SHEIKH YAMANI: STILL 'MR OIL' 

Eric Ellis, London

06/08/1990

Business Review Weekly

Sheik Ahmed Zaki Yamani: few in world business have wielded as much influence as "Mr Oil" did during his 24 years as Saudi Arabia's Oil Minister and the head of Opec, which supplies half the world's oil.

From 1962 until his sudden dismissal in 1986, he called the tune to a Western world craving oil. A few cryptic remarks from Yamani could, and often did, send boardrooms into a panic, make governments shudder and send stockmarkets careering.

Best remembered as the architect of the 1973-74 energy crisis, when Opec halted supplies to quadruple oil prices in two years and usher in a decade of high inflation, Yamani was sacked by Saudi royal decree in 1986 after a bitter dispute over pricing policy. Never far from the oil limelight despite his dismissal, Yamani still commands considerable authority and respect. With his former secretary-general at Opec, the Iraqi Dr Fadhil al-Chalabi, Yamani has put together a research group in London, the Centre for Global Energy Studies, to exercise ssme of that influence. The move is timely. Oil prices have dropped from a four-year high of $US23 a barrel in January to a 12-month floor of $US15 in April. That is equivalent to slicing $US100 billion off the world's fuel bill Q good news for motorists and consumers but bad for oil producers such as BHP.

It is also bad news for Opec, the 13-nation cartel of mostly developing countries that are burdened by big foreign debts and flagging production. An emergency meeting of Opec held in Geneva on May 2 agreed to cut production by a million barrels a day for three months to ease the world oil glut. This has stopped the fall temporarily but the market is still edgy.

"The May meeting was a fairly shaky compromise," says Alan Marshal, an oil analyst with Nomura Research. "The market is looking for a more workable agreement over the longer term."

Against this backdrop and the movement towards democracy in Eastern Europe, Yamani has assembled an impressive array of oil, business and political experts for the London group. Financed by the Yamani Foundation and operating from his private office in fashionable Knightsbridge, it includes four analysts and a team of secretarial staff working full-time on energy issues.

The body's governing board is chaired by Yamani and includes former British Conservative Prime Minister Edward Heath, the former Labor Chancellor of the Exchequer Denis Healey, Abdulaziz Hijazi, the former Egyptian Prime Minister, and Yousef Al-Shirawi, Bahrain's Industry Minister.

The international council is chaired by Yamani and includes former West German Chancellor Helmut Schmidt, former chairman of the US Federal Reserve Board Paul Volcker, former US Secretary of Defence and Energy James Schlesinger, the recently retired chairman of British Petroleum, Sir Peter Walters, Kuwait's Oil Minister, Sheik Ali Khalifa Al-Sabah and the chairman of the state-owned Petro-Canada, Wilbert Hopper, as well as oil and scientific leaders from Japan, the Soviet Union, France and Venezuela.

The group has just published its first "global oil report", which studies the volatility in the world's oil markets over the past year and examines Opec's role in those markets. The group plans to publish reports later this year on the Soviet oil industry and the impact of change in Eastern Europe.

"We're a non-profit group dedicated to promote a better global understanding of issues and problems of energy Q not just oil, but all forms of energy," Yamani says.

Chalabi denies the group is a front for Yamani's business activities or for covert Saudi interests. Nor, he says, does it represent an attempt by Yamani to undermine Opec by creating an alternative secretariat just as Opec's future as a cartel is being questioned.

The all-powerful Opec once maintained a semblance of unity but the ties have become weaker in recent years. Only five of the 13 member countries have any real influence: Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates. Together they supply 85% of Opec's daily output of 23-24 million barrels. Chalabi says this could be further condensed to a core of the Saudis and the Kuwaitis, the only two Opec producers with much excess capacity.

"These are the two countries to have the biggest say in Opec affairs and I believe they will become even more important over the next few years," he says. Opec has never been a tight cartel. Maverick members are continually breaching quotas and persistent in-fighting and the the Gulf War have prompted speculation about the cartel's future, given the power of its main members and the opening up of the Eastern bloc.

