Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite

Hangover of oil dependence has only just begun.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

It was supposed to be the biggest, most ambitious, most lucrative infrastructure project Spain’s construction industry had ever undertaken on the Arabian Peninsula. Launched three years ago, the high-speed rail link project between Medina and Mecca was a dream come true worth some €6.7 billion, the perfect payoff of decades of patient lobbying of the House of Saud by Spain’s former King Juan Carlos I. But now it’s a rotting financial albatross around the necks of 12 large Spanish companies.

Even from the beginning, things were not easy. Within a year and a half, the project was suffering significant delays. And two months ago, the consortium asked the Saudi government for more funds — “an absolute minimum of €1.4 billion” — to cover the Saudi Railways Organization’s “unforeseeable demands,” such as, amazingly, keeping desert sand off the tracks.

None of the consortium partners want to take responsibility — or the attendant financial hit — for keeping sand off the tracks. And the House of Saud, already hemorrhaging money due to the oil bust, is in no position to pay Spanish companies extra funds for it.

Now, news is leaking that the Saudi Railway Organization stopped paying advances on the consortium’s work over six months ago. According to the Spanish financial daily Expansión, the consortium could be owed hundreds of millions of euros in late payments. Although the reasons for non-payment are as yet unconfirmed, sources in Spain are blaming it on the House of Saud’s acute cash-flow problems.

Saudi Arabia’s oil-dependent economy is in a bit of a pickle. For its budget to break even, the country needs an oil price of $104 a barrel, claims the Institute of International Finance. The current price is around $45. According to the IMF, Saudi Arabia may run out of financial assets needed to support spending within five years. So severe is the problem that the House of Saud now has little choice but to do something it hasn’t had to do for decades: ration its spending.

To mitigate such economic pressures, Riyadh is planning a massive sell-off of major government entities, including up to 5% of Aramco, presumably the largest oil producer in the world, valued at $2 trillion.

Ominously, commercial banks recently began tightening lending to anyone outside of the government. As the cash flow problems of both the government and large domestic companies stack up, stories proliferate across the Middle East of salaries and contracts not being honored.

Just this week Saudi construction firm Binladin Group laid off over 12,000 Saudi employees. A further 77,000 out of a total 200,000 foreign workers were shown the door, though approximately 50,000 of them are refusing to leave the country because they haven’t been paid for at least four months.

It’s not just in Saudi Arabia that infrastructure projects are feeling the crippling knock-on effects from the oil crisis. This week Qatar Railways Company terminated the €1.5 billion contract of an international consortium that was building the stations of the Doha Metro project. The company did not give any reason for the contract termination but emphatically insists that every effort will be made to “ensure continuity of the project.” It even hired a replacement contractor to back up its claim.

As for the discarded consortium, its three main partners — South Korea’s Samsung C&T, with a 50% stake; the Qatar Building Company, with a 20% stake, and Spain’s Obrascon Huarte Lain (OHL) with a 30% stake — will have little choice but to launch litigation. For OHL, its Arabian hangover has only just begun. Not only will it be left €250 million short of funds by the termination of the Doha metro contract, it is also one of the leading partners in the fast-train-to-Mecca consortium.

For the moment — and probably for some time to come — the fast train to Mecca is going nowhere, very slowly. According to sources close to the Spanish consortium, it will be impossible to finish the project by the official deadline, scheduled for January 1, 2017. The consortium will need at least an extra 12 to 18 months to finish the work, which one assumes will be dominated by lots of sand brushing, work for which Saudi authorities adamantly refuse to pay.

But that doesn’t mean the 12 Spanish companies, three of which are large publicly owned companies, won’t get paid. As has happened already on numerous occasions with Spain’s world-beating construction industry, taxpayers in Spain (myself included) will be shanghaied into finishing the job. By Don Quijones, Raging Bull-Shit

Taxpayers, get ready to open your wallet! Read … Saudi Arabia Turns to Nightmare for Spanish Consortium

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  31 comments for “Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite

  1. Chip Javert says:

    Well then, it sounds like everybody pretty much knew what was going to happen when they went into the deal, and they (or at least the Spaniards) knew how to get out of it.

