At a time of great change in Saudi Arabia and amidst debates about rapid economic diversification, it is perhaps easy to overlook the fact that even in the most optimistic forecasts of Saudi Vision 2030 – the national development strategy – the oil and gas sector will account for at least half of the country’s exports in the fourth decade of the 21st century. Similarly, while the revolution in shale oil and gas in the US has dominated headlines, the cost at which Saudi Arabia is able to pump crude oil and gas remains among the lowest in the world. The global oil supply and demand cycle may have resulted in lower prices since mid-2014, but the anticipated initial public offering (IPO) of 5% of the state energy company Saudi Aramco, valued at up to $2trn, has heightened expectations that the Kingdom could soon be home to the most valuable listed company on the planet.
Looking beyond Saudi Arabia’s 2030 goals, and based on growth in populations and economies around the world, most energy forecasters agree that global energy demand will grow by between 35% and 49% by 2040, with fossil fuels – including gas and oil – accounting for 75-80% of the mix.
Performance Indicators
Although there are reasons for an optimistic outlook for Saudi Arabia’s energy sector, the sharp decline in the value of oil since June 2014 has prompted an urgent review of the country’s economic model, coupled with a raft of austerity measures. Between 1987 and 2017, the spot price for Brent crude went through three broad phases: a long, and in retrospect, low plateau; a decade of strong growth in all but two years; and a sudden fall that now appears to have eased.
There were fluctuations during the 1987-2002 period, but the annual price of Brent crude remained within a band of $12.76-28.66 per barrel, according to data from the US Energy Information Administration (EIA). Between 2002 and 2008 the price rose from $24.99 to $96.94 before falling in the wake of the global financial crisis to $61.74 in 2009, only to recover with average prices of $111.26, $111.63 and $108.56 in 2011, 2012 and 2013, respectively. The price remained strong in the first half of 2014 before falling, dragging the average annual price down to $98.97. In 2015 and 2016 the average annual prices dropped again to $52.32 and then $43.67 per barrel, respectively. The EIA estimates that Brent spot prices averaged $54 in 2017 and will average $57 in 2018.
Exports
The extent of Saudi Arabia’s exposure to the more dramatic rises and falls in crude oil prices of the decade is apparent when examining export data from the General Authority for Statistics (GaStat). In 2008 oil constituted 89.7% of the total value of exports, and in 2014, the year prices started falling, oil accounted for 83.1% of the value of goods sold abroad. In 2015 and 2016 oil exports comprised 75.1% and 74.2% of export revenues, respectively. Saudi exports were worth more than SR1trn ($266.6bn) between 2011 and 2014, peaking at SR1.27trn ($338.6bn) in 2012. However, in 2015 they totalled SR573.4bn ($152.9bn) and declined again to SR510.7bn ($136.2bn) in 2016.
The fall in export revenues was felt more acutely as government spending had grown rapidly when oil prices climbed. In April 2017 the IMF released its figures on the estimated breakeven price of a barrel of oil in Saudi Arabia, showing that for the fiscal balance to be zero, the price would have had to be $105.70 in 2014, $93.80 in 2015 and $93.70 in 2016. Based on average predicted prices of $55.23 in 2017 and $55.06 in 2018, its projected breakeven oil prices for those years are $83.80 and $74.40, respectively.
Rising Supply
Among the factors driving down oil prices were persistent low growth in Europe, a gradual slowdown in the pace of China’s economic expansion and a rise in inventory, particularly in the US, where tight oil from low-permeable shale, sandstone and carbonate rock formations was making a significant contribution to supply. According to the EIA, 4.25m barrels per day (bpd) of tight oil was pumped in 2016, 48% of total US oil output that year.
Saudi Arabia’s immediate response to the decline in oil prices was to work to win back market share from producers in the US shale arena. Thus, it increased output knowing Saudi producers could weather a prolonged period of lower prices better than the small American companies that required a higher price to break even. In June 2014 Saudi Arabia was pumping 9.87m bpd, according to the Joint Organisations Data Initiative (JODI), but by March 2015 this had increased to 10.3m bpd, and production continued apace until November 2016, when it reached 10.7m bpd. The strategy appeared to work initially, in that output by US producers fell from 9.6m bpd in April 2015 to 8.6m bpd in September 2016. JODI data shows that Saudi Arabia broke all records for crude oil exports and production in 2016, with exports averaging 7.65m bpd and average production of 10.46m bpd.
