Saudi Arabia enjoys one of the world’s highest energy production capacities. Last year alone, the state-owned Aramco produced 10.2mn barrels per day (bpd) of crude oil, in addition to its natural gas output, which is estimated at 11.6bn cubic feet per day (bcf/d). Aramco, as well as other suppliers around the world, continued to increase output, exacerbating the oil glut, and driving prices down by 30% in 2015.
The expansion of energy production remains one of the Kingdom’s priorities. However, Saudi officials believe that it is time for the government to diversify its economy to avoid volatility. To this end, the government took several steps towards developing other sectors, including gas production.
While the Kingdom’s gas programme was launched back in 1975, developing the gas industry became a top priority only recently, with the aim of meeting rising domestic demand for power, enabling the export of more oil.
Ehsan Ul-Haq, senior analyst at KBC Energy Economics, says, “Saudi Arabia has the world’s fifth largest natural gas reserves, but natural gas production has remained limited due to its emphasis on oil output.”
The target now is to boost gas production to reach 17bcf/d by 2020, supporting other industries, including steel, aluminium, and other downstream sectors. To achieve this, Aramco announced in late July the signing of $13.3bn-worth of contracts to build the Fadhili gas processing project, which is scheduled to be completed by 2019.
Created, or shaped, by Aramco?
Since 1933, when Aramco – or California Arabian Standard Oil Company, as it was then known – signed its first oil concession agreement, it has played a significant role in the local economy and greatly contributed to the Kingdom’s transformation from an arid desert to an urban centre.
“The Kingdom is known to have maintained a swing capacity. The higher – and record – level of production over the past lean period proves its ability to increase production at short notice and low investment,” says Saji Sam, a partner at global management consulting firm, Oliver Wyman.
The oilfields that it manages throughout the Kingdom are the key to Aramco’s substantial output. Discovered in 1948, Al-Ahsa-based Ghawar is the world’s largest conventional oilfield, producing 5mn bpd of oil and 2bcf/d of gas.
The expansion of another field, Khurais, due to be completed in 2018, is one of the world’s largest upstream projects, for which output will increase by 300,000 bpd to reach a capacity of 1.5mn bpd.
Located on the northern edge of the Empty Quarter, 10km from Abu Dhabi’s borders, the output of Shaybah field also increased to 1mn bpd in 2016, up from 750,000 bpd previously.
With one-fifth of the world’s oil reserves, Aramco is worth some $2tn. It aims to evolve to become a global industrial conglomerate that is involved in many sectors and services.
Abdulaziz al-Abdulkarim, vice president for procurement and supply chain management at Aramco, announced at a conference in early October that the company plans to invest a total of $334bn in infrastructure and projects within the next decade to maintain oil capacity. “That is the 10-year investment. It is everything,” Reuters reported him as saying.
Experts contacted by O&GME say the proceeds from the initial public offering (IPO) of Aramco will generate enough wealth to diversity the Kingdom’s economy. The move is expected to reform the Kingdom’s economy in unprecedented ways. Some expected Aramco to regress on the initially offered 5% of its shares but, instead, officials eventually announced the offering of its entire stakes.
In order to trade Aramco’s share in the stocks, the company will be subject to an independent audit, reviewing Saudi’s reserves and production capacity, the first review of its kind done in the country, and a welcome step towards transparency.
The government is hoping to raise around $100bn from the IPO. According to the company’s announcements, Aramco plans to list shares on the Saudi stock exchange, Tadawul, and is also considering listing in New York, London, and Hong Kong.
Aramco’s CEO, Amin Nasser, told Bloomberg: “There are no obstacles. It is going very smoothly. We are on target.”
Boosting local supplies
Saudi’s government realises that its future success depends on the involvement of local people. Hence, one of its top priorities is to align the demand for talent with supply. The Kingdom has taken concrete steps towards defining the specific market requirements, which are being translated into vocational and other training institutes with relevant curriculums. The industry typically holds a stake in these programmes, selecting, sponsoring, and eventually hiring the institutes’ students.
Ul-Haq, from KBC Energy Economics, says, “Although it is going to be an uphill task to train Saudi nationals to take over key positions in the oil industry, proper investment in education could bring jobs to Saudi nationals and cut spending on foreign specialists.”
A recent study, conducted by Aramco Drilling and Workover Admin Area, showed that upto 90,000 Saudis will need to be trained within the next 20 years. In an effort to cater to this demand, the government launched the In-Kingdom Total Value Add (IKTVA) programme, which will invest more than $300bn over the next decade to double the rate of locally produced, energy-related goods and services to 70%.
Even though Aramco has traditionally relied heavily on foreign contractors, the company recently announced that it aims to contribute to IKTVA by creating around 500,000 direct and indirect jobs for Saudi nationals. In another effort to boost the local supply chain, the company plans to develop an energy industrial city between Al Ahsa and Dammam, which includes manufacturing oil and gas equipment and drilling centres.
International oil players that are present in the Kingdom, such as Schlumberger, General Electric, Siemens, and Vallourec, also plan to contribute to the IKTVA programme. Being a key component in the Kingdom’s master gas system, the cost of the Fadhili gas project will also contribute, with 40% of its expenditure going to benefit localisation initiatives, and to accommodate 4,500 jobs for Saudis.
If implemented successfully, these programmes will create a diverse, non-oil dependent economy for the Kingdom.
Bright prospects
During the September 28 OPEC meeting of this year, Saudi finally consented to reduce its oil production in a bid to collaborate with other global producers to recover oil prices, a decision that marked the first OPEC deal since 2008. According to the announcement, output would be reduced to a range of 32.5mn to 33mn bpd from the current 33.24mn bpd.
According to experts, the benefit of the price rise that the cut will entail to the Kingdom’s economy should outweigh any production output lost.
KBC’s Ul-Haq says: “Saudi Arabia has been a swing producer for several decades and can still micro-manage supplies, although its clout has been reduced [slightly] by shale production in the US. Riyadh understands that it has to bear the burden of OPEC’s production cuts, by contributing massively to OPEC cuts.”
The market has yet to discover where the axe will fall. Saudi’s Energy Minister, Khalid al-Falih, has intimated that OPEC might go the extra mile and discuss a production cut at the November meeting. However, sceptics feel that another agreement on the cutting of production cannot realistically be expected, given that every oil producer is trying to monetise its production to reap benefits.
According to Oliver Wyman’s Sam, “Whether KSA will reduce production is probably the wrong question to ask. Over the next few years, as global demand increases, the real question is who will serve the incremental demand.”
Iain Stewart-Linnhe, a specialist in global regulatory policy, risk management, and capital markets, agrees. He concludes: “What is perhaps more significant is how the next OPEC meeting plays out, should certain oil producers – such as Iran – look to increase output in the face of overall output cuts from other members.”