    This does not sound like business; more like Casino Royale…

  2. Jungle Jim says:

    How the heck could anyone familiar with the desert not have anticipated sand drift ? That’s equivalent to the Canadian Pacific not expecting snow drifts.

    • Bigfoot says:

      No fears, Goldman-socks it to ya will come to the rescue with the great House of Saud oil field IPO & this little financial debacle will be history. Perhaps the Saudi Railway Organization laid their checkbook down & it too was covered over by sand.

      What a mess. I wonder where the majority of the 50,000 unpaid foreign workers that won’t leave are from? That’s a large group of mad people. Metal scrappin in their future?

      • Jonathan says:

        The Saudis would be begging foreigners not to leave once shit really hits the fan, because even the Saudis themselves know their very own people are useless bums.

      • MC says:

        Most foreign workers in the Gulf are from Asian countries with a Muslim majority, like Bangladesh, or a sizable Muslim minority, like India.
        They aren’t usually treated terribly well and workplace abuses are common as it’s very hard if not impossible for a foreigner to fill a complaint with local authorities on the matter.

        Which leads us to another matter: to save money, last year Saudi Arabia ended a long-running contract with Pakistan to keep thousands of tough Pakistani soldiers in the country.
        For all the military hardware (more in a minute) the House of Saud does not trust its regular military and much prefers entrusting its own safety to either foreigners or the National Guard, a parallel army composed of tribal militias personally loyal to various princes.
        Pakistani troops remain in the country, but these are contractors (read: mercenaries), not regulars, and usually serve as bodyguards to noblemen or in a personal capacity.

        Now there’s the question of why Saudi Arabia is hellbent on slashing expenses left and right but is actually increasing her military budget, as various recent mammoth contracts prove.
        The problem is exclusively political: it’s no mystery relationships between Washington and Riyad have been deteriorating for years now.
        To this it must be added the House of Saud has been in bad relationships with Iran since the days of Reza Khan, as proven by how his son pitched to his Western allies the idea of invading and breaking up Hejaz.
        The US has long been the ultimate safety provider for the House of Saud. For all the talk of keeping infidels out of the Holy Places, the Saud clan always breathes a little easier when US servicemen are at the ready for defending them.
        With the fracking revolution cutting oil imports from Saudi Arabia to a single digit percentage of their needs, the US had to be kept entwined in some way to the oil kingdom. This was through gargantuan military contracts, which ensue contractors will fight tooth and nail to keep relationships between Washington and Riyad at least civil. For the time being.

        • Winston says:

          Thank you for that extremely informative post. It sounds like you have a “ground truth” perspective due to having been a resident in Saudi Arabia or somewhere in that area.

        • interesting comment there
          I’d somehow managed to miss the fact that Saudi had terminated its contract with the Pakistani military

        • Guido says:

          It is indeed an aberration how the West has propped up SA for so long and it is something I have been struggling to understand.

          Certainly, from a cultural point of view, Iran is far closer to the West than SA can ever hope to be. Iran is also a far larger and far more productive society than anything the Arabian Peninsula can ever aspire to become. Too, Iran has a far more interesting mix of natural resources from caviar to oil and everything else in between including some very interesting agricultural land.

          So I have always struggled with the reason for demonising Iran whilst going into business with a retrograde, extremist, brutal and, frankly, ignorant and primitive society like SA.

          Too, the energy equation has changed significantly over the past 20 years.

          Western refining capacity is not only old but it is also overwhelmingly geared towards refining light sweet crude. The West has not build any significant refining capacity in the past 40 years. This is important to understand because SA has not produced any significant quantities of light sweet crude in a couple of decades.

          Prior to the fracking revolution, major suppliers of crude to the USA have been Canada, Mexico and Venezuela. It makes sense of course. Why ship heavy sour half way across the world when you have plenty on your doorstep?

          If my information is correct, the only places in the world that can still supply significant quantities of light sweet crude are Basra (Iraq), Libya and Nigeria (Bonny Light).

          In light of the above, the West’s cozy relationship with SA is even more puzzling.

          Here is another factoid that most people are unaware of.

