Gulf oil giants Saudi Arabia, UAE tussle over foreign company headquarters

Dubai — Saudi Arabia has said it will stop doing business with foreign companies who do not have their regional headquarters in the kingdom by 2024, in what could be a blow to international services companies and consultancies operating in the hydrocarbon sector.

"The decision aims to incentivize the localization of businesses by foreign companies that deal with the kingdom's government or any of its agencies, institutions and funds, in addition to creating more jobs, limit economic leakage, increase spending efficiency, and guarantee that the main goods and services purchased by the different government agencies are made in the kingdom with appropriate local content," according to an announcement made via the Saudi Press Agency late Feb. 15.

The move underlines a growing tension between Saudi Arabia and the UAE, where most companies base themselves in the region and which stands to lose from the directive.

Both are core members of OPEC and are seeking to expand their crude production capacity, as well as their downstream sectors, to monetize their vast oil reserves. Both countries also have ambitious plans to expand their green sectors, including in hydrogen.

Weak economic performance amid COVID-19, combined with the need for Saudi Arabia to kick-start its diversification plans, is likely driving the move, analysts told S&P Global Platts.

"Despite the macro declarations of Gulf unity, national interest is driving this decision due to the economic threats of low oil prices and the pandemic," Rachna Uppal, director of research at Azure Strategy, a MENA focused consultancy.

"It is not about trying to bring anybody else down, it is about trying to deliver on what has been promised."

The new rule will apply to foreign companies wanting to do business with Saudi public companies. It is thought that will apply to clients of Saudi Aramco, which is 98.5% government owned. Further details of the directive were expected to be revealed at a later date.

The announcement followed memorandums of understanding signed by 24 companies earlier in February, in which they pledged to establish their main regional offices in Riyadh. Among these companies were the major oilfield services company Schlumberger, as well as Pepsi and PwC.

Going head to head

While tensions between the UAE and Saudi Arabia may be simmering, they are unlikely to battle publicly at present, analysts said.

Signals that the relationship may be becoming fraught include recent spats at OPEC+ meetings, as well as divergences in geopolitical policies, such as the UAE normalizing ties with Israel in September.

The UAE, which has internally questioned whether to remain within OPEC, drew Saudi ire last summer when it briefly breached its production quota, as the kingdom has tried to keep the coalition's output discipline in line to bolster oil prices.

In January's OPEC+ meeting, Saudi Arabia made a surprise pledge to cut an extra 1 million b/d of production for February and March, which has helped send crude prices to 13-month highs, relieving financial pressure on other members.

"One of the biggest factors in the OPEC+ meeting last month was the UAE. In some respects, Saudi Arabia has already extended an olive branch to the UAE. The decision was mostly to accommodate the UAE," said a Gulf-based industry source, who spoke on condition of anonymity.

"The danger could happen maybe six months from now," the source said. "What happens when US shale makes its comeback and Iranian barrels start hitting the market? There might be a problem if prices start heading south again. Then, the onus is on Iraq and UAE to cut, plus Saudi is asking for regional headquarters. Then it could impact the relationship."

Decisions to make

For companies operating in the oil and gas sector, non-compliance with the new rule would mean forgoing a significant portion of their business, the source said. Saudi Arabia, the world's largest exporter of crude, pumps roughly one out of every 10 barrels of crude consumed globally.

"Saudi Arabia is at least 30% [economic] market share of the [Gulf] region. In some sectors its 50%," said the source. "They are 60% of our revenue, and if we lose that I do not really know what would happen."

There was an indication in January that such an announcement may be coming, when, during the Future Investment Initiative conference in Riyadh, Crown Prince Mohammed bin Salman announced his intention to make Riyadh one of the 10 largest city economies in the world by 2030. At present, Dubai is considered the financial center of the Gulf Cooperation Council (GCC).

Uppal said the move puts the two in direct competition.

"The Gulf is a very competitive place. There is only so much money globally to be pumped into the region," Uppal said.

Questions remain over whether Saudi Arabia can transform itself into a business-friendly environment in such a short time frame, however.

"Dubai is years ahead of Riyadh and other Saudi cities," Uppal said.

"It will take a lot more than three years to develop Riyadh infrastructure and make it more expat friendly, as well as regulatory and legal frameworks to allow companies to operate in the Kingdom. I imagine there will be a few teething problems."