Those same Opec mavericks, led by Nigeria and the North African states, are lobbying to hold back supplies and lift prices as a way of curing their own chronic economic ills. Saudi Arabia and Kuwait are resisting this, fearing that higher prices would encourage Western consumers to look for cheaper suppliers. The spectre of the Soviet Union, the world's biggest oil producer, joining the world market as the West is looking for cleaner energy sources bolsters the Gulf states' arguments against any dramatic moves.

"In the 1960s and early 1970s it was the major oil companies, the so-called Seven Sisters, who set the oil price," Chalabi says. "Then it was Opec until the early to mid-1980s. In the 1990s, I believe the only Opec countries that could dictate the market to any real degree will be Saudi Arabia and Kuwait. The rest are becoming peripheral."

He says political events in Eastern Europe have also brought "an oil revolution, possibly one of the most significant events in oil history", and one that could pose further headaches for Mikhail Gorbachev and his perestroika program.

The Soviet Union produces 12.1 million barrels of oil a day, twice Saudi Arabia's output. That amount could easily be absorbed domestically but Moscow prefers to encourage the use of gas for fuel and exports about four million barrels a day, divided about equally between Eastern Europe and the West, where it generates much-needed hard currency. About 60% of the Soviet Union's foreign-exchange earnings come from oil sold to the West.

But important changes are under way that could affect not only world oil prices and Opec's influence on them, but also add to Gorbachev's problems in his push for reform.

Chalabi believes Eastern Europe will look other than to Moscow for the oil to fuel its expected boom. Moscow has served notice that from next year it wants hard currency for its oil and gas, and that counter-trade and barter are out.

Yamani says: "The changes we have seen will soon mean that there will be a single, integrated global supply-demand picture."

Opec has responded by courting Prague and Budapest. Saudi Arabia and Kuwait have even been negotiating to fund the "down-streaming" of the oil they would supply - in other words, helping set up the supply chain, down to the corner service stations, that we take for granted in the West.

At the same time as Moscow's traditional customers are tempted to go elsewhere, Soviet production is declining. Chalabi says output was down 2.5%in 1989, 4% in the first quarter of 1990, mostly due to strikes and political unrest in the republics.

Despite exports showing signs of slipping, Chalabi believes the main thrust of the Soviet energy policy will be to maximise exports and seek new markets for money to fund and cushion the shocks of transition to a market economy.

Foreign companies are also being invited to explore for oil in the Soviet Union. France's Elf Aquitaine only last month signed the first such deal with Moscow, over a 35,000-square-kilometre area near the Caspian Sea, a joint venture designed to raise money and the Soviets' international profile.

Chalabi says the willingness of the Soviets to deal with foreigners gives an idea of the challenges Gorbachev faces. At the same time as he is trying to maximise exports to maintain hard-currency flows, declining production could lead to domestic fuel shortages. Chalabi says the expected boom in Eastern Europe will not affect oil prices, production or consumption for at least five years.

"These countries will be consuming the same quantity for some time yet," he says. "Oil exports to Eastern Europe are likely to remain relatively small-scale until the infrastructure moves away from Soviet supply. The West is unlikely to commit major investment, at least over the short term, until there are clearer signs of political stability in the region."

Chalabi believes Asia and the Pacific Rim will play an increasingly important role. World oil consumption last year rose a modest 1.5%, but it was up a healthy 5% in Asia due mostly to the rise of the "tiger" economies of Hong Kong, South Korea, Singapore and Taiwan.

"In a more open world market, the Soviet Union might try to sell more of its output to Asian countries," Chalabi says. He does not expect big fluctuations in oil prices over the next year or two. "I'm expecting a maximum of $19 and a minimum of $15 in the short to medium term," he says.

Other experts agree. Nomura Research's Marshal predicts a trading range of$16P18 for most of 1990. Warburg Securities' oil analyst, Peter Nicol, ffrecasts that $20 a barrel "may be a possibility early next year".

Oil companies can basically live with any price but there could be a bit of pain this year for producers such as BHP, Nicol says. "The impact of this year's unexpected slump will be offset to some degree by the prices last year but earnings could suffer in this quarter."

Meanwhile, attention will be focused on next month's Opec meeting, called to thrash out a new strategy after the May cuts. Chalabi and other analysts are expecting few surprises.

"I think the smaller countries will toe the line. They were mostly successful in stopping the first-quarter slide and the major producers should be happy to keep the status quo," he says.