          SA is a country of scarcely 30M souls that is mostly desert with only 4 cities to speak of. Other than oil, it produces nothing that is economically viable. Yet, SA consumes as much oil OVERALL as Germany or South Korea.

          Thankfully, I am forced to deduce that about 13 years ago, the West has finally decided to cut SA loose although very slowly. I seem to have detected further confirmation about 1 year ago that we have finally thrown this vile people under the bus. I cannot agree with the way we are doing this and, frankly, it is 60 years too late, but, we have finally done it.

          With luck, these are the last years of this aberrant, intolerant and vile regime that nobody will miss… other than the MIC of course…

  3. Jonathan says:

    Always happy to see one trick oil ponies getting karma-bitched, who think their “successes” is anything but lucking out geographically on black liquid.

    • OutLookingIn says:

      “lucking out geographically”

      If it wasn’t for that “black liquid” being found under the desert sand in great quantities, the differing Arab tribes would still be living under tents, riding camels and shooting each other over water well rights.

  4. Willy2 says:

    – Perhaps Qatar considered the price for those stations to be too high and used this “trick” (in an attempt) to force the price lower.
    – Saudi Arabia also is fighting a costly war in/against Yemen. So, SA had to make some (tough) choices.
    – The BinLaden construction Group laying off people ? Outrageous (tongue in cheek) !!!!!!!!!

  5. Don says:

    Read a book named “Twilight in the Desert” by Matt Simmons a few years back (it was published in 2005). It proposed that Saudi Arabia only had a single major reserve called Ghawar that was diminishing in output.

    What happened to that prediction? Is Saudi Arabi still dependent upon a single reserve or have output predictions been raised for Ghawar??????

    What are we seeing? Are the Saudis finding new reserves or are they depleting Gahwar to compete with the US?

    • Wolf Richter says:

      The death of Saudi Arabia’s oil reserves has been exaggerated, so to speak, for the past decade or two. But there are still no real signs that its oil reserves will dry up anytime soon.

      • hidflect says:

        Maybe that well really is a gift from Allah. It’s been pumping for decades and decades. The story I heard is that there hasn’t been a publicly stated estimate of its reserve since the Americans got kicked out. I mean, you’d expect Saudi Arabia to collapse at some point…

        • Wolf Richter says:

          They’re going to run out some day. That’s for sure. But that day may be further in the future than many folks had predicted. All we know right now is that they’re pumping more than they’d pumped ever before, so that’s not a sign that they’re running out soon.

  6. R Davis says:

    I am confused, 2.45 minutes into the documentory – Piers Morgan: The Luxury Life of Dubai & A Luxury Tour of Dubai – Piers Morgan tell us that the OIL of Dubai will run out in only 10 years – this video was made several years ago – there are not many years left. The Royal Family Of The House Of Saud signed off on this Documentory – which tell us that it is true.
    Next is the failed property investment venture of Dubai – the burning sky scrapers of The United Arab Emirats – called by some, the burning Mountains of End Time Propheys.
    According to all the leading papers, no building throughout the UAE is safe, they are all potential inferno’s, disasters just waiting to happen.
    Saudi Arabia is a basket case – who in their right mind would do business with them – or am I missing something ?

  7. Nicko says:

    Many of these mega-infrastructure projects were conceived when oil prices were in the stratosphere…consequently, many were probably not economically viable. I’m sure more rail projects will make it back on the master plan. For example, Saudi recently gave the go ahead to build a bridge crossing the Red Sea and join with Egypt, it will carry oil, rail, and cars. The cost will be covered by tolls by traveling pilgrims on Hajj. There is still a huge potential for the growing middle class in the region.

    • MC says:

      Now, that bridge is a hot potato.

      Saudi Arabia and Egypt have been spinning the commercial potential of the project, but the underlying reason for that bridge is far more sinister.
      In 1986 Bahrain and Saudi Arabia inaugurated the King Fahd Bridge linking the two countries. It was spun exactly in the same way as the proposed bridge over the Red Sea, but it served its originally intended purpose in 2011, when the Saudi National Guard rolled through it to crush the Shiite-inspired uprising against the ruling al-Khalifa family.
      I have no doubt that bridge would help the Egyptian army to roll into Saudi Arabia in case of “troubles”. As I said before, the House of Saud has a long standing policy of not trusting its own regular military, much prefering the tribally-recruited National Guard and foreign troops.

