As the kingdom of Saudi Arabia celebrates its national day, Aramco proudly claims that it has been the world’s largest oil producer for more than 80 years. Indeed, we can’t talk about the history of Saudi Arabia without addressing the significant role Aramco has played in the development of the kingdom’s economy.
However, the world at the present time has completely changed compared to the time when the kingdom pumped its first barrels of oil. Saudi Arabia is seeking to diversify its economy, and sees its strategic and energy future as revolving around becoming a global economic and energy power, based on being a dominant global supplier not only of oil but also of other energy-based commodities. Here Aramco has played a vital role in the formation of Saudi Arabia’s economy and is preparing to complete this mission by contributing in shaping the future of the kingdom.
Saudi Aramco currently has three main strategic objectives. First, preserving Saudi Arabia’s spare oil production capacity is crucial to maintaining the kingdom’s political and economic influence. Additionally, in an effort to free up crude for export, it has to boost gas output (including potentially shale gas), to ease domestic demand. It also must rapidly deepen the economic ties with the emerging Asian powers such as China and India
Preserving Saudi Arabia’s pivotal role
Saudi Arabia’s pivotal role in the global energy market is due to its holding the world’s largest proven oil reserves. Estimates at the end of 2012 reached 265.9 billion barrels or 16 per cent of global total according to BP’s Statistical Review of World Energy 2013. Saudi Arabia is also the world’s largest exporter, the volume of its crude oil and petroleum reached 8.4 million barrels a day mb/d (7.5 mb/d crude oil).
Given the structure of its economy, Saudi exports are geared very much to the major oil consumers.Naser al-Tamimi
To underline that unique role, Saudi Arabia is the only producer with significant spare capacity, the kingdom plays a systemic and stabilizing role in the global oil market. As the Petroleum Economist noted: “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.” Indeed, the International Energy Agency (IEA) said in its August Oil Market Report (released Sept. 11) Saudi Arabia, OPEC’s biggest producer, pumped 10.19 mb/d; the highest level since October 1980. To put this in perspective, the IEA assessed Saudi Arabia’s spare capacity in August at 2.23 mb/d, accounting for 75% of OPEC’s total effective spare production capacity.
This massive spare capacity is the outcome of a capacity expansion program from 10 million barrels per day to 12.5 million barrels per day and beyond, which the kingdom is undertaking at a cost of over $ 100 billion. In order to keep this capacity cushion around of 2.5 mb/d, Saudi Aramco is moving ahead with the development of the Manifa oilfield, and also expects to increase production in a number of projects, including the expansion of the Khurais and Shaybah fields. That would allow the kingdom to maintain its export capacity, while reducing the output from the Ghawar, Saudi’s largest oilfield.
Aramco launched a major initiative in 2011 saying that “by 2020, Saudi Aramco aims to be the world’s leading integrated energy and chemicals company, focused on maximizing income, facilitating the sustainable and diversified expansion of the Kingdom’s economy, and enabling a globally competitive and vibrant Saudi energy sector.” Aramco President and Chief Executive Officer Khalid A. al-Falih goes further in explaining Aramco’s future: “we are also engaged in a major transformation of our business and our corporate culture - a transformation that will build upon our foundation of capability, leadership and innovation, and enable us of becoming the world’s leading integrated energy and chemical company ahead of our 90th anniversary.” This is visible in three key areas; development of gas resources, building sophisticated refineries and investment in petrochemicals.
Saudi Arabia is an oil-consumer as well as a producer; burning oil for electricity production which currently consumes about a quarter of the crude oil Saudi Arabia produces. The surging domestic Saudi oil demand would erode its export capabilities. In 2012, the kingdom consumed an average of 2.92 mb/d and is expecting to consume over 3 mb/d this year according to the IEA. Saudi government estimates that the kingdom needs to find at least another 20 gigawatts (GW) of generating capacity by 2020 to add to its existing one if it is to meet projected demand. In addition, the Economist Intelligence Unit (EIU) forecasts that Saudi Arabia’s natural gas demand will double between 2012 and 2020, as a rapidly growing population and rapid economic growth causes electricity usage to soar and the expanding petrochemicals and aluminium industries rely heavily on gas for feedstock.
With this in mind, the development of the gas resources is vital to the kingdom’s industrial diversification. Aramco set a target of increasing gas output by nearly 50% to 15 billion cubic feet a day, over the coming five years. Barclays expects the company to increase spending on exploration and production to $15 billion this year from $ 11 billion in 2012, largely to develop gas resources and unconventional resource potential, including drilling in deep offshore waters in order to meet soaring demand for gas. Nonetheless, Aramco will still need the government to make accelerating moves towards rationing demand by improving energy efficiency and tackling the fuel subsides. As Business Monitor International (BMI) rightly put, “the economics of gas exploration in the region are also an obstacle. The challenge here is dual: generous subsidies have fuelled inefficient consumption patterns, while low state-set prices undermine the commercial attractiveness of gas exploration.”
