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Aramco ploughs ahead

The jewel in the kingdom's crown is concentrating on downstream joint ventures, as it awaits the IPO go-ahead

High above the Riyadh rooftops, tall cranes form thin fingers of lattice patterns against the colourless early-morning sky. Many of the cranes are starting to move again after a year or more of remaining idle, a signal that the higher global oil prices of recent months have given the Saudi economy a boost. The economic slump meant that some contractors put projects on hold and others went bust. Today, the signs are that the worst of the cash-flow crisis is over.

Saudi Arabia is determined to make sure that there's never a return to the dark days when oil was trading at less than $30 a barrel, triggering an economic crisis across the kingdom. It's why Saudi Arabia has been the driving force in coordinating and encouraging joint action between Opec and non-Opec states to rein in production to restore market balance and support prices. In particular, the kingdom is working closely with Russia—the non-Opec big-hitter—to make sure producers stick to their agreed production ceilings. In terms of complying with the individual allocations, Saudi Arabia is leading from the front. Oil production in the first quarter of this year averaged 9.96 million barrels a day, well below the kingdom's target of 10.06m b/d.

Compliance among other signatories to the deal has also been better than many cynical market analysts had predicted. The producers' joint cause has been helped in no small way by Venezuela's fast-declining output and interruptions to Libyan production. In any event, with the oil price on the plus side of $70/b, Saudi Arabia is feeling more comfortable. Energy Minister Khaled al-Faleh said in late April that there was still plenty of demand for oil, despite the recent price surge. "Reduced energy intensity and higher productivity globally of energy input leads me to think there is the capacity to absorb higher prices," he told reporters in Jeddah.

Even higher prices? Faleh was quick to add that "we never have a price target... Prices are determined by the market". But Saudi energy officials say privately that the kingdom's leadership has its eye on the global price eventually reaching $90 or even $100/b.

If oil was trading at such levels, boosted revenues would help the kingdom overcome its financial difficulties. It would also free up cash for investment in projects associated with Vision 2030, the ambitious plan to expand the private sector and wean the country off its dependence on oil.

IPO uncertainties

A high oil price would also help to increase the value of the kingdom's energy giant, Saudi Aramco, ahead of the planned 5% initial public offering. The IPO remains one of the major talking points in the kingdom today. Speculation centres on where and when it will go ahead, and in what form.

All that's certain thus far is that Saudi Aramco is making final preparations for the offering. In one of the most recent moves, Aramco—based on a new independent audit—is reported to have raised its oil reserves figure from 261bn barrels to 270bn. In a separate development, the company has appointed five new board members. Two of the five are cabinet ministers, Mohammed al-Jadaan (Finance) and Mohammed al-Tuwaijri (Economy and Planning), while the other three are non-Saudis from the global oil and petrochemical sectors. The three from outside the kingdom—including the first female Aramco board member—will bring additional experience and reach to the company's executive team in the lead-up to the IPO.

Also well prepared for IPO D-Day is Tadawul, the Saudi stock exchange. Its chief executive, Khalid al-Hussan, told the Euromoney conference in Riyadh in April that "we have the regulatory framework in place" and "we have made the technological changes to absorb the listing. We have worked out all the measures to ensure that the technical capacity has been raised. I can say Tadawul is ready to hold the IPO".

Whether, as has been widely suggested, shares in Aramco will be offered initially on Tadawul before the company is listed on an international exchange still isn't clear. Nor has a decision been taken on where around the world the shares might go on sale: London, New York and exchanges in Hong Kong are among Aramco's suitors. Another idea is that instead of an IPO, there might be a private sale—with China mentioned as a strong contender.

In the view of a Saudi government economist in Riyadh, who asked not to be named, "it's most likely that 2019, rather than 2018, will be the year for both IPOs, domestic and international. I don't think the domestic one will happen first". He also thought that "a private sale to China is unlikely. The idea of the IPO is to open up Aramco, the crown prince [Mohammed bin Salman] made this clear. Also, the Chinese would probably drive a hard bargain and try to tie the kingdom into some kind of long-term agreement for the supply of crude oil at discount prices—or something like that."

In the meantime, it's business as usual for Saudi Aramco. Against the background of the collective Opec/non-Opec production ceiling, the company is under no pressure to pursue new upstream oil opportunities. Nor is it in a hurry to see output resume in the Neutral Zone, which the kingdom shares with Kuwait. The 500,000-600,000 b/d of Neutral Zone output has been shut in since mid-2015 because of a dispute between the two sides.

In 2016, when Vision 2030 was announced, there were suggestions that Aramco might raise output capacity to 15m b/d or more. But chief executive Amin Nasser told Petroleum Economist last December that "at this stage we're sticking to our maximum existing capacity [12m b/d]. We're producing less than that. So, for the time being we're not thinking about expanding".

Downstream boom

So much for upstream. When it comes to the downstream however, expansion is the order of the day—within the kingdom and overseas. In April, Aramco announced it was taking a 50% stake, along with three Indian companies, in a $44bn refinery/petrochemicals plant on India's west coast. The facility will have capacity to process 1.2m b/d of crude oil. In the same month, Aramco and Total signed a preliminary agreement to establish a similar facility at Jubail in western Saudi Arabia, with 400,000 b/d capacity.

In March, Nasser said Saudi Arabia wanted to strengthen the mutual oil-supply relationship and increase Saudi investments in China, particularly in the downstream. Last summer, the two countries signed a memorandum of understanding on the establishment of a $20bn joint fund to invest in the energy and mining sectors.

Saudi-Chinese cooperation is already strong. Saudi Aramco has a 25% stake in the Fujian Refining and Petrochemical Company's plant in China and is deciding whether to acquire a major stake in the Anning refinery operated by PetroChina in Yunnan province. Saudi Arabia would be the main supplier of crude oil for the 260,000-b/d facility.

In Saudi Arabia itself, Sinopec holds 37.5% shares in Saudi Aramco's Yasref oil refinery at Yanbu (capacity of 400,000 b/d) and its Petro Rabigh refining and petrochemicals plant. Both facilities are on the Red Sea coast.

With new plants being constructed and current ones expanding, expect plenty of crane activity on the Saudi skyline in the months ahead.

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