In a comfortable, dimly-lit conference room at Saudi Aramco’s Dammam headquarters, eight energy journalists sit in silence, waiting for the first presentation of the two-day media visit to begin. Although each of us came with our own hopes, and in spite of the clearly organised agenda in each of our Aramco-branded folders, none of us know what to expect. At the head of the table, a Saudi Aramco media spokesman stands, looks around the room, and laughs.
“Now you see, we were telling the truth!”, he says, breaking the silence and earning a round of chuckles across the room. He was referring to Saudi Aramco’s recent, 470-page bond prospectus, which verified its claimed production capacity of 12mn barrels per day (bpd) and revealed it to be the world’s most profitable company in 2018, generating a staggering $111bn in profit that year. It had been telling the truth.
For the decades following its nationalisation, Saudi Aramco has kept a tight grip on its books—one that is loosening as it, the kingdom, and the global oil and gas industry transform. The oil price crash, and the reality of a lower-carbon future, are major factors in this transformation, setting the kingdom on a path to diversify its economy away from oil. Separating oil from Saudi Arabia seems impossible—imagine separating the Pyramids of Giza from Egypt. Oil forms the historical foundation of Saudi Arabia’s success, and it wasn’t until the discovery of oil in Dammam in the 1930s that Saudi Arabia made its fortune.
Small fishing villages like Ras Tanura were transformed into hubs of industrial activity, and flare stacks, hydrocrackers and stabilisers now stand tall against the turquoise blue backdrop of the Arabian Gulf. The country has developed and grown around Aramco. But in reality, it wasn’t until 1959 that a KSA national was on the board of the company. Only in 1984 did a Saudi Arabian first take the reins of Saudi Aramco as its president.
The company’s headquarters in Dammam, and its base in Ras Tanura, reflect the company’s US origins. It was originally a partnership between the US and KSA, the Arab American Oil Company, which was shortened to Aramco. Tidy rows of houses with lush, green lawns emulate US suburbia, and street signs carry names like Holmes Street. The Dammam Camp, as it is called, was built by Americans with military experience, multiple Aramco media representatives say as we walk from one building to another. That is why the headquarters, which is more of a small town, is called a camp, and the cafeteria near the nerve centre of the sprawling base is called Dammam Commissary.
Everything in the ‘camp’ seems to be tailored to Western expats and to help them acclimatise. But this stands in stark contrast with one, long-standing facet of Aramco—its secrecy. Since the government took 100% in the company in 1980, nationalising its vast assets and prompting it to change its name to Saudi Arabian Oil Company (Saudi Aramco), it has kept a tight lid on its books, but as Saudi Aramco tests the waters of a public listing, transparency is an eventuality.
After months of anticipation, Saudi Aramco announced in March 2019 that it would acquire a majority stake in Saudi chemicals giant SABIC for $69.1bn, and issued a $12bn bond as part of its payment plan. Saudi Aramco currently has a petrochemicals production capacity of 17mn tonnes per annum, while SABIC boasts 62mn tonnes per annnum.
WATCH: Who wins in Saudi Aramco’s SABIC acquisition?
Vertical integration is a common strategy among international oil companies (IOCs). Those with robust downstream portfolios suffered less during the market downturn than their upstream-heavy counterparts, because they had the agility to shift production to the most profitable outcome.
“Not so long ago I used to hear a lot of advice about how we should separate out our downstream business and sell it off,” British Petroleum CEO Bob Dudley told shareholders in April 2016, when oil prices hovered around $40 to $46 per barrel of Brent crude. “I don’t hear that so much anymore.”
National oil companies (NOCs) appear to be following that trend, with many downstream mega deals announced in the past year. With much of demand centred in China and India, Saudi Aramco agreed in February 2019 to form a joint venture with NORINCO Group and Panjin Sincen to develop a $10bn downstream complex in China. Meanwhile, ADNOC in April 2019 made its first ever shipment of UAE-produced calcined coke to China. Further downstream, Aramco and Total agreed to invest $1bn in a network of fuel and retail services across Saudi Arabia.
Still, downstream is not immune to fluctuation—SABIC reported a 38.1% drop in its profit for the Q1 2019 due to lower prices for petrochemicals. This is where agility comes into play, and an integrated oil company would decide whether it could maximise profits by selling crude oil rather than petrochemicals.
Saudi Aramco plans to have an integrated refining and marketing capacity of 8mn to 10mn barrels per day, with planned chemicals investments to exceed $100bn in the next decade, excluding the SABIC acquisition. At its Ras Tanura Refinery, pipes snake across the 5sqkm facility, which has 1,800 employees working to keep it running 24 hours a day. An ongoing clean fuels projects means a new section is being built within the complex. The industry is shifting towards lower sulphur content, and lower carbon emissions. In a lower-carbon future, vertical integration will be key to national oil companies.
“Investments in petrochemicals represent a hedge against the long term ‘peak oil demand’ scenario,” Fitch Ratings noted in a report following the SABIC acquisition announcement. “Companies that have lower production costs and are more integrated into petrochemicals would be better positioned to withstand ensuing declining demand.“
Amin Nasser said it himself in a speech at London Petroleum Week, noting that while 20% of global oil demand is for passenger vehicles, “the remaining 80% is used by sectors like planes, ships, trucks, petrochemicals and lubes for which there is no alternative yet and where demand for oil is expected to increase substantially.”
Essentially, even if the price and efficiency of electric vehicles and renewable power generation sources suddenly improve and demand for fuel crashes, there are plenty of industries that rely upon hydrocarbons as a raw product. By investing into refining and petrochemicals, NOCs are assured a flow of feedstock from their upstream operations with a lower risk of decreased demand.