      The Egyptian military is a bloated monstrosity. If Saudi Arabia at least has oil, Egypt suffers from an extreme version of the malady afflicting the US (GDP is not growing as fast as the population) described by Mr Richter. Egypt has long been dependent on foreign benefactors to afford both that oversized army and the feared Mukhabarat, the secret police keeping Egypt’s military rulers in power since the days of Anwar Sadat.
      The two chief benefactors are the US and Saudi Arabia, followed at a safe distance by the EU and the rest of the GCC.
      That money comes with a lot of strings attached. It’s beyond doubt the Saudi want the Egyptian army ready at a moment notice to come to their aid “if the need arises”.

      • Bigfoot says:

        Thanks for all the input, I’m weak on SA history. One thing I have looked at in the past due to bldgs falling down in the US was the BLgroup mentioned here in the article. Talk about some far reaching tentacles. I’ve read that only the royal family is wealthier. I just wonder what is below the surface of the mundane recorded in the press. Everything is falling apart because we forgot to factor in clearing sand from the rails?? Something’s not right with this.

        Back when I looked at BAgroup, it was an eye opener. The American political connections, carlyle, bushies, bbci, paki, afgh, international banks, & a whole lot more. Trying to trace the money flow seems almost impossible. It’s amazing that almost nothing financial or political that is “fed” to us is truthful & searching for the truth leaves one augering into the ground. What’s your take on this link if you have time?

        • MC says:

          The Bin Laden Group has an extremely interesting early history.
          The patriarch, Mohammed, was neither a native Saudi nor a member of a noble clan: he was a Yemenite immigrant who happened to have a construction firm at a time when oil dollars where starting flowing into Saudi Arabia.
          Mohammed was a gifted businessmen, but also understood perfectly well internal Saudi politics.

          It’s well known the House of Saud has long had a lifestyle so extravagant and expenses so massive even the kingdom’s oil wealth is often barely enough. Under King Saud they were not enough, period, and the country suffered a massive budget crisis which was averted when Mohammed bin-Laden gifted King Saud an unspecified sum to make ends meet.
          One needs to remember at the time there was no sophisticated financial industry in Saudi Arabia: despite their taste for Western technology, the House of Saud was very wary if not downright distrustful of modern banking and they preferred doing business “the desert way”, the unwritten code regulating commercial and business transactions across the Muslim world.

          Needless to say, King Saud and his son, Crown Prince Faisal, for all their other faults, were honorable men and kept their end of the deal under “the desert way”. Bin-Laden was richly rewarded by handing him and his group as many government contracts as possible. Faisal, a highly intelligent man, also started the practice of initiating joint ventures between the ruling house and the Bin-Laden Group, whose operations are often shrouded in mystery and secrecy.

          Faisal again kept faith to his end of deal by giving the Bin-Laden Group the most important government contract to date: the rebuilding and modernization of the Holy Sites in Mecca and Medina in the late 60’s. This was as much a financial as a personal gift to the elder bin-Laden, as by all accounts he was an extremely pious man.
          Since then it’s literally impossible to say where the Bin-Laden Group ends and the House of Saud begins.

          US and British contractors have long learned how to do business with the Saudi. Spanish haven’t.
          Despite the relentless lobbying by King Juan Carlos on their behalf, these Spanish contractors pretty much rushed into the fray, blinded by the prospect of massive nominal contracts.
          Now they are getting hammered.
          You see, dealing with these oil kingdoms, where you never know where the State stops and the ruling family starts, is not exactly easy for a Westerner, even one accustomed to dealing with Eastern Asia.
          Some thing that in our own business climate would be considered corruption or bribery are the norm there. This is not a criticism: it’s just a different way of doing business.
          To this it must be added personal connections matters: being on friendly terms with a prince helps, but being on friendly terms with several princes helps far more.
          The House of Saud is huge (about 6000 members) and divided in several subclans, not all of them on friendly terms. To this it must be added the princesses of royal blood: while rarely, if ever, seen in public they exert enormous influence behind the scenes: here it must be remembered the only advisors King Saud fully trusted were his paternal aunt and his elder sister, whose advice he always seeked.
          Dealing with them and their power struggles is a hard challenge as any.

