Saudi Aramco—the gentle giant
Saudi Aramco's downstream reach is expanding fast, but its upstream operations remain central to both the company's future and that of the kingdom
Saudi Aramco is a curious creature. On the one hand it's a quite simple business; but its great size, systematic national and global importance, and opacity make it hard to assess and value. But judging the prospects for the state oil behemoth's initial public offering (IPO), and indeed for the whole Saudi economic reform programme, hinge on understanding it.
Aramco's core business, under its original American owners and after its final nationalisation in 1980, was and remains to produce oil from Saudi Arabia's enormous reserves. But along the way, it has acquired new missions, partly arising from its size and partly from its domestic importance.
Its nationalisation, which was phased and more consensual than in most of its regional peers, preserved a strong company culture drawing on the ethos of Exxon and the other former partners. Aramco is respected as an "island of excellence" within the kingdom, attracting the highest-quality graduates and prizing technical competence, even as the workforce has steadily shifted from expatriates to Saudis. Of course, Aramco isn't exposed to international upstream operations or to competition at home, making it hard to judge its level of ability and efficiency versus an internationalised national oil company peer such as Statoil or Petronas. Technocrats from former oil minister Ali al-Naimi, to current incumbent and confidant of the crown prince, Khalid al-Falih, and chief executive Amin Nasser, have risen through the company ranks, reinforcing the symbiosis between company and state.
Saudi Aramco is by far the world's largest oil producer, extracting some 11.9m barrels a day of oil and natural gas liquids, while nearest rival Rosneft pumps about 5m b/d. Although some outside observers, without much evidence, have cast doubt on its reserves, the company itself insists that a recent third-party audit conducted in support of its forthcoming IPO will confirm its reserve figures or show even higher numbers.
The kingdom has to move beyond oil, but to do that it needs its national champion to keep delivering
The bulk of the reserves lie in a group of supergiant fields in a relatively small area of the Eastern Province and adjoining offshore: the world's biggest oilfield, Ghawar, the largest offshore field, Safaniya, and a number of others such as Zuluf, Marjan, Khurais, Abqaiq and Khursaniyah. In the late 1980s, the company developed the Hawtah trend of super-light oilfields southwest of Riyadh. Only relatively recently has Aramco ventured seriously into the Empty Quarter (the Shaybah field, south of the UAE), offshore heavy oil (Manifa), and exploration of the Red Sea and northwest.
These fields, producing primarily from the Jurassic-aged Arab Formation carbonates, and in the offshore Cretaceous sandstones, have proved enormously prolific, with Aramco applying progressively more advanced technology to maximise recovery factors. This includes some of the world's largest reservoir simulation models, a massive sea-water injection system, trials of ionically-optimised injection water, and multi-branched Maximum Reservoir Contact wells. Trials began in 2015 of carbon dioxide injection into the North Uthmaniyah sector of Ghawar. The company now targets 70% recovery across its fields.
In the early 1980s, Aramco developed the Master Gas System to make use of the large volumes of previously flared associated gas for power generation and industry. The availability of gas enabled the development of a large petrochemical industry initially focussed on basic chemicals such as ethylene, and led by another state-controlled company, Saudi Arabia Basic Industries Corporation (Sabic). Sabic has been joined by other part-private petrochemical players, and Aramco has built up its own petrochemical business, which is an increasingly important strategic focus.
However, in the early 2000s, it became apparent that the kingdom was falling behind on gas development, and the Saudi Gas Initiative was launched in 2001 to bring international investment into gas exploration, development, industry and desalination, with oil companies such as Shell and ExxonMobil. Eventually the initiative foundered in the face of Aramco's opposition, and shrank into gas exploration of some areas of the Empty Quarter, which proved commercially unsuccessful.
