8 September 1998

BAe Saudi deal hit by oil price

British Aerospace is facing some cutbacks in its important 2 billion a year Saudi Arabian defence contract because of the slide in oil prices.

The Saudi authorities are understood to have postponed some contract items and services as they wrestle with the problems posed by the oil slump to their finances. BAe insists that its profits - its interim results are due in the next two weeks - will not be affected but its cash flow will suffer from the way the Saudis are handling the problem.

Under the terms of the contract Saudi Arabia pays in oil for the BAe equipment. The oil is sold in the marketplace and the money is then handed over to BAe. The total of oil is fixed at 600,000 barrels but fluctuations in oil prices means the money paid to BAe varies and Saudi Arabia makes up the difference in cash.

The oil price pressure has prompted Saudi to take a long, hard look at the contract and examine ways to cushion the cost. It is understood that the Saudi authorities have decided to limit the cash outflow as well as defer some parts of the contract.

BAe has been amicably discussing the problems at quarterly meetings with the Saudis and has agreed to go along with the rephasing. The Tornado aircraft contract has provided a considerable work load for BAe factories and it is the company's biggest profit earner.