After 12 months in which crude oil peaked at more than $100 a barrel and averaged almost $72, the world’s largest oil company is using bumper revenues to deliver one of the most aggressive exploration and expansion programmes in its 75-year history.
The boom in demand for energy, combined with the kingdom’s ownership of a quarter of the world’s oil reserves, is delivering record revenues for Saudi Aramco, which grossed $168bn in 2006. Analysts predict that figure may increase by a further $10bn when 2007
figures are confirmed.
Aramco is to spend as much as $90bn by the start of 2011 in an effort to boost crude oil production capacity by 35 per cent.
In a presentation to industry executives in late October, Nabilah al-Tunisi, manager of Aramco’s project support and control department, said $51bn of overall investment would be spent on developing its own projects, with the rest invested in joint venture deals.
The logic for Aramco’s growth push is clear. The International Energy Agency predicts that by 2030, demand for oil will be high enough for Aramco to nearly double production to 18.2 million barrels a day (b/d) from about 9 million b/d at present, taking its contribution to global output to 15 per cent from 11 per cent. Several other factors are also working in Aramco’s favour.
The cost of finding, developing and producing oil in the kingdom is less than $2 a barrel, compared with about $7 a barrel in Brazil, $8 in Russia and $14 in the Gulf of Mexico. The low initial cost base helps Aramco dominate the supply market.
Rigs are increasingly being diverted to the Gulf, and Aramco ventures in particular, where demand for equipment and supplies is at record levels.
Oil field services company Baker Hughes estimates that Saudi Arabia has about half the total number of drilling rigs in the Middle East, provided by mostly Western companies lured by long, secure contracts and lucrative pay deals. Regionally, Aramco continues to lure top engineering and technical talent to its Eastern Province headquarters.
“We are tremendously proud of the way Aramco continues to set the example to other national oil companies,” Ibrahim Muhanna, adviser to Saudi Oil Minister Ali al-Naimi, tells MEED. “We work hard to harness our local workforce so Aramco becomes a place where they strive to work.”
Although Aramco can afford to bankroll even its most ambitious upstream exploration efforts, its partnership model with international oil companies (IOCs) keeps it aware of global constraints facing the industry.
However, IOCs remain frustrated by the lack of upstream exploration opportunities on offer in the kingdom, despite the company’s enormous crude and gas reserves. The much-heralded Saudi gas initiative talks with the UK/Dutch Shell Group and the US’ Exxon-Mobil Corporation at the turn of the millennium descended into acrimony when the two sides could not agree on terms and the pricing of the deal.
While Shell went on to secure arguably the most lucrative acreage as part of the speculative Rub al-Khali (Empty Quarter) exploration, the tension between the IOC community and Aramco was clear.
In 2002, Aramco’s president, director and chief executive officer Abdullah Jumah hinted that the company was studying the viability of privatising some of its operations to provide oil support services such as engineering, seismic surveying and drilling.
Aramco later played down any suggestions that it was considering a partial privatisation, with the company saying it had no official explanation of what was meant by these comments.
Diplomats within the kingdom suggested it was a political message aimed at ensuring Western oil majors did not give up hope in the chase for stakes or acreage in the kingdom. But five years on, little has materialised, and it appears that IOCs are not optimistic about opportunities in the oil sector.
Paolo Scaroni, chief executive officer of Italian oil major Eni, told the New York Times in 2006 that Aramco was off limits. “Try going into Saudi Arabia and help Aramco to extract the easy oil,” Scaroni said. “It does not need us. First of all, it is a good company. Second, the oil is easy. Why should it share something it can do by itself?”
A London-based energy analyst tells MEED Aramco is aware it has to balance the desires of IOCs with its own agenda. “I cannot see Aramco changing its upstream policy with IOCs anytime soon on the oil side,” he says. “But the gas sector may be a different matter.”
Additional gas joint ventures involving IOCs are seen as more hopeful. Aramco has been told by the kingdom to prioritise gas exploration, with the target of adding 50 trillion cubic feet (tcf) of non-associated gas reserves by 2016.
Fresh exploration areas include the Nafud Basin, northern Saudi Arabia, the Red Sea, the Empty Quarter and the Gulf. “We are likely to see more and more gas deals in the next five years,” says one analyst. “Aramco has to deal with the bread and butter of boosting its existing prospects. There is an enormous amount of new [gas] acreage to cover and we expect IOCs to be given the opportunity to be part of the exploration process.”
Part of the reason for IOCs’ enthusiasm in working with Aramco is the scale of its resources. Although the company usually quotes the figure of 260 billion barrels of oil reserves, internally Aramco refers to the kingdom having 716 billion barrels of ‘discovered’ oil reserves.
While it concedes that not all these resources are recoverable with current technology, Aramco may be able to significantly boost its recoverable reserves in the future.
“The target we have set ourselves in discovery is to increase the total size of the [exploration] pie, and increase the discovered oil resources, from the current 716 billion barrels to 900 billion barrels and beyond, within the next 20 years,” said Abd Allah al-Saif, senior vice-president of Aramco, in early December.
