areas were chosen while the others excluded. In order to explain why certain aspects of a subject were outlined, it is necessary to cover the important issues concerning the investment opportunities in oil and gas service sector in Saudi Arabia:
In the Islamic financial system, the so-called sukuks gained a broad distribution. These bonds satisfy the norms of Islamic dogmas as well as correspond the requirements of the Saudi Arabia Sharia law . In 2005, the volume of sukuks in Islamic states equaled $0,3 billion, while in 2010 they amounted to $56 billion. Distribution of sukuks makes the Saudi Arabia financial system more stable, which is especially important within the conditions of the current oil/gas crisis. The money attracted from effective investment of “Islamic bonds” may be injected into boosting of the collapsing oil and gas sectors (Saudi Arabia Monetary Agency, 2016);
The role of sovereign investment funds in Saudi Arabia is increasingly growing. Around $1,5 trillion is accumulated on Saudi Arabia bank accounts. Some of the sovereign funds chose an active investment strategy acquiring the deposit of commercial minerals, shares of financial and hi-tech companies in all parts of the world, enabling the progressive economy growth;
The Saudi insurance market being the least developed among the competitors has all the chances of a rapid growth. The Saudi companies working in insurance sector will be able to derive enormous profits and attract foreign investors to the country’s economy cooperating more closely with the oil and gas service sectors;
Saudi Arabia new vision 2030 proposes a creation of a single economic space for all Islamic states with high level of integration, a common currency, and customs, which will allow efficient investing into oil and gas sectors (The Council of Economic and Development Affairs, 2015).
Delimitation of the study gives an overview of investment opportunities within the present socio-economic conditions in Saudi Arabia. This overview gives clues for the key investment reasons to oil, gas, and petrochemicals:
Saudi Arabia is the largest Middle East economy and the most powerful region in Northern Africa;
The Kingdom is the fastest growing global country with the GDP per capita equaling to $25,000 in 2014 (The Council of Economic and Development Affairs, 2015);
The country has extremely favorable cost advantages due to low energy and land costs, which are subsidized by the government;
Saudi Arabia has a good transport and infrastructure together with the rapidly developing national rail system.
Proposed Structure of the Study
This dissertation proposal represents the following study structure:
Chapter 1 outlines the topic and states the problems existing with investment opportunities in Saudi Arabia. This chapter presents the theoretical and conceptual framework and introduces rationale of the study, the context of the study and research questions. Aim and objectives are also included in this chapter.
Chapter 2 is dedicated to literature review section. The available secondary sources aim to study the investment efficiency and opportunities in the country from various dimensions. This chapter has several subsections. The first sub-section analyzes the peculiarities of the Saudi financial system and investment policies with regard to Sharia law. The law of Islam directly relates to investment opportunities, which at times require settlement of the disputed investments and arbitration. The second sub-section will be devoted to research on foreign investments in the oil and gas service spheres. It explains the criteria used to identify types and forms of investments and investors (Saudi/non-Saudi Arabian). The third sub-section will review the Saudi Arabia new vision 2030 program outlining all the details of governmental attempts to diversify the country’s economy. The fourth sub-section of the literature review part presents information on IKTVA program promoted by the largest oil corporation Saudi Aramco, which controls the oil market in the country and is responsible for carrying out an API certification.
Chapter 3 relates to the current oil and gas situation on the global market and the way it affects the growth rate in Saudi Arabia. This chapter describes the scope of business, competing companies operating on the market and various types of manufacturing facilities.
Chapter 4 is devoted to empirical data analysis presenting evidence to the research questions, explaining graphs, statistics, and secondary data.
Chapter 5 is a conclusion and recommendation section based on the various issues explored in previous chapters. It summarizes the empirical evidence obtained during the research and examines its implications, which serve as the primary basis for suggested recommendations.
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