Riyadh Regroups
As Saudi Aramco’s oil wells were ramping up production in April and May 2016, the government unveiled Vision 2030, a roadmap for reform with the overarching aim to reduce the country’s dependence on oil revenue. At the same time, some significant changes took place in the leadership and structure of the energy sector. Prior to the reorganisation, three ministries had been involved in the industry: the Ministry of Petroleum and Minerals, the Ministry of Commerce and Industry, and the Ministry of Water and Electricity. After the reorganisation, functions including petroleum, electricity and industry were brought under one new portfolio, the Ministry of Energy, Industry and Mineral Resources. A Ministry of Commerce and Investment was also formed, and the responsibility for water passed to a new Ministry of Environment, Water and Agriculture.
Khalid Al Falih, the former CEO of Saudi Aramco, was appointed to head the new energy, industry and mineral resources ministry, giving him responsibility for large swathes of both the oil and non-oil economy in the drive to implement Vision 2030. The move also effectively meant Al Falih replaced the oil industry veteran, Ali Al Naimi, as the minister in charge of oil.
Opec Leaders
A change in Saudi Arabia’s response to falling oil prices and rising global inventories followed. The Kingdom persuaded fellow members of the Organisation of the Petroleum Exporting Countries (OPEC), as well as some significant non-OPEC oil-producing countries such as Russia, to impose an output freeze. The agreement, announced in December 2016, was the first deal between OPEC and non-OPEC countries to reduce production since 2001. Output was to be slashed by almost 1.8m bpd for six months starting January 1, 2017. The decision saw Brent crude prices rise above $50 per barrel and, apart from a dip between April 21 and May 12, the price remained higher than $50 throughout the year.
However, global inventories were slow to fall, and shale in the US began to recover with producers trimming margins to achieve lower breakeven prices. The weekly Baker Hughes rig count acts as a barometer for the US oil industry, and in the week ending May 27, 2017 there were 504 more rigs active in the US than at the same time a year before. Furthermore, according to JODI, production had risen to 9.2m bpd in March 2017, only a little behind Saudi Arabia’s output of 9.9m bpd. In the same week at the end of May 2017, a nine-month extension to the output freeze was agreed upon by OPEC and non-OPEC members at a meeting chaired by Al Falih. However, the announcement was met with a tepid response from traders, who had factored in the extension but were hoping for deeper cuts in output, and the price of Brent crude dipped to $51.36 per barrel.
Breathing Space
While the output reduction agreement may not have created a dramatic surge in prices from its implementation in January 2017 to the extension agreement at the end of May of the same year, the measure gave Saudi Arabia some fiscal breathing space. In an unprecedented move, the government published a first-quarter budget update in 2017. According to the report, government oil revenues totalled SR112bn ($29.9bn) in the first three months of the year, compared to SR52bn ($13.9bn) in the same period of 2016 when the price of Brent crude hit its recent nadir of $27.67 per barrel on February 17, 2016. This 115% year-on-year (y-o-y) increase was largely due to a rise in barrel price, which local investment and research firm Jadwa Investment calculated to be an average of $53 versus $31 in the first three months of 2016.
However, in its first-quarter 2017 budget statement report, Jadwa noted that strict compliance with OPEC reduction quotas meant that the volume of Saudi Arabia’s exports of oil and its products had fallen by 4% y-o-y to 8.6m bpd. Still, the impact of the improved financial position was felt immediately by Saudi citizens, many of whom are government workers. In April 2017 a public sector wage freeze imposed in 2016 was removed, and allowances for government employees were restored.
The per-barrel price of oil remained fairly steady over the next six months, averaging $51 in the second quarter and $54 in the third quarter of 2017. While oil revenue fell to SR101bn ($26.9bn) in the second quarter, the value was 28% higher y-o-y. However, with third quarter revenue at SR94.3bn ($25.1bn), this was down 7% compared to the third quarter of 2016.
Initial Public Offering
The success of the extended production freeze on global oil prices, and consequently Saudi Aramco’s revenues, had an added significance in 2017 as the company prepared for an IPO of up to 5% of its shares, expected in 2018. Saudi Aramco is also due to be transferred to the Public Investment Fund in 2018, which plans to use the money raised from the IPO to invest both domestically and abroad to provide seed capital to develop high-growth industries. These new areas of investment will be relied upon to provide hundreds of thousands of jobs for young citizens in the private sector as part of Vision 2030 objectives for diversification.
