Throughout 2013, Saudi Arabia’s national oil company Saudi Aramco has been producing about 10 million barrels a day (b/d) of oil. Such high levels of output from the world’s biggest oil producer has not been welcomed by all its partners in oil producers group Opec, who would like to see oil supplies constrained to maintain higher prices on the energy markets. But it highlights how seriously Riyadh takes its responsibilities as the world’s swing producer of oil, able to adjust output to protect interests of both energy producers and consumers.

Unlike most national oil companies (NOCs), Aramco has extensive domestic and international commitments, which means whatever decisions Riyadh takes regarding its oil output, there will always be somebody challenging the decision, either inside or outside the kingdom.

Oil oversupply threat

“Saudi Aramco is proving that an NOC can balance its obligations” says oil consultant and former Aramco vice-president, Sadad al-Husseini. “No other NOC operates in the same way [as Aramco].”

The company was founded as California Arabian Standard Oil Company in 1933, as a subsidiary of US firm Standard Oil of California, (now the US’ Chevron). Texas Company (now the US’ Texaco) bought a 50 per cent stake in that subsidiary and eight years later, in 1944, its name was changed to Saudi Aramco. Since its launch, the firm operated as a commercial enterprise until it was fully nationalised in 1980.

Unlike most NOCs in the region, Aramco does not offer production-sharing agreements for any of its upstream oil and gas operations. However, times are changing and it will be forced to change with them.

As new sources of unconventional oil and gas becoming available, Aramco’s biggest customer, the US , is forecast to become self-sufficient in its energy needs by 2020.

The withdrawal from the market of the world’s biggest energy consumer would, at a stroke, lead to a glut in global energy supplies and prices, currently being sustained at record levels, could drop significantly.

The consequences of such a scenario are being examined closely in Riyadh. The Oil Ministry, Aramco and other key decision-makers are reviewing the oil firm’s strategic priorities and operations, and planning huge rounds of investments aimed at safeguarding the kingdom’s position as a major global energy player.

One result is a series of major domestic and foreign investment initiatives across the whole hydrocarbons value chain and a renewed focus on its core capabilities.

But despite the looming threat of oversupply in the future, Aramco continues to pump very-high levels of oil output and, as a result, business in 2013 is booming.

Despite having an estimated oil production capacity of about 12.5 million b/d, the oil company is usually happy to produce anything above 8 million b/d. Since mid-2012, Aramco has plugged the gap in global energy supplies caused by sanctions against Iranian crude oil exports. As a result, it has been producing more than 9.5 million b/d throughout 2012 and 2013.

While this has pleased US consumers, it has caused problems within Opec, as Tehran has accused Riyadh of profiteering from fellow members. This has led to strained relations within the group with both Riyadh and Tehran nominating opposing candidates for the secretary-general role.

Opec challenges

Deadlock over the appointment has reached the stage where the incumbent secretary-general, Libya’s Abdalla el-Badri, has extended his tenure due to the lack of a replacement. Where this leaves Opec in the future is the cause of much debate with some oil industry commentators saying the group is a diminishing force.

Saudi Arabia, however, remains Opec’s most powerful member and can usually count on support from its three fellow GCC member-states as well as Iraq. Riyadh knows that without its 12.5 million b/d of of oil production capacity Opec’s influence would be significantly weakened.

Another challenge to Opec’s influence comes from the rise in new sources of hydrocarbons. The US, Canada and Venezuela are all starting to exploit unconventional oil and gas and many traditional producers are starting to worry about the pressure this could apply to global markets.

“With ongoing problems to supply in countries such as Libya, there is no real chance of the global oil market becoming oversupplied,” says Robin Mills, head of consulting for the Dubai-based Manaar. “However, look forward towards the end of the decade and Iraq should be producing significantly more oil, as well as other countries bringing on unconventional sources. This could put extreme pressure on the oil price.”   

Aramco is not expected to change any of its operating policies around its conventional oil and gas assets, but there are indications that it may be considering partnerships on the development of any unconventional oil and gas deposits, especially where specialist expertise Aramco does not have is required.

The firm currently has one upstream joint venture with the UK/Dutch Shell Group for a gas field development in the Empty Quarter, but Shell is understood to be seeking to extricate itself from the partnership.

