Terror Target Was Oil Industry

HOUSTON -- The latest attack on foreign residential and office complexes in Saudi Arabia has ratcheted up concern over the nation's ability to increase oil production at a time when global petroleum supplies are becoming increasingly sensitive to any disruptions.

The attack had no immediate effect on Saudi Arabia's production and transportation of oil.

Still, its violent outcome, including the killing of least 22 people and a commando raid freeing dozens of foreign hostages, illustrated how terrorists penetrated a center of the Saudi oil industry.

"The attack was orchestrated to display that the royal family cannot maintain security in the heart of its own oil patch, and in that sense they succeeded," said Jean-Fran?ois Seznec, an authority on Saudi Arabia and a professor at Columbia University in New York.

The timing of the attack in Khobar, a city on the Persian Gulf near Dhahran, also appears to have been intended to inflict damage on the credibility of Saudi officials traveling to Beirut this week for a meeting of the Organization of Petroleum Exporting Countries. Ali al-Naimi, the Saudi oil minister, is pressing OPEC to increase its output target by two million barrels a day in an effort to bring oil prices down.

Oil prices reached a high of $41.85 per barrel on May 17 but fell below $40 on Friday. Markets are closed on Monday in New York and London, so the earliest that traders are expected to react to the attack is Tuesday. "Even though this doesn't disrupt supply, it is a significant psychological shock," said Daniel Yergin, chairman of Cambridge Energy Research Associates in Massachusetts.

Despite efforts in recent years to replace Western executives and technicians with Saudis, 25,000 Americans and Britons are thought to remain in Saudi Arabia's Eastern Province, many of them clustered around Dhahran, the headquarters of Saudi Aramco, the government-controlled concern that is the world's largest oil producer.

The State Department repeated a recommendation over the weekend, first issued in April, that Americans living in Saudi Arabia should immediately leave the country. Saudi Arabia, the world's largest oil exporter, remains heavily dependent on U.S. and European contractors to maintain the smooth functioning of its oil infrastructure.

It is too early to determine whether Western companies will begin pulling employees out, though some U.S. companies are already reducing their presence in the country. Citigroup, for example, ended nearly a half century of activities in Saudi Arabia last week when it said it would sell its remaining stake in the Samba Financial Group.

The presence of U.S. companies in Saudi Arabia and of U.S. employees at Saudi Aramco is a legacy of nearly seven decades of close ties between the United States and Saudi Arabia. Oilmen from Texas and California created the nation's oil industry in the 1930s, forming the Arabian American Oil Co., which evolved into Saudi Aramco.

Overproduction by OPEC members, however, which is estimated at 2.5 million bpd, means that a higher quota would simply cover oil that is already being sold. Markets are looking to see if Saudi Arabia will actually start increasing production from its own wells.

Saudi Arabia, which has most of the world's spare oil production capacity, would be responsible for much of any increase in output, and Naimi has signaled that it is prepared to increase production. Still, the psychological effect of an increase could be canceled out if markets remained nervous about the possibility of further attacks on Saudi energy installations.

A high-ranking official at OPEC, speaking from Beirut, where delegates began arriving over the weekend, said that while the group's 11 members planned to discuss the Saudi proposal as expected at its meeting on Thursday, officials seemed more concerned with recent rioting over fuel prices in Beirut than with the attack in Khobar.

"This is a little bit of turbulence, nothing crucial as of yet," the official said.

Executives at Saudi Aramco were quick to assert Sunday that their operations were unaffected by the violence over the weekend.

One of the buildings attacked in Khobar held the offices for companies that had recently entered into gas exploration ventures with Saudi Aramco, including Total of France, Royal Dutch/Shell, LUKoil of Russia and Sinopec of China. The ventures are part of a hesitant opening of Saudi Arabia's energy industry to foreign investment.