The Saudi Aramco IPO will also give international investors their first glimpse into the financial operations of the state-owned energy company, which has never published detailed fiscal results. The government believes the company could be worth more than twice as much as tech giant Apple. The accuracy of their forecast and the success of the initial sale will have far-reaching consequences for the rest of the economy (see analysis).
Oil In Figures
Saudi Arabia has 15.6% of the world’s proven crude oil reserves, a share that is second only to Venezuela, with 17.6%, according to BP’s “Statistical Review of World Energy 2017”. The Kingdom’s great advantage is that its 266.5bn barrels of oil are easy to access, making it a relatively cheap process to recover them. For comparison, Iran, Iraq and Kuwait had reserves of 158.4bn, 153bn and 101.5bn barrels, respectively, at the end of 2016, with the UAE close behind at 97.8bn barrels of reserves. The US’ proved reserves were estimated at 48bn barrels in 2016, while Russia had 109.5bn barrels.
According to Saudi Aramco’s 2016 annual report, published in July 2017 and the latest data available at the time of press, the company produced 10.5m bpd of crude oil that year, an all-time record and up from 10.2m bpd in 2015. The company reported that it exported 2.8bn barrels in 2016, up from 2.6bn the year before. In 2016 it produced 665m barrels of refined products and exported 296m of those, with production and exports increasing from 641m and 236m, respectively, in 2015.
In 2016 some two-thirds of Saudi Aramco’s crude oil was exported to Asia and 15.8% to the US, with North-west Europe and the Mediterranean receiving 5.9% and 5.4% of exports, respectively. The export destinations were more diverse for the nation’s refineries, with 32.5% of refined products going to Asia, 11.9% to North-west Europe and 9.5% to the Mediterranean, while other destinations comprised 46.1% of the firm’s refined products.
Onshore & Offshore
Although Saudi Aramco operates over 100 oil and gas fields, more than half of its reserves are held in just eight fields. These include the giant Ghawar field, the world’s largest in terms of production and supply, with approximately 75bn barrels of proved reserves. This means that Ghawar alone has over 20bn more barrels in reserves than the whole of the US. Other major onshore fields include Khurais, with a capacity of 1.2m bpd of Arabian heavy crude, and Shaybah, which saw its production capacity rise to 1m bpd of Arabian extra-light crude following expansion work in mid-2016 that increased production by 250,000 bpd.
The largest offshore field in the world is also owned by Saudi Arabia: the Safaniya field, 200 km north of Dhahran, produces 1.2m bpd of Arabian heavy crude. In March 2017 US-based upstream field development company McDermott was awarded a contract from Saudi Aramco for engineering, procurement, construction and installation services at the Safaniya and Zuluf fields, which will involve modernisation and electrification of some of the platforms to enhance the potential production of the fields.
Meanwhile, the Manifa offshore field produces 900,000 bpd of crude oil, 90m standard cu feet per day (scfd) of non-associated gas and 65,000 barrels of condensate per day. The causeway linking the field’s wells to the shore has 13 bridges, the longest of which is 2.4 km. The Manifa field feeds two joint venture (JV) refineries: Saudi Aramco Total Refining and Petrochemical Company, a facility it runs with Total in Jubail, and Yanbu Aramco Sinopec Refining (YASREF) in Yanbu, which it shares with China’s Sinopec.
Moreover, Saudi Aramco operates an oil pipeline network of more than 19,000 km, including the 1200-km East-West pipeline, which runs from Abqaiq to the Red Sea. Located on the Gulf, Ras Tanura is the largest port for oil exporting and is complemented by Yanbu on the Red Sea. The two ports handled 3466 tankers during 2016, loading them with a total of 3.46bn barrels of oil, according to GaStat figures.
Natural Gas
The Kingdom’s gas reserves total 297.6trn standard cu feet, the fifth-highest in the world behind Russia, Iran, Qatar and the US, according to the EIA. In 2016 Saudi Aramco processed 12bn scfd of raw gas, and produced 8.3bn scfd of sales gas, 920m scfd of ethane and 497.5m barrels of natural gas liquids (NGL) from 1.4m bpd of NGL production. In 2016 Saudi Aramco’s NGL output included 195.7m barrels of propane, 127m barrels of butane, 83.4m barrels of condensate and 91.4m barrels of natural gasoline. In 2016 the company recovered 6m tonnes of sulphur, a by-product of gas processing, and exported 4m tonnes of it.
