Governance System in Saudi Arabia Oil Industry and Its Impact on Attracting Investors

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Table of Contents

Introduction
Literature Review
Methodology
Projected Research Limitations
References

Introduction

One of the aims of recent Saudi Arabia’s economic reforms, collectively known as “Vision 2030,” is to increase foreign investments by improving the Kingdom’s investment climate. The governance of the oil industry, which has undergone substantial changes in recent years due to the fall in international oil prices, remains controversial. Understanding how foreign businesses view the governance of the Saudi Arabia oil industry can help to improve it and attract more investors to the sector.

History and Background

Saudi Arabis is the world’s most important oil producer and exporter, whose oil industry is almost totally controlled by the government. Following the recent oil price crisis, the country has developed a new strategy aimed to diversify its economy to focus more on non-oil industries. It currently seeks increased foreign investments and international private sector participation in its economy, including the oil sector. The recent changes include allowing foreign investors to own controlling stakes in Saudi companies, a new consolidated authority to protect intellectual property rights, and significant investments in infrastructure. Investor concerns persist, however, over the rule of law, business predictability, and political risk.

Research Justification

The research is intended to contribute to my studies of corporate governance. Approaching the end of my MBA, I am interested in corporate governance to explore the overlap between social, regulatory, and business best practices. Corporate governance practices of Saudi Arabia are significantly influenced by the country’s unique cultural, economic, and political features, and understanding them is essential for pursuing a business career. It is now a subject of high demand both globally and nationally, and by conducting this research I plan to expand my views on the matter.

The research also intends to contribute to the general studies of Saudi Arabia’s business environment. It can be of interest to local companies willing to change their image on the international market and foreign businesses wishing to invest in the country’s oil industry. In order to make changes to the Saudi market, the efforts of the government and each individual business are required to create a motivational environment where companies can thrive and increase their contribution to the economy.

Research Problem & Foreseen Knowledge Gap

The proposed research aims to focus on the analysis of Saudi Arabia oil industry’s governance from the perspective of foreign investors. The literature provides extensive information on the government’s policies and different aspects of the sector’s management that can be used to form the full picture of the current state of the Saudi oil industry. It intends to cover the gap in the investors’ awareness of the country’s investment climate from the perspective of corporate governance.

Purpose of the Research

The purpose of the research is to investigate how investors view governance in Saudi Arabia oil industry and how their views can be improved to attract more investors. The research intends to focus on the current state of the country’s oil sector after the recent economic reforms and study:

how the companies strive to create a balance between governance and culture;
how Saudi Aramco IPO affects governance;
how the governance landscape changed after the reforms;
what is the historical background of the Saudi governance system, and what factors are affecting it;
what is the role and importance of governance for companies and shareholders, and to what extent it provides protection to shareholders.

Literature Review

The article “The Economic Adjustment of Saudi Arabia and the Docking of Bilateral Economy and Trade between China and Saudi Arabia under the ‘One Belt and One Road’ Initiative” by Chen (2016) explores the process of Saudi Arabia’s economic development. Focusing on the China–Saudi Arabia relations and the “One Belt and One Road” initiative, it studies Saudi Arabia’ economic adjustment under the impact of low oil prices. Changing the ownership structure of oil enterprises from nationalization to privatization is regarded as an important step towards improving the country’s investment climate.

The research “Four Policy Actions to Improve Local Governance of the Oil and Gas Sector” by Vasquez (2016) discusses actions that can contribute to more efficient use of oil and gas resources at the local level. The first is the integration of oil and gas revenues into the local development agenda. The second is adopting mechanisms for ensuring transparency in the allocation of industry revenues. The third is ensuring that mechanisms are in place that provide benefits for local communities from oil and gas projects. The fourth is avoiding enclave economies through the integration of the producing area to the national economy. The efficient management of natural resources on the local level is the key to making the industry more attractive for foreign investments.

The 2020 Investment Climate Statement on Saudi Arabia, prepared by the U.S. Department of State (2020), provides an overview of the country’s investment climate and opportunities as seen from the United States’ perspective. It explores the recent changes in Saudi Arabia’s investment policies, the legal regime, industrial policies, protection of property rights, political and security environment, labor policies and practices, and the country’s financial sector. It is a comprehensive document for foreign businesses wishing to invest in the region that provides a valuable source of information for the purposes of this research.