Oil field services agreements

Despite a lack of IOC involvement in current oil and gas production, international companies still play a vital role helping Aramco to maintain its enormous hydrocarbon capacities. Many of the world’s biggest oil field services companies, including the US’ Halliburton, Baker Hughes and Schlumberger, have long-term service agreements in place to support Aramco’s major onshore oil field developments.

All of the deals are focused on maintaining production at the kingdom’s major assets such as Ghawar, the world’s largest oil field, and ensuring the fields can sustain production levels into the future. The same companies are also working with Aramco to search for unconventional energy reserves, such as shale gas deposits in previously untapped areas in the north of the kingdom.

An anticipated ramping up of Aramco’s offshore activities in particular offers exciting potential opportunities to international engineering companies.

“Many contractors are excited about Aramco’s offshore oil and gas fields, especially in the Red Sea,” says an executive from an international engineering consultancy. “It is looking like Aramco is preparing for a new wave of offshore oil and gas field developments.”

Currently, Aramco has a long-term services agreement in place with Australia’s WorleyParsons to provide engineering support for the maintenance and repair of Aramco’s offshore oil and gas field assets in the Gulf. Aramco, however, is tendering a similar engineering services contract to support the potential rapid  expansion of its Red Sea developments, which is likely to run concurrently with the WorleyParsons deal.

In contrast to its upstream operations, Aramco takes a different approach on its downstream refining and chemicals projects. In this sector, the firm’s approach is more like other NOCs in the region and it works closely with IOCs as well as operating its own domestic refineries. Aramco has a global refining capacity of 4.5 million b/d, of which it retains an equity share of 2.4 million b/d.

Domestically, it operates four wholly owned refineries across the kingdom, with another world-scale complex under construction at Jizan. Jizan will have a capacity of 400,000 b/d when it starts operations in 2016-17.

The remainder of its refining operations are joint ventures with some of the world’s largest IOCs and are located either domestically or in strategic markets such as China and the US.

An ongoing challenge for Aramco is balancing the often conflicting demands of its commercial interests, which encourages it to sell its output internationally, and its obligations to support the kingdom’s domestic policy objectives.

Gasoline consumption is growing at more than 5 per cent a year in the kingdom, fuelled by the world’s second-lowest price a litre, $0.12. This means that a large proportion of the 1.2 million b/d of domestic refining capacity due to come on stream in the next four years will have to be set aside for domestic use.

This challenge is reflected in Aramco’s recent foray into the petrochemicals sector, with schemes being designed to lengthen the value chain and aimed squarely at job creation.

The most ambitious is the $20bn Sadara Chemical Company project, which is under construction at Jubail in the Eastern Province. The complex will be the largest ever single-phase petrochemicals plant and will have a capacity of 8 million tonnes a year of speciality chemicals when completed. The plant is a joint venture of Aramco and the US’ Dow Chemical.

Business initiative

Aramco believes Sadara will be the anchor tenant for an adjacent conversion park that will attract small to medium-sized enterprises (SMEs) to the area and drive job creation.

To help SMEs, the oil company has also set up an initiative that offers assistance to any budding entrepreneurs in Saudi Arabia. The Wa’ed Programme is focused on turning ideas into established businesses within the kingdom. This includes funding and advice on setting up a small business.

Historically, exporting crude oil has been the primary driver of all Aramco’s operations, but as the world’s oil industry changes, the company’s strategic priorities are evolving. Aramco is now repositioning to place its domestic downstream operations on an equal footing with exporting crude oil.

The news reported by MEED in late August that Aramco is planning a $70bn expansion of its petrochemicals capacity is part of this change in focus. It is also a reaction to the changing global picture and the prospect of potential oversupply in the global energy oil markets.

Saudi Aramco leads the world in the scale of its operations and also in the way it balances its commercial and domestic obligations. The energy sector is adjusting to the prospect of a new era, defined by a surge in unconventional energy sources unlocked by new technology and potential oversupplies of raw energy. It is likely that where Saudi Aramco leads in this new landscape, many more of the region’s NOCs will follow, creating new opportunities for the region IOCs, oil services contractors and engineering and technology suppliers.