Until 2011 some 70% of natural gas production was of associated gas from the Ghawar, Safaniya and Zuluf fields. However, two new non-associated gas facilities have recently come on-stream. The Wasit Gas Plant, one of the largest non-associated gas plants ever built, has the capacity to produce 1.7bn scfd of sales gas and to fractionate 240,000 bpd of NGL. The Midyan Gas Plant in the north-west of Tabuk will have the capacity to produce 75m scfd of non-associated gas and 4500 bpd of condensate.
Three non-associated gas fields are also being developed offshore. Discovered in 2006, the Karan gas field came on-line in 2012 and produces 1.8bn scfd of sour gas, which is brought ashore by pipeline feeding into the Khursaniyah gas plant. The Arabiyah and Hasbah offshore fields both commenced production in the first quarter of 2016 with capacity of 1.3bn and 1.2bn scfd, respectively.
Gas is a valuable feedstock for petrochemicals plants and Saudi Aramco uses its master gas system built in 1975 to distribute supplies. Under the National Transformation Programme, a medium-term policy document unveiled in June 2016 to accompany Vision 2030, the Kingdom aims to boost production of dry gas from 12bn scfd to 17.8bn scfd by 2020.
Downstream Expansion
As of 2016 Saudi Aramco had a global refining capacity of 5.4m bpd through international partnerships both at home and abroad. It has direct ownership of 3.1m bpd, or around 57% of that total. The company has plans to increase the refinery activities it is involved in to a capacity of 8m-10m bpd by 2030. Its downstream expansion strategy enables the Kingdom to capture more value from its hydrocarbons resources, and building new refining capacity in its key markets helps to secure long-term crude oil exports to those countries as it competes for market share.
In 2017 Saudi Aramco has been able to benefit from the shifting priorities of other global players. Royal Dutch Shell’s $54bn acquisition of BG in 2016 meant a focus on gas for the Anglo-Dutch company, and it opted to sell its interest in a number of ventures around the world to reduce debt. In March 2017 Saudi Aramco and Shell announced their 19-year Motiva JV in the US would be broken up. Saudi Aramco paid Shell $2.2bn, taking full ownership of Motiva enterprises, including the US’ largest refinery at Port Arthur in Texas, which has a refining capacity of 600,000 bpd and 24 terminals. Shell retained ownership of the Norco and Convent refineries in Louisiana and 11 terminals. The two companies also divided the retail part of the business along state lines, with Saudi Aramco retaining exclusive rights to sell Motiva products through Shell filling stations in six southern states plus parts of Texas and Florida. Prior to the separation, Saudi Aramco’s share of refined products produced by the three Motiva refineries was 535,000 bpd, and the company’s refinery capacity increased by 65,000 bpd as a result of the agreement.
Shell also sold a 31.2% share in another JV with Saudi Aramco in Japan, Showa Shell, for $1.4bn in December 2016. Saudi Aramco owns 14.96% of Showa Shell, with total refining capacity of 445,000 bpd at Yokkaichi, Keihin and Yamaguchi. Domestically, Saudi Aramco and Shell each hold half of the 300,000-bpd Saudi Aramco Shell Refinery in Jubail.
Investment Abroad
In South Korea, Saudi Aramco holds 63.4% of shares in S-Oil, which owns and operates an integrated refinery and petrochemicals complex at Ulsan with a daily run of 669,000 barrels. The remaining stock is listed on the Korean Stock Exchange and the Dow Jones. In China, Saudi Aramco and ExxonMobil each have a 25% stake in Fujian Refining and Petrochemical Company, with China’s Fujian Petrochemical Company controlling the other 50%.
Saudi Aramco further expanded its international operations in 2017. In May the company announced a new $18bn investment in Motiva over the coming five years, including plans to expand refining capacity; and Aramco Trading, a wholly owned Aramco subsidiary that trades refined, liquid chemical and polymer products, inaugurated its first international trading office in Singapore in September. “It is essential to keep a close relationship with clients although they may be spread across the globe,” Ibrahim Al Buainain, CEO of Aramco Trading, told OBG. “With trading, ship chartering, logistical support and risk management all under one roof, it makes sense to have a local presence in one of the world’s fastest-moving markets.”
