Saudi Arabia: The Expatriate Exodus and the Oil Industry
STRAFOR.COM January, 2005

Summary

Security concerns among expatriate oil workers in Saudi Arabia have led many Western workers to leave the kingdom. The flight of foreign workers -- which began almost two years ago -- is beginning to affect Saudi oil production.

Analysis

Saudi Arabia began seeing an exodus of expatriates following the May 12, 2003, attacks against Western expatriate oil workers. Within a year, Stratfor projected that those workers -- who numbered as many as 100,000 at one point -- would begin leaving the kingdom in droves. We projected that since the expatriates formed the intellectual backbone of the kingdom's state-owned oil firm Saudi Aramco, their departure would harm Saudi oil output.

The future is now.

Recent attacks in Riyadh and Jeddah have only reinforced the perception that Saudi Arabia is not a safe place to live and work. The exodus has reached the point at which it is affecting Saudi oil production. Riyadh lobbied (successfully) for a reduction in Organization of Petroleum Exporting Countries (OPEC) output in December, not because it wanted to -- but because it had to.

The most dramatic indication of the expatriate outflow was the Jan. 11 announcement that as of March 27, British Airways would stop all flights between Great Britain and Saudi Arabia. Expatriates and their families regularly travel to and from their home countries, particularly dependents who normally attend school at home. Some simply relocated to safer locations such as Bahrain, Qatar or Kuwait, but the bottom line is that enough of them had left for British Airways to simply write the kingdom off completely. No expatriates, no travel, no need for an air route.

Sources affiliated with Saudi Aramco confirm that not only have security concerns continued to push expatriates and their families to the door and make it extremely difficult to replace them, they also have -- nearly two years after the first attack -- begun to negatively affect Saudi oil output.

The expatriate departures have hit across the board but particularly have affected Saudi Aramco's exploration, finance, geology, training and project management sectors. Without them, indigenous Saudi -- and some South Asian -- workers might be able to keep the lights on, but oil production can be a tricky business. The Western expatriates are the best that money can buy, and the indigenous Saudi workers are not.

In December, to the surprise of the markets, Saudi Arabia took the lead in arguing within the OPEC cartel for a production cut even though prices were in excess of $40 a barrel -- well above the $22 to $28 a barrel band that Saudi Arabia had favored.

The reason is simple. Saudi Arabia no longer can produce as much crude as it would like. In December it produced 9.5 million barrels per day (bpd), still under the 11 million bpd that it claims it can reach if the circumstances warrant. If more production was not warranted in October, when prices brushed $55 a barrel and Saudi output did not increase, they never will be.

As Stratfor said at the time, the indicators had led us to an "inescapable conclusion: Saudi Arabia, the bastion of the oil markets and the producer of last resort, has no excess capacity."

Indications from the markets and sources are that Saudi Aramco is not just losing surplus capacity, it also is losing nominal capacity. In the aftermath of the Jan. 1 OPEC cut, Saudi Arabia already has reduced production to 9 million bpd. Other OPEC producers have not followed suit.

And why should they? With Nymex crude prices above $46 a barrel, all producers are producing as much as the possibly can.

So is Saudi Aramco.