The report “Towards good governance of the oil and gas sector in the MENA,” prepared by Nakhle for the Economic and Social Commission for Western Asia (2017), analyzes the governance of the oil and gas sector among Arab net oil exporters. It compares the management strategies of each of the five pillars of the value chain of Arab net oil exporters and Norway, used as the benchmark. The main feature identified throughout the comparative analysis is the lack of transparency surrounding the management of the oil and gas sector in the Arab region. Insufficient clarity around the division of roles and responsibilities and transparency of the fiscal terms are the main flaws that prevent oil exporters from translating their wealth into sustainable development on the international level.

The report “Energy Governance in Saudi Arabia: An Assessment of the Kingdom’s Resources, Policies, and Climate Approach” (2019) explores the country’s established policy practices while assessing its emerging strategy for future participation in the oil business. Focusing on the climate policy agenda, it explores the government’s efforts to demonstrate to the world that it can build environmental credibility by joining a collective global action that runs counter to the county’s economic interests.

The article “Oil Rents and Economic Growth in Oil-Abundant MENA Countries: Governance is the Trump Card to Escape the Resource Trap” by S. Matallah & A. Matallah (2016) examines the resource curse phenomenon in MENA countries. It claims the curse can be avoided, and oil rents turned into a tool for economic diversification through improving the governance system. It includes implementing trade facilitation, broadening the region’s export base, developing a highly competitive business environment, and strengthening the private sector’s employment.

Preliminary Research Propositions

Preliminary research propositions primarily concern the ways in which the investors’ view of the Saudi oil industry can be improved. The first is raising their awareness of the changes in the sector’s governance associated with the recent economic reforms and the new Vision 2030 strategy. The second is the focus on Saudi Arabia’s involvement in the climate policy agenda, which is a matter of global concern. The third is increasing transparency in communication with international partners and ensuring the security of their investments. The propositions need to be tested and analyzed through the perspective of the current oil market situation.

Methodology

The research intends to address the identified questions through a systematic approach that includes the following steps. First, conducting a literature review, which includes scholarly articles and reports of government organizations for the past ten years. Second, conducting a historical survey of Saudi oil industry governance. Third, analyzing the current situation on the local oil market’s governance based on the identified research questions. Fourth, exploring the views of foreign investors of the governance of the Saudi oil industry. Fifth, applying theories from literature to propose suggestions for improvement.

The primary sources include the reports of Saudi and international organizations and government agencies and scholarly articles on the subject published over the last ten years. Secondary sources are interviews with industry experts and scholars and articles published in specialized business magazines. Based on the analysis, the research intends to provide recommendations on how to improve oil industry governance in Saudi Arabia and the attitude of potential foreign investors.

Projected Research Limitations

Possible research limitations may include the lack of data on the foreign investors’ attitude towards the Saudi oil industry and the governance systems of individual companies. The scope of the research will possibly be narrowed to focus more on particular aspects of the governance system. Literature analysis suggests that most articles published on the subject in English provide a foreign view on the matter, which may not align with the local context and priorities.

References

Chen, M. (2016). The economic adjustment of Saudi Arabia and the docking of bilateral economy and trade between China and Saudi Arabia under the “One Belt and One Road” initiative.Journal of Middle Eastern and Islamic Studies, 10(2), 46–70. Web.

Krane, J. (2019). Energy governance in Saudi Arabia: An assessment of the Kingdom’s resources, policies, and climate approach.Center for Energy Studies. Web.

Matallah, S., & Matallah, A. (2016). Oil rents and economic growth in oil-abundant MENA countries: Governance is the trump card to escape the resource trap.Topics in Middle Eastern and African Economies. 18(2), 87–116. Web.

Nakhle, C. (2017). Towards good governance of the oil and gas sector in the MENA.Economic and Social Commission for Western Asia. Web.

U.S. Department of State. (2020). 2020 investment climate statements: Saudi Arabia. Web.

Vasquez, P. (2016). Four policy actions to improve local governance of the oil and gas sector. International Development Policy, 7.1. Web.

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