Restructuring Saudi Aramco

Last week, it was a toss up whether to discuss changes in Saudi Arabian national oil company, Saudi Aramco, or the Price Waterhouse Coopers (PWC), forensic report on the non-remittance of $20 billion into the federation account by the Nigerian National Petroleum Corporation,  NNPC. The two news items hit the headlines about the same time and, obviously, the $20 billion dollar story won the day because not only is it local, it was also more sensational. But only after a promise to discuss the Saudi Aramco story in today’s edition.

The management reshuffle at the world’s biggest energy company, which also doubles as the national oil company, NOC, of Saudi Arabia, Saudi Aramco by the ruler of the Kingdom of Saudi Arabia, King Salman bin AbdulaAziz Al Saud, sent tremors through the financial capitals of the world. Time was when such news shakes many a western capital to its foundation, but gone are also those days of feared OPEC supply cuts and politically motivated oil embargoes. It is a different world and Saudi Arabia along with many other oil-export dependent economies have challenging years ahead.

Rumbles of some change started about two years ago, several months before the ascension of King Salman to the Saud throne. In the 2013 edition of the Saudi Aramco annual revenue, the company enumerated a three-pronged strategy to transform the company - expanding the kingdom’s resource base through a major step-out into unconventional oil and gas development, further downstream expansion into petrochemicals and curbing domestic oil and gas consumption.

Saudi Aramco recognises that unconventional oil & gas resources, especially shale oil & gas, are game changers in the industry. So, buoyed by the large discoveries in its eastern operations, the development of the of the Manifa heavy crude field and the Karan gas field, the first non-associated gas development in the kingdom, the company announced that its unconventional gas programme will be fully operational by 2013. Both Manifa and Karan are not typical Saudi Aramco type of developments and they signal a major step-out, both operationally and technically, for the company.

In the downstream, the company is focussing on being the global standard bearer for a petrochemicals-focussed NOC. A statement of intent in that direction from the company is the almost completed Sadara petrochemical complex in the Jubail industrial city, a joint venture with the American giant Dow Chemicals. Sadara is the largest chemical complex ever to be built in a single phase, with 26 integrated world-scale manufacturing plants. It is estimated that Sadara will be a Fortune 500 company within the first year of full operation. The country’s Master Gas System, MGS, launched over a decade ago has seen the country surpass the United States and most western European economies in per capita consumption of gas. Industrial use of gas is a major component and success of the MGS - Saudi Arabia now hopes to develop car and aircraft parts from the aluminium it is smelting and more advanced plastic goods from its plastics.

The third leg of this strategy tripod is a move to curb the domestic fuel and power consumption within the country by venturing into renewable energies. This calls for a brief raising of the eyebrows considering Saudi Aramco’s extensive oil and gas reserves, but it is a real concern for the country. Just recently the Saudi Basic Industries Corporation, SABIC, the country’s largest industrial concern, complained that it has not been getting enough gas from Saudi Aramco to meet its production obligations. Likewise, the immediate past head of Saudi Aramco, Khalid al-Falih, warned in 2010 that even with production increases, Saudi Arabia’s oil export capacity might be reduced by 3 million barrels per day by 2028 if skyrocketing domestic energy demand is not curtailed by more efficient usage. Citigroup even went as far as to suggest in 2012 that Saudi Arabia could turn into a net oil importer by 2030 if current energy demand growth patterns continue.

So although analysts see the transformation as Saudi Aramco’s way acknowledging the challenges ahead for it and other NOCs, it is not for lack hydrocarbon reserves. Considering that of the 30 mega oilfields with over 10 billion proven reserves in the world five are Saudi Arabian. The biggest oilfield in the world, the super giant Ghawar field, discovered in 1948 accounts for nearly half of the production coming out of Saudi Arabia. The field has an estimated 71 billion barrels in reserve and for the past half century has been producing an average of 5 million barrels of oil 2 billion cubic feet of gas a day and has the capacity to maintain that for another half century. Currently Saudi Arabia exports about ten million barrels of oil a day and has the capacity to ramp that up to twelve at will.

The change has been long in coming. Saudi Aramco and its owners have, by and large, been successful in policy planning and execution in the last few decades but such success and the expected bumps ahead for the global energy industry call for a transformation to both keep up with the successes and to prepare for the challenges. What is most instructive is how King Salman approached it.

Two weeks ago the management of the company was reshuffled with Khalid al-Falih, the CEO, moving up to the position of chairman, a position held by the 80-year-old oil minister, Ali al-Naimi. Amin al-Nasser, the senior vice president in charge of upstream operations moved up to be the new CEO.

Firstly, early in the year the Supreme Petroleum Council, led by the King, which is in charge of all policies and decisions relating to the petroleum industry was scrapped and replaced by the Supreme Economic Council headed by the monarch’s son, Prince Mohammed Bin Salman. The change is not in the name only, it is another way of affirming that the kingdom’s hydrocarbon resources will be shaped by the nation’s economic needs and not the other way round.

Ten days ago, the council approved the separation of Saudi Aramco from the Saudi Petroleum Ministry. This move, seen as a first step to wide ranging structural changes in the company, belies the new focus of giving the company the flexibility to have full financial controls and take commercial decisions without undue political interference.

The separation of Saudi Aramco, a commercial entity, from the Saudi Arabian oil ministry is said to be influenced by a need to divorce Saudi Aramco from foreign policy agenda of the Saudi government. This is a strategic move that underlines the understanding of the kingdom’s rulers that the game has changed and oil reserves should be seen for what they are - a strategic economic asset and not a political tool. This, in a way, means gone are the times when Saudi Arabia used its oil resources and clout in the Organisation of Petroleum Exporting Countries, OPEC, to declare an oil embargo on the West over the actions of Israel.

It is also a move steeped in realpolitik. Firstly, it has been a policy of the Kingdom for decades now to use the leverage it holds in maintaining the stability in both the supply and price of the commodity in its interest and that of the wider global economy. The recent price plunge of the last twelve months could easily have been averted if the Saudis had so wished. Secondly, even nations that would hitherto be hurt by a Saudi-assisted oil embargo are on the way to being energy independent and self sufficient.

What has all this got to do with Nigeria? If a giant like Saudi Aramco after climbing to the summit of the reserves pyramid and building an extensive indigenous industrial base on the back of petrochemicals is looking into the horizon and preparing for challenges aheads then it behoves on every oil exporting country in the world to examine its future vis-á-vis, its relationship to  its hydrocarbon resources. The smart move for any country is to de-emphasise the resource, any resource, and focus on the economy. As many other petroleum-rich nations can attest, oil has the capacity to both improve and wreck an economy. All the Saudis are doing is taking the right bend at the fork.

Knowing that a nation’s level of economic development is directly related to its energy consumption, let us all pause and imagine the level of economic activity that could see Saudi Arabia, a country of less than thirty million people, consuming over ten million barrels of oil a day internally in fifteen years as projected by Citigroup above! That is half of what the United States of America, a fully developed economy with five times the land area and ten times the population of Saudi Arabia, consumes today. Nigeria, Africa’s largest economy, in comparison consumes about 300,000 barrels a day.