Domestic Refining
At home, Saudi Aramco has refinery JVs with ExxonMobil at the Saudi Aramco Mobil Refinery Company in Yanbu; with Total at Saudi Aramco Total Refining and Petrochemical Company in Jubail; and with China’s Sinopec at YASREF in Yanbu. It holds a 62.5% share in each of these facilities, while it also owns 37.5% of the Petro Rabigh JV on the Red Sea with Sumitomo of Japan. A number of agreements with Asian countries were signed in 2016 and 2017 that will further cement Saudi Aramco’s ties with its key markets in the Pacific. Also on the Red Sea coast, Luberef, a JV between Aramco and local investment bank Jadwa Invesment, is nearing the final stages of a billion-dollar upgrade that will add the capability to produce group-II oils for the regional market.
Saudi Arabia’s domestic refineries processed an average of 2.46m bpd in 2016, 12.8% higher than in 2015. At the annual Asia Oil and Gas Conference in Kuala Lumpur in May 2017, Abdulaziz Al Judaimi, Saudi Aramco’s senior vice-president for downstream, told media that a new refinery complex in Jazan was 70% complete and the facility is due to be operational by 2020. The Jazan Refinery will serve the south-west of the country and will have the capacity to produce 75,000 bpd of gasoline, up to 160,000 bpd of ultra-low-sulphur diesel and 220,000 bpd of fuel oil. A new shipping terminal is being built to handle crude carriers to support exports from the new refinery.
Focus On Localisation
Saudi Aramco’s investments in the south-west are a key part of plans to develop a new Jazan Economic City. Saudi Aramco is working to integrate its refineries with petrochemicals plants and foster the development of downstream conversion industries capable of supporting tens of thousands of jobs. The Sadara complex, a JV with Dow Chemical in Jubail, as well as Petro Rabigh II, a JV with Sumitomo on the Red Sea, began commercial operations in 2017 and introduced new materials into the Saudi market. Industrial parks have been built alongside each complex to house factories for downstream conversion industries.
Saudi Aramco is also working to create jobs for citizens by increasing the share of goods and services it procures locally. In 2015 it launched a programme called In-Kingdom Total Value Added (IKTVA) to rate its suppliers and raise the volume of local content in production. Suppliers are surveyed on the proportion of Saudi workers they employ, as well as the Saudi materials and services they utilise, and that information is used to generate an IKTVA score. Saudi Aramco hopes the system will help it achieve a 70% localisation rate by 2021, and in the process the company believes it can help create 500,000 jobs for Saudis in the supply chain. In May 2017 Amin Nasser, CEO of Saudi Aramco, signed $50bn worth of agreements with a number of US engineering and oil service companies. These deals are expected to create more than 15,000 jobs in the Kingdom.
Carbon Capture
Saudi Aramco is helping the country slow global climate change through two initiatives in carbon capture and storage. Its CO capture and enhanced oil recovery project launched in July 2015, taking 40m scfd of CO from its Hawiyah NGL plant and piping it 85 km to the Uthmaniyah field where it is injected into flooded reservoirs under high pressure to enhance the recovery of oil. Company researchers are also working on a mobile carbon-capture unit for vehicles that has been successful in catching 25% of vehicle CO emissions, and aims to remove up to 60% of the gas from exhaust emissions.
Renewables
With the introduction of Vision 2030 came a fresh approach to the development of renewable energy. The new Ministry for Energy, Industry and Mineral Resources – also responsible for electricity generation – has brought together disparate bodies and was given representation in the new Renewable Energy Project Development Office (REPDO). REPDO’s target is to see the Kingdom’s renewable energy capacity reach 3.45 GW by 2020 and 9.5 GW by 2023.
Bids to develop a new 300-MW photovoltaic station at Sakara were received in October 2017, while 25 bidders were pre-qualified for work on a 400-MW wind farm at Dumat Al Jandal in August. The renewable power plants will have 20% power purchase agreements, but will be fully independent operators.
Outlook
Saudi Arabia is playing a leading role through OPEC in attempting to bring balance back to global oil markets and striving to reinvigorate the Kingdom’s economy. While the country is actively moving to diversify its revenue streams, there is little doubt that the energy sector will remain a central pillar of the Saudi economy for decades to come, although perhaps in a different form than years past.
