Saudis Drop Price of Oil, Report Says : Exxon, Texaco and Mobil Signed Deals, Publication Claims

Three major oil companies have signed deals with Saudi Arabia to buy oil at a reduced price, according to a report Monday in the Middle East Economic Survey.

The respected Cyprus-based publication reported that Exxon, Texaco and Mobil had agreed to buy up to 800,000 barrels of oil at prices related to the market value of refined petroleum products. These so-called netback agreements would reduce the price of Saudi Light by $2 to $3 a barrel from its current $28-per-barrel price, the Survey said.

The deals take effect Oct. 1, according to the report, two days before the Organization of Petroleum Exporting Countries plans to meet in Vienna to discuss oil pricing and production. The publication said the Saudis are negotiating a similar agreement with Shell Oil.

Exxon, Texaco and Mobil declined comment. Shell said: “Since Shell has crude supply contracts with the Saudis, we are in regular communication with them. The exact content of these discussions is proprietary.”

The agreements would increase Saudi oil production from its current low of 2 million barrels a day to between 3 million and 3.5 million barrels daily, according to the publication. The deals reflect a major policy shift by the Saudis, who in the past have reduced oil production in order to maintain official prices. Under OPEC’s self-imposed production quotas, the Saudis are alloted 4.3 million barrels daily.

Oil industry analysts viewed the oil company agreements as Saudi weapons intended to force OPEC members to stay within the cartel’s production quotas.

“If they exist, they may never be used,” said Raymond Urban, an analyst with Duff & Phelps in Chicago. Urban said he believed that the Saudis wanted the agreements to show OPEC members that “they not only mean business but they have the ability to impact prices quickly.”

However, Thomas McHale, an economist with Drexel Burnham Lambert in New York, said he believes that the Saudis “are not bluffing.”

He said the Middle East country was tired of its role as OPEC’s “swing producer” and “the logic of a netback agreement makes impeccable sense.” He said the Saudis aren’t afraid of a drop in the price of oil, since it costs them “less than 50 cents” to produce a barrel of crude oil. This means that the Saudis can make money even if the price falls substantially.

Urban said that, if the coming OPEC meeting ends without agreement among members, Saudi Arabia may be forced to sell the reduced price oil “to show they are not a paper tiger.”

Only Major Companies

The Middle East Economic Survey report said the Saudis are discussing netback agreements only with major oil companies. The companies aren’t allowed to sell the crude oil to third parties.

Additionally, the publication said, the Saudis won’t sell to Japanese companies unless the deal is part of a larger agreement to restore Japanese oil purchases to higher levels.

Exxon, Mobil and Texaco are members of Arabian-American Oil Co., the government-controlled Saudi national oil company. These companies, along with Chevron, the fourth Aramco partner, currently purchase nearly all of Saudi Arabia’s production at the official price, analysts said. Analysts believe that Chevron may also be involved, but the San Francisco-based company has said only that it has been contacted by Aramco and is interested.

Separately, Saudi Arabia’s oil minister, Ahmed Zaki Yamani, was quoted over the weekend as saying that oil prices could drop to as low as $18 by next spring. Yamani reportedly made his remarks during an off-the-record talk at St. Anthony’s College in Oxford, England.

According to Reuters, Yamani qualified his remarks after returning to Saudi Arabia, saying that oil prices would only drop that low if a price war developed among producing countries this winter.

Oil Prices Steady

Oil prices were steady in Europe on Monday, with Saudi Arabian Light quoted at about $27.45 in trading on the so-called spot, or non-contract, market. But futures contracts for crude oil continued their decline Monday. Oil for October delivery closed at $27.92 a barrel, down 9 cents on the New York Mercantile Exchange

William Randol, an oil analyst at the New York securities firm of First Boston Corp., said: “We think netback pricing will spread to other producers. One way or another, we’re looking at $25 (a barrel) oil by the end of this year with more downward pressure in 1986.”

Analysts said consumers would probably benefit from such a price decline, which would likely result in lower interest rates and much lower fuel prices. Each $1 decline in the price of a barrel of oil, when passed entirely on to consumers, is the equivalent of a 2.5-cent drop in the price of gasoline.

Lower fuel prices would help the airline industry, where a 1-cent drop in the price of fuel produces industrywide savings of $80 million to $90 million, said Robert Joedicke, an airline analyst with Shearson Lehman Bros. in New York.

Other industries would suffer. Analysts said a $9 to $10 decline in the price of oil would batter oil company earnings. Hardest hit among the major oil companies would be Atlantic Richfield and Phillips Petroleum, since both must make substantial debt payments as part of financial restructurings, Urban said.