After the Sheikhs: The Coming Collapse of the Gulf Monarchies (9 page)

As with Kuwait, Qatar was closely tied to British oil concessions following the first drilling in 1939. Later offshore concessions in the 1940s were however granted to the American company Superior Oil and Central Mining and Investment, and in the 1950s to Royal Dutch Shell. In 1973, closely mirroring the Al-Saud’s decision to part-nationalise, the newly independent Qatari government took a 25 per cent stake in the country’s oil industry before choosing fully to nationalise the new Qatar Petroleum Company in 1976. In recent years, gas has become much more important to Qatar than oil, with the government-owned Qatargas being established in 1984. Following major discoveries, most of which were located in the massive offshore North Field shared with Iran, exports of liquefied natural gas commenced in 1997, and in 2001 a second government-owned gas company, Rasgas, was established.

The development of the UAE’s hydrocarbon industry is a little more complex to understand, much like its state formation. Given that most of the original concessions were signed before the UAE came into being, the two principal oil-producing emirates of Abu Dhabi and Dubai had already entered into agreements with different companies. In Abu Dhabi’s case, following the discovery of oil at Umm Shaif in 1958, the original British concessions were mostly renewed, with the granting of concessions to British Petroleum. Many other concessions were granted though, with Campagnie Française des Petroles, Royal Dutch Shell, Exxon-Mobil, Total, and the Japan Oil Development Company all winning sizeable stakes, most of which have been renewed. Since independence in 1971 a national oil company—the Abu Dhabi National Oil Company (ADNOC)—has always held controlling stakes in the various concessions, but these have never exceeded 60 per cent.
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Similarly, Abu Dhabi’s gas industry has only been part-nationalised, with ADNOC holding stakes of 68 per cent and 70 per cent in the emirate’s two main gas concessions, while the remainder has been shared between British, American, and Japanese companies.
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With oil discoveries in the early 1960s, Dubai followed a similar pattern to its neighbour with the government-owned Dubai Petroleum Company managing several international concessions from Britain, the US, Spain, France, and Germany. Production increased greatly in the 1980s before peaking in 1991. Since then, Dubai’s oil industry has been
described as simply ‘ticking over’, with Abu Dhabi having accounted for over 90 per cent of the UAE’s oil exports over the past decade.
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After oil was discovered in the western province of Oman in 1964, the Omani government pursued much the same model as Abu Dhabi and Dubai, with its wholly owned Petroleum Development Oman taking a 60 per cent stake in the industry and granting concessions to Royal Dutch Shell, Campagnie Française des Petroles, and Partex. Production increased greatly throughout the 1970s, and eventually reached its peak in 2000, at the same time that Oman opened its first major gas plant at the port of Sur.

Today, the Gulf monarchies produce a combined total of about 16.6 million barrels of crude oil per day,
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about 19 per cent of the global total, with the bulk being produced by Saudi Arabia, Kuwait, and the UAE—or more specifically Abu Dhabi. The six states also produce about 232 billion cubic metres of natural gas per year,
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about 8 per cent of the global total, with the bulk being produced by Qatar, Saudi Arabia, and the UAE. More importantly, perhaps, the Gulf monarchies account for 37 per cent of all known crude oil reserves and 25 per cent of all known natural gas reserves,
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with Saudi Arabia alone accounting for 25 per cent of global oil reserves
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and with Qatar accounting for at least 15 per cent of global gas reserves.
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As discussed later in this book, an important disparity between the six states has thus emerged, with a hydrocarbon-rich group—namely Saudi Arabia, the UAE, Kuwait, and Qatar—all of which have at least a few decades of supply remaining, and with a much poorer group consisting of Oman and Bahrain, the latter of which now has to import most of its oil given the depletion of domestic reserves.
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Closely connected to the region’s hydrocarbon industry has been the channelling of surplus oil and gas revenues into long-term overseas investments by many Gulf monarchies. Conceived as a means of cushioning their domestic economies should the international oil industry falter, most of these sovereign wealth investments have been made through a handful of government owned authorities or companies. Today, their combined assets are thought to be in excess of $1.7 trillion,
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and were generating some 10 per cent in interest per year prior to the 2008 credit crunch.
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Although their operations remain fairly secretive, it is thought that they have historically favoured index-linked blue chip investments in the developed world along with mature western real estate.
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Following
the Dubai Ports crisis of 2006, when a government-owned Dubai company that had already purchased Britain’s Peninsula and Orient Steam Navigation Company unsuccessfully attempted to take over operations in several P&O managed ports in the US, most of the Gulf monarchies’ sovereign wealth funds have been careful to keep their stakes in western companies and multinationals relatively small in order to assuage fears that their investments are being used to gain political influence, and to avoid future xenophobic backlashes. As discussed later in this book, it appears that the funds have now branched out significantly into emerging markets and Pacific Asia, with Kuwaiti and Saudi Arabian funds in particular having poured billions of dollars into China. Soon it is likely that the value of these Pacific Asian investments will exceed those in Western Europe and North America.
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By far the largest of the funds is the Abu Dhabi Investment Authority (ADIA). Founded in 1976, it had accumulated $100 billion in overseas assets by the mid-1990s
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and about $360 billion by 2005.
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Now symbolically housed in the tallest building in Abu Dhabi, it was estimated that ADIA controlled nearly $900 billion in assets in early 2008
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and now it probably has about $600 billion following some losses, especially in the US.
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The second largest and the eldest of the region’s funds is Saudi Arabia’s SAMA Foreign Holdings. Founded in 1960, it now holds over $400 billion in assets. The Kuwait Investment Authority (KIA), founded in 1963, was for many years the largest of the funds, but after the 1990 Iraqi invasion of Kuwait and the subsequent costly rebuilding programme a number of its assets were sold. Nevertheless it still stands at over $200 billion, making it the region’s third largest fund.

