NOC Survey 2008: Saudi Aramco

04 July 2008
Already the world’s biggest producer, Aramco is under pressure to raise output.

Saudi Aramco can still claim to be comfortably holding its position as the region’s top national oil company (NOC), despite a tough year of rising costs and labour shortages.

With many of the world’s largest energy consumers blaming the recent spike in oil prices on concerns over the short-term supply of crude, Aramco faces unprecedented pressure to hit production capacity of 12.5 million barrels a day (b/d) by 2009, in addition to ambitious refining and exploration targets.

While the oil giant faces delays on some of its major fields, in common with other major producers in the region, it can take credit for continuing to push its production limits to levels that were unimaginable at the start of the decade.

At the emergency Jeddah Energy Forum meeting on 23 June, Aramco promised an aggressive campaign to push its overall maximum output to as much as 15 million b/d by 2018, from about 11.4 million b/d now, although the offer is conditional on the needs of the market at the time.

Respondents to MEED’s NOC survey 2008 pick out Aramco’s production capacity and oil field and technology development for particular praise, with more than three-quarters of respondents ranking the company highly in each of these categories.

The International Energy Agency estimates Saudi Arabia still has at least 70 fields to be developed, which are understood to contain an additional 26 billion barrels of reserves.

There is still widespread optimism within Aramco over a series of medium-sized onshore fields that were originally mothballed in the early 1990s, but now form a crucial part of the expansion drive.

Khurais, Khursaniyah, Abu Hadriya, Abu Jifan and Harmaliyah were all put on hold at various times but are now receiving investment to increase production.

Two of these fields in particular are set to play a big part in the capacity increase, with the addition of 1.2 million b/d from Khurais and 500,000 b/d from Khursaniyah within the next 12 months.

Both are suffering delays of up to six months from their original schedules, but with Aramco’s spare capacity buffer of 1.6-2 million b/d, the missed deadlines are not expected to impact on the company’s overall plans.

CompanySaudi Aramco
Oil Reserves259.9 billion barrels
Oil Production 200710.4 million barrels a day*
Gas Reserves253.8 trillion cubic feet
Gas Production 20077.59 billion cubic metres
*includes NGLs. Source: BP Statistical Review 2008

Project delays

Aramco concedes that Khursaniyah has been delayed but still claims the biggest new field in its plan to raise oil capacity, Khurais, will start on schedule in June 2009.

In terms of delays, more than two-thirds of respondents identify the poor productivity of local labour as either ‘important’ or ‘extremely important’ in missing deadlines on projects, while bureaucracy at Aramco is cited by half as an important factor.

Despite these complaints, the majority of respondents say the typical size of cost overruns as a proportion of the budgeted cost is less than 25 per cent.

While most regard the company as a prompt payer for services, one-third of those surveyed that have suffered payment delays say disagreement with the company over price was a significant factor.

For contracts where there have been cost overruns, more than half of respondents single out raw material and labour cost inflation as important factors in causing the inflated budget, underlining the fact that Aramco is no longer immune from problems faced by the energy industry worldwide.

In an effort to counter this supply and skills gap, Aramco has drawn up a shortlist of 27 local and international engineering and construction contractors to compete exclusively for billions of dollars worth of energy projects over the next five years.

The list, created to ensure Aramco has access to enough engineering and contractor capacity, includes project management consultancy (PMC) work for the first time, in addition to general engineering and construction services.

While consuming countries continue to fault major oil producers for their lack of investment in production and facilities, even the most ardent critic could hardly accuse Aramco of not playing its part to bolster production.

Aramco expects capital spending on its own projects to hit nearly $60bn over the next five years, while spending $70bn on domestic and international downstream joint ventures.

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, particularly in the refining sector.

The development of the new refineries represents a significant change in the scale of activity, especially when seen alongside the upgrade of the refinery at Rabigh, and Aramco’s joint venture developments abroad.

In December 2007, work began on the Motiva project, a $7bn joint venture with the UK/Dutch Shell Group to expand an existing plant at Port Arthur, Texas, into what will become the largest refinery in the US, with a capacity of 600,000 b/d.

The company is also active in China, with 25 per cent stakes in the 230,000-b/d Fujian refinery project being developed by Sinopec and the US’ ExxonMobil Corporation, and in Sinopec’s 200,000-b/d Qingdao plant.

By embarking on new global joint venture refinery projects such as Fujian, which will rely on heavy crude, Aramco has managed to create a new market for a type of oil the world has not previously sought, in time to meet its planned increase in heavy crude production.

More than half of respondents cite Aramco’s development of difficult reserves as one of its core strengths, but the company’s forays into gas exploration have been more mixed.

The oil giant has committed about $1.5bn to the Karan gas facility to hit production of 1.5 billion cubic feet a day (cf/d) by 2012, but few other sizeable gas ventures are yet commissioned despite strong domestic demand, particularly from industrial users.

Progress on the four joint venture exploration efforts with international oil companies in the Rub al-Khali (Empty Quarter), a scaled down venture from the initial Saudi gas initiative launched at the turn of the decade, have been more mixed. Although rumours continue to circulate that several of the consortiums have struck gas, no meaningful finds have yet been certified and aside from Shell’s joint venture, which has agreed an extension on its drilling deadline, time is running out for the three other groups.

Many industry insiders argue that the time is right for similar agreements to those for the Empty Quarter to be signed for gas exploration programmes planned in Nafud, the Red Sea, the western region and the Saudi Aramco reserved area (Sara) in the Empty Quarter, but Aramco seems reluctant to spread itself too thinly at such a busy time.

There is a sense that international oil companies remain perplexed by the limited amount of opportunities given to work with the world’s largest energy company. Only one-third of respondents rate Aramco’s partnering with oil majors as better than average.

More than 80 per cent of respondents praise Aramco’s health and safety record despite almost 50 construction workers dying in two separate fire incidents at its facilities in 2007.

Midway through one of its busiest capacity expansion programmes, Aramco can ill afford to relax and reflect on its achievements.

While plenty more could be done to improve the company’s image and transparency around the world, Aramco is doing a good job of guaranteeing supplies at a tense time for the global economy.

The challenge will be to continue to deliver on its promises, regardless of what happens with oil prices.

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