Stock Saudi oil Aramco refinery
Energy giant Saudi Aramco is leading the third phase of evolution of GCC oil companies. Image Credit: Bloomberg

Since oil was discovered in the Gulf 90 years ago, relations between foreign oil companies and GCC governments have passed through various phases – from shared interests to a change in ownership and management of projects.

However, the GCC states have dealt with all such issues in a flexible manner that helped strengthen their role in managing oil-generated wealth over past decades. Initially, these countries, through concession agreements, gave foreign companies full rights to produce, manage and market oil in exchange for a portion of the oil revenues.

Manna from the heavens

At the time, it was akin to great wealth falling from the sky after years of decline in the pearl industry due to Japan's discovery of industrial pearls. Accordingly, the Gulf states did not bargain and argue much about the concession terms. They did not have the basic knowhow of this industry.

Four decades later, the GCC nations have gained the expertise, whether in oil production, project management and marketing, when they realised how unfair the original oil concession agreements were. This raised awareness in the rest of the Arab oil-producing countries, which led to changes in these agreements for more equitable distribution of wealth created.

The first approach was adopted in the early 1970s by Arab republican regimes such as Iraq and Libya, which nationalized oil companies, but found they did not have the necessary industrial skillsets to develop oil fields or the competencies needed to manage this vital sector, causing significant losses.

In the same period, the GCC countries adopted a rational approach through partnerships, under which they owned 60 per cent of the joint venture companies, in exchange for technological and marketing expertise and human resources.

This led to a rapid development of the oil and gas industry, and eventually the ownership grew to reach 100 per cent for some companies later, particularly after local workers gained needed expertise.

A third phase of change

The first phase took four-and-a-half decades, while the second phase is nearing completion. The Gulf oil industry thus enters a new phase influenced by economic, technological and environmental factors. Oil is rapidly shifting from a sellers’ market to buyers, due to expectations about a decline in oil’s share of the global energy balance, the rapid development of alternative energy sources and moves to reduce carbon emissions.

Although the effects will be felt gradually, they will be huge and influential, requiring preparation on more than one level. This will be linked to the third phase of change in the ownership of GCC oil companies, which can be derived from Saudi Crown Prince Mohammed bin Salman’s stated intention to sell a share of Aramco to a foreign investor, which is expected to be China, by virtue of its heavy reliance on Saudi oil.

This approach, which could include the rest of GCC countries and even oil countries in general, is necessary, as it aims to link the interests of large oil-consuming countries to those of oil exporting ones. This will eventually ensure the existence of permanent end-user markets, particularly in Asia.

- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.