The other Gulf monarchies have more modest funds, reflecting their smaller hydrocarbon surpluses. The Investment Corporation of Dubai for example, may have about $20 billion in assets,
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but this is unclear given some of the below-mentioned controversies regarding the Dubai government’s ability to make debt repayments. Bahrain’s Mumtalakat Holding Company and Oman’s State General Reserve Fund are even smaller, perhaps less than $12 billion
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—and with depleting oil reserves they are unlikely to grow much further. Instead, the fastest growing funds are likely to be the more recently established Qatar Investment Authority—founded in 2006 and now controlling about $60 billion in assets given its access to substantial gas export revenues—and the numerous other sovereign wealth funds in Abu Dhabi that seem to operate in parallel
to ADIA. Notable among these are the Mubadala Development Company, which was founded in 2002 under the umbrella of the emirate’s crown prince and which now controls about $15 billion in assets, and the much older International Petroleum Investment Company (IPIC), which has recently been rejuvenated under the stewardship of one of the crown prince’s brothers
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and now controls about $14 billion in assets.
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Nonetheless, despite these substantial overseas investments, there has been a keen awareness in the Gulf monarchies of the need to diversify their economic bases, not only in an effort to reduce their vulnerability to the vagaries of the international oil markets, but also to generate employment opportunities for their fast-growing indigenous populations and to cope with some of the other mounting pressures discussed below. Initially most of the diversification efforts were concentrated on building up heavy, energy-reliant export-oriented industries, all of which relied on the competitive advantage of having cheap abundant energy supplied by the state. Unsurprisingly, it has been the resource-rich states, notably Saudi Arabia, Kuwait, Qatar, and the UAE’s Abu Dhabi that have led the way, often by developing petrochemicals, metals, fertilisers and plastics industries. In Saudi Arabia’s case the biggest player has been the Saudi Arabian Basic Industries Corporation (SABIC), which was established in 1976 to produce polymers and chemicals. Today it is one of the world’s largest exporters of such products, and is also the region’s largest producer of steel.
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Established in 1997, Saudi Arabia’s Maaden was originally focused on developing the country’s gold mines, but has since diversified into the manufacture and exporting of aluminium and phosphate.
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Six new ‘economic cities’ have been inaugurated too, the largest being the King Abdullah Economic City on the Red Sea coast. Containing both a seaport and industrial zone, it is intended to become an attractive, integrated hub for foreign direct investment in Saudi Arabia’s manufacturing sector.
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Since the founding of the Shuaiba Industrial Zone in 1962, Kuwait’s heavy industries have followed a similar pattern of development.
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Most have concentrated on the exporting of petrochemicals, with others focusing on the production of ammonia, fertilisers, and cement.
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Some of these industrial projects have either stalled or collapsed, often as a result of the aforementioned vibrancy of debate within Kuwait’s parliament. Most notably, in 2008 a multibillion dollar joint venture between Kuwait’s
Petrochemical Industries and the American Dow Chemicals—expected to position Kuwait as the world’s greatest producer of polyethylene—was cancelled.
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Qatar’s heavy industries have likewise concentrated on petrochemicals, fertilisers, and steel, with most activity taking place close to the main gas-exporting centres of Ras Laffan and Mesaieed. Most production is in the hands of Qatar Steel, the Qatar Primary Material Company, and Industries Qatar—which are second in the region only to SABIC. Abu Dhabi’s most prominent downstream industrial companies are Fertil (established in 1980 and co-owned by ADNOC and Total),
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the Abu Dhabi Polymers Company (established in 1998),
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and Emirates Aluminium (EMAL). The latter now operates the world’s largest aluminium processing facility on Abu Dhabi’s manmade Taweelah island.
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Over the next few years the sector is set to expand further, with both Mubadala and the Abu Dhabi Basic Industries Corporation (ADBIC) planning to build massive new aluminium plants.
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And by 2013 Abu Dhabi’s IPIC will have built a new Chemicals Industrial City: capable of producing 7 million tonnes per year of aromatics and ammonia derivatives, it will be the world’s largest such complex.
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The government has put its full weight behind these developments, having increased spending on industrial infrastructure by over 400 per cent over the past decade. By the end of 2012 it promises the completion of the $7 billion Khalifa Port and Industrial Zone on Taweelah
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and has committed a further $8 billion for other sector-specific infrastructure projects. A new unit—ZonesCorp
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—has been set up to administer these new districts, provide organisational support, and build residential camps for labourers.
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Combined, it is expected that the new projects will account for 15 per cent of Abu Dhabi’s GDP by 2030.
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In parallel to these heavy, energy-related industries, many export-processing zones have been set up in the region. Again there has been significant variation, with most being in the Gulf monarchies which no longer have the competitive advantage of abundant hydrocarbon resources. By providing integrated industrial zones, mostly geared towards small manufacturers and branches of foreign companies, these states have sought to attract foreign direct investment and kick-start import-substitution industries while also creating diverse employment opportunities for their citizens that are not directly tied to oil, sovereign wealth funds, or government services. Crucially, as specially designated ‘free zones’ in most cases they have allowed companies to circumvent the described
kafala
sponsorship system, and have thus proved popular with multinationals seeking bases in the region unrestricted by domestic legislation.