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Threats to Saudi Aramco are overstated

The threats to the world’s biggest and most important oil company are overstated

Soaring shale-oil production in North America is a threat to Saudi Arabia and the kingdom must quickly diversify its economy away from oil to avert the looming crisis. So thinks Alwaleed bin Talal, a billionaire investor and a very rich prince in a kingdom not short of them. “It is necessary to diversify sources of revenue, establish a clear vision for that and start implementing it immediately,” Alwaleed wrote in an open letter to oil minister Ali Naimi in July. Saudi Arabia would never be able to lift output capacity from 12.5 million (b/d) to 15m b/d, he continued, and the kingdom’s budget depends too heavily on oil revenue.

It isn’t the first time Saudi Arabia – and its state oil company Aramco – have been told its days at the top are numbered. The late Matthew Simmons, doyen of peak-oil theorists, once wrote a whole book arguing that Saudi reserves figures were over-stated and the inevitable decline of the giant Ghawar field, bedrock of the kingdom’s supply, would soon begin to cut into production capacity.

You can only imagine the sighs as Naimi and Khalid Falih, Aramco’s boss, read the prince’s letter. Last year, however, Aramco’s production average 9.5 million b/d, its highest rate ever. 

Saudi Arabia shelved its 15m b/d target several years ago and Naimi has repeatedly said the kingdom is happy with output capacity now, which is 12m b/d, according to Aramco. Alwaleed has a point about oil dependency, though it has suited the ruling Sauds well for several generations. But the sheer size of Saudi oil reserves and the volume of crude it exports mean hydrocarbons revenue would dwarf other sources of income in much bigger economies, too.

Rising market share

Shale oil is not the immediate threat the prince believes it to be, either – or not for Saudi Arabia, anyway. Despite new unconventional supplies in the US, the kingdom’s share of that market has actually risen in recent months. Anyway, Aramco sold more than half of its oil last year in Asia. “I felt the optimism towards the future growth of the region,” the globe-trotting Naimi said recently after a visit to Hong Kong. All sources of oil will be welcome, because thanks to Asia global demand isn’t going to stop rising soon, runs his argument.

Kingdom tower - a symbol of Saudi Arabia

It can be hard to grasp quite how important Aramco remains to the world’s economy. As supplies collapsed in Libya, Syria and South Sudan and sanctions hit Iranian oil exports, fluctuations in Saudi supply have been crucial in preventing a price spike in the past two and a half years. Unconventional oil producers in North America have Naimi to thank for their profitability, too. When prices have threatened periodically to stay below the kingdom’s preferred $100-barrel price range – a level that would begin to threaten unconventional supply – Aramco has reined things in.

Aramco’s sway over the oil market makes some people nervous. What if things go wrong? Iran is believed to have been behind the Shamoon virus that shut down thousands of Aramco computers last year, crippling internal communication and possibly deleting some drilling and production data. Some Saudis and American strategists think Iran could threaten Saudi infrastructure if it were ever attacked by Israel or the US. The prospect of unrest in the Eastern Province, home to Aramco’s Dhahran headquarters, most of its oil, and also Saudi Arabia’s restive Shia minority, is often cited as a threat to the kingdom. Security has been tight ever since a local Al Qaeda-linked group massacred foreigners in Al Khobar in 2004, though terrorists attempted (and failed) with another attack in 2006, on Aramco’s Abqaiq processing facility.

While analysts say Saudi Arabia’s problems are mounting -- youth unemployment, demographic changes, an ailing king and unclear succession – Aramco has remained an anomaly. Technically astute, well-managed and staffed with highly paid foreigners and bright Saudis (including women, who are allowed to drive in the company compound), the state firm resembles nothing more than a Western major, albeit with crude reserves beyond any international oil company’s (IOC) dreams.

There are other threats to the company, though. A report last year from Citi, a bank, claimed Saudi Arabia could soon run out of oil to export. About a quarter of Aramco’s oil output is already consumed domestically, much of it to feed power generators. But with electricity demand rising by 8% a year, said Citi, “if nothing changes Saudi may have no available oil for export by 2030”.

The caveat was crucial, because the kingdom isn’t going to watch its lucrative oil-export business die slowly. Eroding subsidies that make Saudi oil and natural gas prices among the cheapest in the world would be the obvious answer – though managing that transition while the ruling Saud family frets about any signs of unrest will be difficult. “Powerful groups within the country as well as the poor currently benefit from the status quo, so opposition to price rises would be strong,” said a research paper from Chatham House, a UK think tank, on the question of fuel-subsidy reform.

Cleaner energy

The government is also developing an efficiency master plan. According to another paper from Chatham House, the kingdom’s plan to introduce clean energy and efficiency measures could cut oil and gas demand from 4% to 2.8% between now and 2025. “This would result in savings of between 1.5m and 2m barrels of oil equivalent per day – a volume which roughly matches what the country needs to maintain the spare crude capacity so critical to global markets,” the authors write.