As part of that challenge, Saif says Aramco hopes to increase recovery to 70 per cent from 50 per cent at its producing fields within the next 20 years, translating to approximately 100 billion barrels of proven oil reserves.
Another challenge for the company is dealing with an annual production decline of 8 per cent. Aramco has to deliver 700,000 b/d in new output each year to compensate. Yet high recovery rates and some of the lowest production costs in the world provide an effective cushion against this.
Saif admits that much of these reserves will be drilled using improved conventional recovery and enhanced oil recovery, which is where IOCs and service companies hope to increase their footprint.
“We are changing our approach from the conventional model of waiting for the service companies to deliver tools, then finding the potential applications, to the new model of identifying current needs and then collaborating with the service companies to develop appropriate tools to address these needs,” Said told a conference in December.
A London-based executive at Shell, which is already involved in the Empty Quarter gas exploration, tells MEED it is hopeful of a more collaborative approach in the upstream sector. “There is talk of a series of official meetings being held next year between Aramco and the IOCs to share expertise across the energy sector. We are hoping this may lead to more opportunities down the line.”
The scale of Aramco’s domestic ambitions are most obvious through a series of new initiatives under development. Until recently, two giant fields, Khurais and Manifa, which jointly hold reserves of 41 billion barrels, were undeveloped, while only 23 of Aramco’s oil fields from its reserve portfolio of 80 are currently active.
But with international demand for more supplies from Arab Light-producing fields showing no sign of letting up, Khurais and a smaller facility, Khursaniyah, are being fast-tracked despite rising labour and equipment costs.
The massive Manifa field is also being brought on stream through a multi-billion-dollar development programme. Aramco hopes to produce 900,000 b/d of sour heavy crude from the field by 2011, while heavy oil could also be produced from the Zuluf and Marjan fields.
The success of the Manifa project ultimately depends on the ability of two new export refineries to process the crude. Although Aramco is committed to each, despite costs spiralling, heavy crude remains a less lucrative prospect on the international market.
Over the past five years, Arabian Heavy has traded at an average discount of more than $10 to light West Texas Intermediate. However, the importance of heavy oil is only ever going to increase as its already ageing Arab Light-producing fields begin to decline.
Aramco, sensing the need for a tactical shift, has revamped its upstream and downstream divisions into a new operations division to prepare for its next phase of growth. The change is significant, with Aramco increasingly integrating petrochemicals plants with its refineries to harness synergies.
Its most ambitious project to date is the $22-26bn megaproject to upgrade the existing 550,000-b/d Ras Tanura refinery and integrate it with the world’s largest grassroots petrochemicals plant.
“We have a unique situation, with access to liquid-based feedstocks, to go down the value chain,” says Fayez al-Sharef, director of project implementation at Aramco. “We wanted to enhance our assets’ financial performance by leveraging the assets and operations, and using competitively priced feedstocks.”
The strategic shift is also breathing new life into Aramco’s management. While Abdullah Jumah continues to be the most recognisable face of the company, Khalid al-Falih, Aramco’s newly appointed operations head, now masterminds the day-to-day business of the oil firm.
There were fears when Sadad al-Husseini, Aramco’s highly regarded head of exploration and production, resigned several years ago that it might spark a more extensive management reshuffle, unsettling the company.
Instead, Aramco has regularly reshuffled its executives, spreading them around the business to gain different operating experience. Speculation has been quietly building in the kingdom that Jumah will be asked to become Saudi oil minister in 2008, when Al-Naimi retires. If Jumah receives the call from Riyadh to take a ministerial position, Falih is expected to take the top job at Aramco. Whoever takes over will face an environment of rising demand, geopolitical tension, misconceptions about resources and tight margins.
One thing is certain: all eyes will remain on Saudi Aramco to see whether it can deliver on its promise to satisfy the market’s insatiable appetite for crude.
The availability of skilled workers is a critical concern for Saudi Aramco and the entire oil and gas sector. By 2010, the industry is expected to face staff shortages of as much as 15 per cent, according to energy consultant Cambridge Energy Research Associates. This means that globally there is expected to be a shortfall of 5,500-6,000 engineers by the end of the decade.
Aware of the immense pressure for qualified engineers and technicians, Aramco has been charged with helping to create a university to groom young Saudis to international academic standards, ensuring they do not need to leave the kingdom to gain good degrees.
Oil Minister Ali al-Naimi, who is also chairman of Aramco, backed by a government fund of $10bn, recently opened the doors to the King Abdullah University for Science & Technology overlooking the Red Sea north of Jeddah.
Many of Aramco’s and sister company Saudi Basic Industries’ (Sabic) recruits already come from King Fahd University of Petroleum & Minerals.
Now, the science and technology university provides an opportunity for wider research into energy, with international universities being asked to send their top academics there.
The ‘world’s future energy needs’ is to be one of the central curriculas, with one of the four university institutes focusing on energy research, water and sustainable development.
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