“Our downstream business ventures will provide a reliable destination for Saudi Aramco’s future oil production, and diversify both the company’s business portfolio and the kingdom’s economy,” Nasser said at the GPCA Forum in November 2018.
While growing its downstream portfolio is a strategic move for Aramco’s development, its SABIC acquisition carried a larger incentive. It acquired the 70% stake from the Public Investment Fund (PIF), Crown Prince Mohammed bin Salman’s (MBS) primary vehicle for economic diversification in the kingdom. Just as NOCs were upstream-dependent, regional governments were oil-dependent at a time where oil prices had sunk to around $30 per barrel of Brent crude.
To increase the PIF’s liquidity, the government originally planned a public listing of up to 5% of Aramco for $100bn, at a valuation of $2trn, but they were shelved for several reasons, including skepticism about the company valuation. Instead, the SABIC sale will free up $69.1bn for MBS’s economic diversification programme. One part of Saudi’s Vision 2030, as written on its website, is “transform Aramco from an oil producing company into a global industrial conglomerate.” Purchasing a majority stake in SABIC fits the bill—the chemicals giant has operations in 50 countries across the globe, and creates a wide array of products.
Meanwhile, as Saudi Aramco and the Kingdom aim to diversify, technology, research & development are coming into sharp focus as areas of opportunity. For Aramco, with two research and development bases in Dammam Camp alone, and 9 outside of KSA, some interesting technologies are coming to light.
“We have two major programmes that comprise this flagship programme, and both are converting crude to chemicals directly,” says Amer Amer, chief technologist in Saudi Aramco’s Fuel Technology Division. “One of them uses a catalytic route, and the other uses a thermal route to do the same.”
SABIC and Saudi Aramco are venturing in a crude oil to chemicals (COTC) complex in Yanbu, which is set to start operations in 2025. It is expected to have a direct conversion rate from crude oil to chemicals of around 50%, where traditional methods yield around 10%. “We’re looking at opportunities to convert up to 60% maybe to 70% of our crude directly into chemicals that can be used in various industrial applications,” Amer says. That would mean more profit from the same amount of crude, but has not yet been proven commercially.
“The pace that the company is moving is too fast, even for us,” says Ras Tanura Refinery engineering manager Abdullah Bagar before a tour of the facility. “We sometimes get surprised with things in the media that we were not aware about.”
Other projects, with varying degrees of maturity and success, comprise robotics, carbon capture, synthetic fuels and more. Its SpiceRack autonomous subsea seismic acquisition unit, for example, will be used for its ongoing exploration efforts in the Red Sea.
“This will be the first time in the industry where 200 [autonomous underwater vehicles] will be employed to conduct a seismic ocean bottom survey,” said Abdulmohsen Al Ali, a geophysicist with Saudi Aramco, on the sidelines of the Middle East Oil & Gas Show (MEOS) in Bahrain. “[The Red Sea] is unexplored and much more challenging, we don’t have the ocean bottom data yet.”
In parallel, Saudi Aramco has an increasing focus on digitalisation. Some buildings in the Dammam Camp have the look and feel of technology companies in Silicon Valley. In the Upstream Professional Development Centre, a digital tabletop allows trainees and professionals alike to virtually plan drilling sites with an eagle eye view of actual locations. In a dark room with large, rotating seats, a virtual drilling rig with controls, pressure valves simulate work onsite for training purposes.
At EXPEC ARC, the company’s upstream research & development centre, one room has a digital wall displaying information from the company’s drill sites, including wells being actively drilled. It is a hub for Aramco’s geosteering technology, which works in combination with horizontal drilling to make operations on the field safer and more efficient, enabling real time reservoir modeling (read more about geosteering, and why the company drills 90% of its wells horizontally, on p20).
Meanwhile, at the Aramco Oil Supply Planning and Scheduling centre (OSPAS), after walking across its gigantic, curved screen displaying all manner of storage, organisation and planning data for all the company’s grades of crude oil, our group is ushered out quickly. On the right side of the room, just entering, is Amin Nasser, lit by the intermittent flash of a photographer documenting a VIP’s visit to the facility. “We have to go now,” our guide says, interrupting our conversation about digitalisation. Saudi Aramco is opening up, but some doors may remain closed, for the moment.
After a few days at the company headquarters, the scale of its operations is far clearer, and, in turn, the potential impact of an IPO. With Saudi Energy Minister Khalid Al-Falih saying the world will be Aramco’s playground, and that it will soon access equity markets for more than bonds, the company’s ambition appears to be transforming into a major competitor on a global scale alongside international oil majors. With 12mbpd production capacity, and new access to petrochemicals production capacity of 62mn tonnes per annum through SABIC, combined with its own 17mn tonnes per annum, it could be fierce competition.
It is now undeniable that Saudi Aramco makes more profit than IOCs (or any other company, for that matter), but can it stand toe-to-toe with oil majors? In terms of production numbers, it is more than capable. British Petroleum, for example, produces 3.7mn barrels of oil equivalent per day, with 11.9mn tonnes of petrochemicals produced per annum in 2018, far less than Saudi Aramco’s figures. But in terms of cash generated per barrel, Aramco falls short of other major industry players. It makes $26 per barrel of oil equivalent, compared to Shell’s $38 and Total’s $31. In the long run, when resources eventually dwindle, this figure will make a difference.
Wherever it takes the company, Saudi Aramco’s push to enter the global arena in a future that could look quite different from today, will be one for the books.