For now, supply-side solutions are the answer. Proposed nuclear power would cut into the crude-oil burn in generation (though Citi wonders how the reactors would be kept cool in the desert). Just as important are Aramco’s efforts to find more natural gas. This is having some impact: the kingdom used less oil in generation in the first quarter of this year than in the same period last year thanks to more gas in the system.

Saudi Aramco by the numbers

That included the Karan project, Aramco’s first non-associated gasfield, which came on stream early (and below budget) last year, reaching 1.8bn cubic feet a day (cf/d) in the summer. On its own, Karan increased the kingdom’s gas production by almost a fifth. Another project, the Wasit gas programme, is in the works, too. It will lift Saudi gas processing capacity by 40%, handling 2.5bn cf/d from the Arabiyah and Hasbah fields.

Broader strategic gas plans have been less successful. Efforts to bring IOCs into the Saudi upstream to explore for gas earlier in the century foundered. ExxonMobil believed the non-associated reserves to be insufficient to justify the risks; an argument in Beverly Hills between then-chief executive Lee Raymond and Naimi eventually led to the oil ministry pulling back on the upstream opening.

Lukoil and Shell have remained to explore the Empty Quarter. The Russian firm has found some tight gas at the Tukhman field. Shell and Aramco want to develop a discovery at the Kidan field. The underwhelming progress in the desert has prompted Aramco to scour further afield and revisit older projects, such as the Midyan onshore gasfield, in the northwest, which was first drilled in the early 1990s. It is also targeting offshore fields in the Red Sea. Last year, Aramco said it found two new gasfields and one oilfield.

But without access to the international market through exports, investors can only sell their gas locally, for just $0.75 per 1,000 cubic feet. Unless that changes, they won’t stay – especially given good alternative destinations for capital elsewhere. Aramco agrees, but Saudi Arabia’s state petrochemicals company, Sabic, is a powerful lobbyist on behalf of the kingdom’s dirt-cheap gas prices, which it believes will keep its business competitive against rivals in the US. Aramco may need to win that argument if it is to lure expertise into its sector to unlock some unconventional gas reserves, which Naimi says amount to 600 trillion cf, or double the conventional reserve base. With some help from oilfield services firm Schlumberger, Aramco has been drilling in the northwest of the country, but the reservoirs are deep with low permeability.

In conventional oil, though, Saudi Aramco is one of the few NOCs capable of bringing big, complex projects on stream on its own. In April, output at the Manifa heavy oilfield came on line (three months before planned). Its production will rise to 900,000 b/d by the end of the year, says Aramco, and keep total output capacity steady. The $17bn development kicks off $35bn more upstream spending in the next five years, which should include another 500,000 b/d from the Khurais and Shaybah fields. The new developments mean the kingdom should retain the 2m b/d buffer between supply and capacity that is so important to global oil markets.

And where Aramco teams up with the majors – always in the downstream -- it tends to make a splash. A 50% joint venture with Shell in the Motiva refinery, in Texas, recently brought on line 325,000 b/d of new capacity, making the 600,000 b/d plant the biggest in the US (including Motiva’s Norco and Convent plants in Louisiana capacity is 1.1m b/d). Shipments to Motiva in part explains the uptick in Saudi sales to the US in recent months.

Indeed, content simply to maintain the world’s biggest crude oil export capacity, Aramco’s focus is increasingly on the downstream, including selling power in the kingdom. With Dow Chemical, it is also building a large new petrochemicals facility in Jubail, in the Eastern Province. A new trading strategy is emerging, too. Integrating its oil exports with refineries in North America and Asia – where Aramco has refineries in China, Japan and South Korea giving total throughput of about 1.3m b/d, and plans to expand capacity and build new plants in the region – gives the company a hedge against price movements and a lucrative stake in the world’s biggest consumer markets. Motiva could even handle Canadian oil, if the bitumen ever makes its way to the US Gulf, allowing Aramco to direct more supplies to Asia.

But Aramco Trading, a new division of the company, will also allow for more flexibility in the parent company’s marketing. This may include sales of products into the spot market, not typically the destination for Aramco crude. New refining capacity in Saudi Arabia, including a partnership with Total at Jubail, another with Sinopec at Yasref, and the Yasref plant, will all be online in the next three years, adding 1.2m b/d to its capacity. That will be part of a global rise in product supplies that the International Energy Agency says will transform international trading patterns.

Aramco Trading will be a key player in that shift – and its rise will be another reminder that, for all the talk of threats to its hegemony, Aramco remains astute enough to stay ahead of global oil trends. In control of the world’s biggest oil reserve, which it can produce cheaply while shuffling projects depending on the priority, and with new flexibility in the downstream Aramco is the last NOC that will be troubled by shale. 

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