Refining also one of issues considered vital to the future of Saudi Arabia and Aramco. Saudi Aramco and its subsidiaries own, or have equity interest, in domestic (7 refineries with refining capacity of about 2.17) and international refineries (U.S., Japan, South Korea and China with total capacity around 2.37 mb/d almost 1.3 mb/d in Asia) with a total worldwide refining capacity of almost 4.5 mb/d, making the company one of world’s top refiners. Aramco expects to double its refining capacity as it increases downstream investments; Falih recently stated that: “over the next decade our total global refining capacity is expected to approach 8 mb/d.”
Aramco is restructuring its refining strategy as the company continues to integrate its refinery projects with large petrochemicals complexes. The formation of Saudi Aramco Products Trading Company (Aramco Trading) in January 2012 was the first step that strategy. MEES noted recently that the drivers for the rethink include: “souring domestic demand, the fact that the kingdom will soon become a net exporter of gasoline and diesel (for which it is currently a net importer), the growing importance of Asia as a market and the North American shale revolution.” Most importantly, integrating Aramco’s oil exports with refineries in the United States and Asia gives the company a hedge against fluctuations in oil prices and a lucrative stake in the world’s biggest consumer markets.
Petrochemicals are another important business sector for Aramco. The Gulf Petrochemicals and Chemicals Association (GPCA) in its latest annual report says that Saudi Arabia maintained its position as the region’s largest petrochemicals producer. Among last year’s notable developments GPCA cited the start of construction Saudi Aramco/Dow Sadara complex at Jubail, due for completion in 2015 at a cost of $ 20 billion and the $ 5 billion expansion Petro Rabigh 2 project jointly developed with Japan’s Sumitomo. These mega-projects will enable Aramco to develop downstream manufacturing through industrial parks. In addition Saudi Arabia is planning a huge expansion in its petrochemicals production and is prepared to spend as much as $ 70 billion on facilities in three strategic locations according to MEED.
Abdulaziz al-Judaimi, Saudi Aramco’s vice president the head of chemicals, explained recently in media interview the company’s strategy: “our ambition is to be the world’s leading integrated energy and chemical company by 2020. This will require us to grow substantially in the area of refining and chemicals integration. The Petro Rabigh and Sadara plants are playing a leading role in achieving this objective.” If successful, the strategy promises to meet several of Riyadh’s economic policy goals, including creating jobs and promoting long-term goal of economic diversification and development of certain disadvantaged areas in the kingdom.
Perhaps a more critical factor in Aramco’s new strategy, the company and a joint-venture partner, France’s Total, are planning to carry out a feasibility study next month (October) to expand the 400,000 barrel / day heavy-oil refinery at Jubail. EIU reported last week that: “the expansion is strategic not just for both companies, but also for the kingdom at large, as it will serve as a litmus test for producing significantly higher volumes of naphtha either to partly offset or to replace in full the use of natural gas or natural gas liquids as feedstock for petrochemical products.”
Rising Asia ... First
Given the structure of its economy, Saudi exports are geared very much to the major oil consumers. Currently, Saudi Arabia exports more oil to Asia than to Europe and North America combined. In fact, about two-thirds of Saudi oil exports are channelled to the Asian continent according to latest statistics from Saudi Arabian Monetary Agency (SAMA). Indeed, Saudi Arabia is the top oil supplier to Asian powers (China, Japan, India, and South Korea). According to HSBC bank, Japan was the largest export market in 2012, but China is expected to overtake within the next two decades, with India becoming the second largest market and the U.S. and Korea being the third and fourth largest export destinations respectively. Speaking in Hong Kong last March, the Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi predicted Riyadh’s already close relationship with the region would grow stronger in the decades ahead, and highlighted Saudi Arabia’s ties with China. “Since 1999, Saudi Arabia’s oil exports to China alone have gone from zero to more than one million barrels per day” he said.
In this context, the establishment of Saudi Aramco Asia Company Ltd. (Aramco Asia) underscores the strategic importance of Asia to Saudi Aramco, and deepens the kingdom’s presence in one of the world’s fastest growing regions. In 2012, the new Aramco Asia regional headquarters was officially opened in Beijing. Aramco in its latest annual review put its future plans clearly: “Aramco Asia will bring together business operations in this vibrant fast-growing region under one entity and be unified in carrying out Saudi Aramco’s vision and strategy for all of Asia. Further, Aramco Asia will play an important role and be part of the building blocks that will contribute to Saudi Aramco’s corporate transformation to become a global leader in energy and chemicals by 2020.” Prince Turki Al-Faisal the chairman of the King Faisal Center for Research and Islamic Studies and former director general of Saudi Arabia’s intelligence agency summarised in speech at Harvard University the Saudi calculation in straightforward way: “as the demand for oil continues to rise, especially from China and India, the Kingdom has every intention of meeting that demand.”
In sum, Saudi Arabia has been for many decades the major supplier of oil to the world; and if Aramco succeeds in achieving the company’s strategic goals; it will ensure the kingdom continues to play a major role in the global energy market for decades to come.
Dr. Naser Al-Tamimi is a UK-based Middle East analyst and author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” (Routledge: September 2013). His particular research interest is in energy politics and the political economy of the Gulf, as well as relations between the Middle East and Asia. The writer can be reached on Twitter: @ nasertamimi