Saudi Aramco plans for a life after oil

Rising from the desert like a metallic oasis, the Sadara chemicals plant in Saudi Arabia’s eastern province is a labyrinth of pipes, tanks and furnaces covering an area three times the size of Monaco and made with enough steel to build the Golden Gate bridge twice. The $20bn project, completed in September, is the largest chemicals facility constructed in a single phase anywhere in the world. It stands as a powerful statement of intent by Saudi Aramco, the state oil company, to adapt to a changing energy environment and as a symbol of what a reformed Saudi economy could look like. Increasing investment in chemicals aligns the company with the ambitious economic overhaul being pushed by Crown Prince Mohammed bin Salman to wean the kingdom off what he has called its “dangerous addiction to oil”. At the centre of his reform programme is a stake sale in Saudi Aramco to international investors next year, proceeds from which will be funnelled into non-oil sectors — from technology and tourism to healthcare and mining. Crown Prince Mohammed bin Salman © Getty Yet even as the young heir to the country’s throne looks beyond fossil fuels for future growth, Riyadh’s $2tn valuation will only be achieved if Saudi Aramco can show that its vast oil reserves — the same resource it is trying to diversify away from — are still worth investing in. “There sometimes seems to be a bit of a contradiction between Aramco working overtime to prolong the oil age, because they know Saudi Arabia cannot entirely end this dependency, while the highest authorities in Saudi Arabia keep forecasting a technology driven, futuristic world,” says Helima Croft, RBC Capital Markets’ head of commodity strategy. “How does Aramco . . . fit into this new Saudi Arabia?” The Sadara plant, which uses oil and gas to produce a range of specialty chemicals found in everything from cosmetics to car parts, is touted by the company as the place where these conflicting messages can be reconciled. A joint-venture with Dow Chemical of the US, Sadara symbolises the Saudi drive to attract more private and international capital to develop higher-value industries such as petrochemicals, which can build on rather than replace the kingdom’s natural resources. “Instead of looking at crude oil as the only economic engine, [the government is] looking at multiple engines and that is something good,” says Amin Nasser, chief executive of Saudi Aramco, in an interview at the company’s headquarters in Dhahran, on the Gulf coast of eastern Saudi Arabia. His portrayal of Saudi Aramco as an ally of economic diversification, rather than an obstacle, is critical to avoiding the impression that the company’s planned stock market listing amounts to a fire-sale by a government desperate to reduce exposure to oil. Saudi Aramco chief executive Amin Nasser © Reuters Prince Mohammed has touted artificial intelligence, automation and renewable energy as priorities for Saudi Arabia 2.0, while finance minister Mohammed al-Jadaan said in May that by 2030 the kingdom “wouldn’t care if the oil price is zero”. That seems a far-fetched goal when, today, the petroleum sector still accounts for 87 per cent of government revenues and underpins the country’s geopolitical power. Saudi Arabia could not afford to make a rapid shift from oil even if it wanted to. Instead, the kingdom must maximise remaining value from its vast fossil fuel resources to finance the transition. The flotation of Saudi Aramco is critical to this strategy, not just because of the billions of dollars Riyadh is aiming to raise, but also as a catalyst for wider privatisation of the economy. Riyadh will soon decide on listing venues for what is billed as the biggest initial public offering in history. London, New York, Hong Kong and Tokyo have all been considered, alongside the domestic Tadawul exchange. A private sale to a strategic investor is also an option. Added drama has been injected into the IPO process by political upheaval in Riyadh. Mr Nasser says the high-profile arrest last month of 11 princes and dozens of politicians and businessmen, including a Saudi Aramco board member, for alleged corruption should be welcomed by investors as a sign of commitment to economic transparency. Yet, many observers saw it as a reminder of the risks inherent in a country ruled by a royal family riven by rivalries and located in one of the world’s most politically volatile regions. An investment in Saudi Aramco will represent a bet on the country’s ability to navigate a changing energy landscape at the same time as managing a cocktail of domestic and regional political tensions. “It’s the cultural revolution of Saudi Arabia,” says Jean-Francois Seznec, a visiting professor at the Johns Hopkins School of Advanced International Studies. “They are trying to change how things are done.” In many ways, Saudi Aramco is a model for the more dynamic economy and open society which Prince Mohammed is trying to promote. Founded in 1933 as a partnership with Standard Oil of the US, the company prides itself on hiring the best and the brightest young Saudis — a symbol of meritocracy in a tribal culture. It strives for the highest standards of operational excellence, has a multinational workforce and has accounting and governance structures similar to the biggest international oil majors, particularly ExxonMobil. At its sprawling compound in Dhahran, men and women work side by side in a way seldom seen elsewhere in Saudi Arabia. None of this, however, can obscure the fact that, as the world’s largest producer of crude, Saudi Aramco remains tied to an industry with its best days behind it. In a windowless control centre deep inside the Dhahran headquarters, workers monitor giant screens tracking each molecule of crude that travels from oilfields, through pipelines and refineries on to tankers bound for points around the globe. This dimly lit, low-key command bunker oversees the production of one in every eight barrels of oil sold worldwide. The question for investors is how much longer will oil remain the lifeblood of global commerce and how much value can Saudi Aramco extract from its reserves in that time? Saudi Aramco chart The company has produced 145bn barrels of oil since its first successful well was drilled almost 80 years ago. It claims to have at least 260bn barrels of proven reserves available — enough to meet total global demand for about seven years — and a further 400bn barrels of possible but unproven resources. Experts once argued about when the world would run out of oil, but the debate has shifted to when demand will be exhausted as fossil fuels are replaced by cleaner sources of energy. Some analysts think oil demand could peak as soon as the