Instead, Aramco pressed ahead with developing its own non-associated gas resources, in deeper reservoirs in and around Ghawar, and then offshore at the Karan, Arabiyah and Hasbah fields. It's also beginning to develop unconventional gas in the far northwest Tabuk Basin, and has trialled hydraulic fracturing using seawater, waterless fracs with carbon dioxide, and resin-enhanced local sand. Nevertheless, starting from 12bn cubic feet a day today, its target of 17.8bn cf/d of raw gas production by 2020 and 23bn cf/d over the next 10 years—essential to meet the goal of cutting oil use in power generation while supplying domestic industry—looks a stretch.
So far, by policy, Saudi Arabia doesn't import or export gas. It has, though, reportedly been in discussions about importing liquefied natural gas, as well as possibly participating in Russia's Arctic II LNG export project.
Aramco has also developed a large refining industry, initially after its 1993 merger with Samarec to supply domestic needs, and then to anchor itself in its key markets. As the world's largest oil exporter, Saudi Arabia has long recognised the commercial and political importance of a presence in the three major consuming regions—North America, Europe and Asia. The rise of US shale oil and the shift of demand from Europe to Asia, though, is gradually changing this balance. Aramco also executes the kingdom's Opec production policy, making it the single most important global oil market player.
In pursuit of its market access strategy, Aramco closed a deal in May to take full control of North America's largest refinery, Port Arthur in Texas, from partner Shell. It has refining joint ventures in Japan, South Korea and Fujian (China), is negotiating to buy a stake in PetroChina's 260,000 b/d refinery in Yunnan, and to build a 300,000 b/d refining and petrochemical complex with defence conglomerate Norinco in northeast China. In March, it signed deals worth $13bn for refineries and petrochemicals in Malaysia and Indonesia. It has just opened an Indian office to capitalise on growing demand there, and is considering investment in a refinery in Maharashtra. But it was beaten by Rosneft in a reported competition to buy Indian refiner Essar.
In recent years, Aramco has constructed five 300,000-400,000-b/d mega-refineries with foreign partners, with a sixth at Jazan to follow, both to meet rising domestic demand and to export high-specification products, particularly Euro-V diesel. It's also working with compatriot and rival Sabic on a $20bn plant which would convert crude oil directly to chemicals, an untested technology but an important step to assure future demand for its reserves.
Aramco's crude oil is mainly exported on long-term contracts with destination restrictions, but the growing need for a balance of product imports and exports has led the company to develop a trading arm. In September, it announced that it would start trading third-party crude, though not its own.
And in addition to these assets, the company also owns 6 gigawatts of power generation, set to increase to 12 GW by 2019, and a tanker fleet (Vela Marine). Aramco is often called on when the Saudi government needs some special task executed, such as fixing the flood drainage in Jeddah or building 11 sports stadia across the kingdom, a tribute to its managerial competence but a dangerous blurring of its core role.
In January 2016, Prince Mohammed bin Salman, now recently risen to crown prince, shocked the oil world by announcing that 5% of Aramco would be sold in an IPO, intended to be the world's largest, as part of kick-starting the Saudi National Transformation Plan to prepare for a future not dependent on oil.
Preparations for the IPO have seen a deep and continuing transformation of Aramco internally. But the IPO has been several times delayed, with suggestions it may now slip into 2019. Key issues include the listing location, where New York and London appear the leading contenders; and transparency over accounts and reserves disclosure. Many investors are concerned by the prospect of having little control over a state company with its own strategic and national imperatives.
In March, the company's tax rate was cut from 85% to 50% to increase its valuation, in an attempt to justify the $2 trillion figure that had initially been floated. But independent analyses, including my own, peg its value around $1.3-1.4 trillion under reasonable assumptions for price and production outlook.
The upstream oil business is by far the most valuable element, whatever Aramco achieves in gas, refining or petrochemicals. But the future revenue outlook appears constrained by Opec policy, the flexibility of shale oil and the growing competitiveness of non-oil technologies. More aggressive production growth would safeguard Aramco's market share but undercut prices. This is the imperative, of course, for Saudi economic reform. Paradoxically, the kingdom has to move beyond oil, but to do that it needs its national champion to keep delivering.
Robin M. Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis