A Look Into Saudi Arabia's Future

 |  Includes: GAF, GULF, MES
by: Peter Pham

Saudi Basic Industries Corp (SABIC), the world's biggest petrochemical producer, is looking to tap into the American shale gas sector as part of its future expansion plan. Similarly, its peer, Saudi Arabian Oil Company, more commonly known as Saudi Aramco, the world's biggest oil exporter and the country's leading business entity, is also hunting for more fuel to fill local energy demands. The news comes a few days after the International Energy Agency released its "2012 World Energy Outlook" that has predicted that United States is going to become the biggest oil producer and a net exporter of natural gas by 2017 on the back of the shale gas boom.

On the other hand, the U.S. Energy Information Administration gave a completely contradictory forecast. By 2035 the country's annual oil and gas imports of 24 quadrillion BTUs would be nearly three times as much as its annual exports. As Jeremy Leggett, an energy analyst and the chairman of the solar energy firm Solarcentury pointed out that the U.S. shale gas boom, at its current rate, is unsustainable in the long run and the massive gas supplies may have lead some into believing that the country is on track towards energy self-sufficiency.

Nonetheless, Saudi Arabia needs more gas for its energy and desalination plants. Saudi Aramco has expressed its concerns that the country is consuming a lot of its own oil, roughly 4 million barrels a day, instead of exporting the commodity at a higher price. In the meantime, Saudi Aramco is itself hunting for shale gas reserves in Saudi Arabia. Even with Saudi production being pushed to nearly 10 million barrels per day, domestic demand is outstripping supply.

Through SABIC, Saudi Aramco sells gas to local firms. According to Baker Hughes, Saudi Arabia has unconventional shale gas reserves of 645 Tcf and conventional gas reserves of 279 Tcf. The country's Ministry of Petroleum and Mineral Resources has been trying to increase the rates at which it sells gas to SABIC for just $0.75/MMBtu.

The oil and gas behemoth that is Saudi Aramco is the biggest player in the oil and gas sector but since it is entirely owned by the government - the house of King Saud - and is not a component of the Saudi Tadawul All Share Index (TASI) - a Saudi equivalent to S&P 500 - it has remained off limits to investors. Amid all the media hype surrounding Apple (NASDAQ:AAPL) being valued at $619 billion in August this year, often wrongly labeled as "the biggest company of the world"- the press had largely ignored that Saudi Aramco was already a trillion dollar empire nearly two years ago. The Financial Times had valued the business roughly at $7 trillion, given the fact that it has about 18 times the reserves of ExxonMobil (NYSE:XOM). Moreover, unlike Exxon, Aramco's reserves lie in the middle of the desert which translates into easier and far more effective extraction than an offshore rig. Similarly, in the conservative estimate of Prof. Sheridan Titman, from University of Texas at Austin and a National Bureau of Economic Research associate, Aramco is worth approximately $2.2 - $3.6 trillion.

The company currently has a $35 billion, five year expansion plan. The decrease in Iranian oil output has put pressure on Saudi Aramco to increase its production levels. It has been the Saudis willingness to push their production on behalf of the U.S. to isolate Iran through sanctions. There is little love-loss between the two nations and this is one of the main reasons why the U.S. is so worried about any further spillover of Arab Spring into places where the oil flow must continue or have all of their foreign policy objectives thwarted.

Even if the U.S. achieves energy independence it will have little effect on Saudi Arabia's ability to sell their oil as the chart above implies, domestic demand is rising, but so are the needs around the world and unless there is a breakthrough in portable energy sources straight out of science-fiction - not beyond the realm of possibility, of course-- liquid fuels will be with us for a long time.

Saudi Arabia is basically an oil economy but the government has been trying to diversify its portfolio through increased investment in other sectors as well, such as power generation, telecommunications and petrochemicals. According to Citi's research report, the country's non-oil sector will rise by an impressive 7.5% this year while the new mortgage law is expected to revamp the nearly frozen real estate market. The country's GDP of $576.8 billion dominates the Middle East and North Africa (MENA) region and is almost 60% bigger than U.A.E's, its closest regional competitor.

Although in the first three quarters of 2012, its GDP growth rate fell from 6.8% in Q1 to 5.51% in Q3 it is still one of the highest in the world. For the fourth quarter, GDP is expected to be second highest among G20. Next year, the GDP is projected to grow by 5.5% which is higher than the emerging and developed markets estimated average of 3.5% and 1.3% respectively. Currently Saudi Arabia doesn't have its own ETF although two new regional ones are in process: Market Vectors Saudi Arabia ETF and Market Vectors Saudi Arabia Small Cap ETF. A way to invest there is through the three MENA ETFs as this region is the significant trading block of Saudi Arabia:

1. SPDR S&P Emerging Middle East & Africa ETF (NYSEARCA:GAF)

2. WisdomTree Middle East Dividend Fund (NASDAQ:GULF)

3. Market Vectors Gulf States (NYSEARCA:MES)
















Net Flows (YTD US$Mil)








Dominant Sector

Fin. Services (20%)

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Dominant Country

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.