late 2020s if electric vehicles (EVs) spread quickly. Others think it will be later but almost everyone agrees that, after a century of dominance, oil is facing much greater competition. “The writing is on the wall,” says Paul Stevens, senior research fellow at London-based think-tank Chatham House. “Saudi Aramco knows it needs to secure markets for the kingdom’s oil [before demand declines].” Mr Nasser insists there is no panic within Saudi Aramco. Its own data show oil demand growing until at least 2040, driven by rising populations and living standards in the developing world. While EV sales will grow rapidly, Saudi Aramco says they will account for only 10 to 20 per cent of the global car fleet by 2040, in line with International Energy Agency estimates. Oil will lose market share to renewable energy but it will continue growing in absolute terms just as coal did relative to oil and gas in the 20th century, Mr Nasser argues. If Saudi Aramco was worried about being left with “stranded assets” it would make sense to dump oil into the domestic market for use in generating electricity and to curtail investment in new resources, says Mr Nasser. Instead, it is doing the opposite by investing in gas for domestic power to maximise oil for exports and pouring billions of dollars into exploration and development. A global refining expansion is another long-term play. By acquiring stakes in foreign refineries Saudi Aramco is banking on locking in buyers for the kingdom’s crude in fast-growing markets such as China, India and Indonesia. “Our exploration programme is one of the biggest in the world,” says Mr Nasser. “We are adding more gas, more chemicals. We are not just saying it, we are demonstrating it with our actions.” Half an hour’s helicopter ride north of Dhahran, the $17bn Manifa oilfield opened in 2013 provides a glimpse of the resource riches underpinning the country both economically and geologically. A 40km causeway jutting into the Gulf waters gives access to a network of man-made islands and 350 wells. It is just one example of the combination of prolific, accessible hydrocarbons and large-scale investment that makes Saudi Arabia the lowest-cost producer in the world. These advantages should keep Saudi Aramco competitive for longer than higher-cost rivals with less plentiful or accessible resources. Yet, the company’s investment in chemical projects such as Sadara signals its recognition of the need to develop new outlets for its oil. Saudi chemicals production “If the Saudis are to convert those reserves to above-ground assets, they need to bet on sectors that will remain viable in the long term,” says Jim Krane, a fellow in energy at Rice University’s Baker Institute for Public Policy. “Petrochemicals is the obvious choice because it is a non-combustion use of oil and gas and therefore ‘climate proof’.” Today, only about 12 per cent of global crude output is used to produce petrochemicals, but Saudi Aramco expects demand to double between 2016 and 2040, on a per capita basis, as chemical-based products from plastics to insulation become more ubiquitous. Khalid al-Falih, Saudi Arabia’s energy minister and chairman of Saudi Aramco, said last month that chemicals, particularly high-value specialty ones, were “foundational pillars” of the country’s industrial strategy to create a Silicon Valley for chemicals innovation. His comments coincided with a deal between Saudi Aramco and Saudi Basic Industries, the country’s two biggest state-owned companies, to build a $20bn plant capable of converting crude oil directly into chemicals. This would reduce the multiple stages of refining and processing normally required. Jubail, near the Sadara joint venture with Dow, is one of the sites being considered for the complex, which is expected to process 400,000 barrels of oil a day and produce 9m tonnes of chemicals annually. Work is also under way on an industrial park in Jubail to attract manufacturers who want access to the speciality chemicals produced at Sadara. The $20bn Sadara chemicals plant is an example of how Saudi Aramco is trying to extend the lifetime of the oil sector by moving into related areas “Until now, we have been losing tremendous value by exporting commodities and importing finished products in which all the value is contained,” says Faisal al-Faqeer, chief executive of the Sadara joint venture. The focus on petrochemicals shows how the “new economy” promoted by Prince Mohammed remains attached by an umbilical cord to the country’s oil. The kingdom is also promoting the manufacture of drilling parts and other energy-related technology. “It makes sense to exploit and preserve what they have — at least over the next 20 years — and use that income to develop entirely new sectors,” says Steffen Hertog, associate professor at the London School of Economics and a Middle East expert. “They are not giving up on oil, they can’t afford to.” Innovation: Robots deployed in effort to boost production A team of young engineers sit hunched over computers in an air-conditioned room within Saudi Aramco’s Dhahran headquarters. In front of them is a huge screen showing a map of Saudi Arabia’s oilfields illuminated with over 30 flashing dots. Each light represents a well being drilled remotely by the engineers — in some cases involving sites hundreds of miles away on the other side of the kingdom. The “geosteering” system relies on satellite communications, digital sensors and 3D models of the oil reservoirs generated by one of the world’s most powerful computers. These technologies allow engineers to chart a path through the rock to maximise contact with the oil. Such innovations are being used to boost productivity levels, already among the highest in the industry, and keep costs low as Saudi Aramco strives to ensure a future for its resources in an increasingly competitive energy market. The company has a recovery rate, the proportion of available oil recovered from a field, of 50 per cent, compared with an industry average of about 35 per cent. It hopes to hit 70 per cent, which, if achieved, would unlock tens of billions of additional barrels of oil. A big push behind technology has seen Saudi Aramco open eight research and development centres outside the kingdom from Boston to Beijing. After securing just 100 patents in its first 80 years of existence, the company is now filing them at a rate of 200 per year — more than rivals such as Royal Dutch Shell and Total. Breakthroughs have included use of nanoparticles — tiny semiconductors invisible to the human eye — injected into oil wells to measure pressure and temperatures; and a robot that crawls over pipes to conduct maintenance checks, removing the need for manual inspections.


Source: Financial Times