Amid Plummeting Oil Prices, Saudi Arabia Rejects Littoral Combat Ship Deal With US

The Saudi Arabian government has rejected a $4 billion U.S. military offer to build state-of-the-art Lockheed Martin Littoral Combat warships, citing high costs and a long delivery time. The ruling royal family in Riyadh, which regularly spends heavily on U.S. defense products, has had to tighten its government budgets over the past year because of the plummeting price of oil, which is the country's main source of income.

While the deal is not dead yet, Saudi officials are expected to ask for a cheaper price tag and a delivery time under the current seven years as quoted by primary manufacturer Lockheed, according to a Defense News report Monday.

Riyadh ordered four larger surface warships along with six smaller corvette-class ships. The contract also involves a $1.9 billion deal for an undisclosed amount of MH-60R Sikorsky helicopters. Some smaller ships and aircraft were also included in the deal. The Littoral ships are designed to operate in shallow waters near the coast.

A significant reduction in the price of oil, which dropped from being more than $100 a barrel around a year ago to under $34 last week, is largely to blame for Saudi Arabia’s reluctance on the deal. Petroleum accounts for around 80 percent of Saudi Arabia’s revenue and 90 percent of earnings from exports, according to a report by OPEC.

While the initial deal was signed in October, it’s not yet known when a finalized contract might be delivered. The Pentagon, in collaboration with Lockheed, is expecting a counteroffer from Riyadh, according to the Defense News report. The Department of Defense had hoped a deal with the Saudis would help offset the costs of its own order of 52 ships, which is now likely to be reduced to around 40 to meet budgetary cuts.

It’s not yet known if Riyadh's concerns over the contract were in reaction to the reduced order from the U.S. Navy. In addition to the reduction of the U.S. order, Defense Secretary Ash Carter announced Dec. 14 that it would build only one ship a year instead of three.

The ships are part of an upgrade to Saudi Arabia's Eastern Fleet in the Persian Gulf. The Western Fleet, which is based in the Red Sea, is manufactured primarily by France.