        • Bigfoot says:

          Thanks for the input MC

      • Nicko says:

        It’s a fascinating game the Egypt military plays in the country and region. One thing I’ve observed while living in Cairo over the past few years, the military is really the only institution strong enough to endure any kind of crisis, the political parties are all kept on a very short leash. On one hand the military still commands the respect of most of the population, perhaps due to mandatory service and generous benefits to anyone part of it. Conversely, political leaders in Egypt have proven very expendable in recent years, whether they’re part of the military or not. Three governments have been deposed in Egypt over the past 5 years! Regardless, There is always the hope more moderate voices will be heard, over the reactionary paranoia of the generals. Both Egypt and Saudi have young, decently educated, and western leaning populations. Western allies (and to some extent China and Russia) are opening their purses to Egypt once again to keep it from the brink.

  8. chris hauser says:

    um, railroad in the sand blown desert. um, seasonal passenger needs. um, spanish construction contractors. um, lots of oil money.

    look upon my works, ye mighty, and despair.

  9. the bottom line for Saudi is that there are 30 million people living in a country that could support only 1 million pre-oil.

    Their economic advisers assure them that this reality is irrelevant, that ”other industries” will somehow be able to replace oil—hence the railway building fantasy. (their towers in the desert also seek to fulfil the same dream)

    This is the ultimate Saudi fantasy:

    So——based on the above, Saudi’s future income is going to be based on “external” investments, which are themselves entirely dependent on continued supply of Saudi and world oil.
    Not only that, after sucking all their oil out of the ground and either selling it to the infidels, or using to finance wars with the infidels, they are selling shares to the infidels in an oil business which is running out of oil!!! But not to worry. Oil production is an irrelevance. Wealth can be created by other means. Saudi economic advisers are about to find out that it can’t.

    The fact remains that the Saudis do not have an economy. They are merely selling their future to buy the fantasies of their gold plated present.
    Without oil, religious dogma and their place in international politics will fade into oblivion. With the oil gone, their unemployable young men will start fighting among themselves in an attempt to restore their wealthy lifestyle, not realizing that it has gone for good and there is no option but to return to the desert. This will tear the country apart. Nevertheless they will continue to demand more (as we all are doing).

    With no Saudi oil to keep them there, the American fleet will sail away and leave them in their killing fields. Without the Saudi prop, the surrounding petty shiekdoms will implode as well.
    The fantasists in Dubai imagine that their international financial empire is somehow self generative, and is not locked into the oil market.

    This mess has been festering in the region for 100 years, right now we are witnessing the endgame. Enjoy the view while you can. We all had a wonderful oilparty, and now it’s nearly over

    • Nicko says:

      The Middle East still holds an estimated 50% of the worlds proven oil reserves, and 40% of proven gas reserves….they will be imprtant for decades to come.

      • The Saudis play their oilcards close to thier chests—so no one really knows what their reserves are.
        Decades??–I doubt it.

        If they had decades left, they wouldn’t be selling off shares in Aramco to raise cash.
        Bin Calman is saying “if” there is no oil by 2020, Saudi can manage quite well without it.

        Now—excuse me for being alarmist here—but where did “if” suddenly come from???
        There’s been no if about oil until now—so what’s changed?

        They are the ultimate commercial fantasists—convinced that embedded energy (ie in buildings, railways etc) will continue to deliver income forever

        • DV says:

          If they really want to float Aramco (not some JVs), they will have to disclose audited reserves. No other way. That is why all this bla-bla-bla about Aramco IPO is one big flop.

  10. ERG says:

    Very recent news is the Saudi Oil Minister, Ali al-Naimi (in that spot since 1995), has been fired or retired, depending on the source.

  11. Chicken says:

    What a nice gesture, Spain bailing out international construction firms. Where do I sign up?

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