Even as Saudi Arabia lays the groundwork for diversification, the energy sector is expected to continue to play a leading role in the economy, with estimates oil and gas will account for at least half of the country’s exports to 2040. As the world’s leading oil exporter, the Kingdom plays a key role in meeting global demand and forming international energy policies, as evident by the implementation of the Organisation of the Petroleum Exporting Countries (OPEC) supply cuts to stabilise oil prices.
In April 2016 Saudi Arabia unveiled its structural economic reform package, Vision 2030, to reduce the country’s dependence on oil revenue while creating a thriving and diverse private sector that will create sustainable jobs for Saudi citizens. In 2019 Saudi Arabia’s energy sector aims to strike a balance between diversifying and strengthening downstream offerings such as petrochemicals, and incorporating renewables into the energy mix.
Size & Performance
According to the General Authority for Statistics (GaStat), the oil sector contributed SR986.7bn ($263.1bn) to GDP in 2018, or around 34% of the total GDP, worth SR2.9trn ($773.1bn) at current prices. According to an analysis of the 2019 fiscal budget by Jadwa Investment, Saudi crude export prices rose by 33% in 2018 to an average of $68 per barrel, while oil revenues grew by 39% to SR608bn ($162.9bn) from total government revenues of SR895bn ($238.6bn). The value of Saudi oil exports increased by 12.7% between December 2018 and the same month in 2017, from SR62.1bn ($16.6bn) to SR70bn ($18.7bn), according to GaStat.
According to BP’s “Statistical Review of World Energy 2018”, Saudi Arabia had total proven reserves of crude oil, condensates and natural gas liquids (NGLs) of 266.2bn barrels, or 15.7% of the global total. Venezuela is the only country with larger oil reserves. The same report noted Saudi Arabia has the world’s sixth-largest proven reserves of natural gas, with 8trn cu metres, or approximately 4.2% of the total. Worldwide, only Russia, Iran, Qatar, Turkmenistan and the US have larger reserves of natural gas. In its annual report for 2017, the state-owned oil company Saudi Aramco reported it controlled 332.9bn barrels of oil equivalent, including crude oil, condensates, natural gas and NGLs.
BP reported that in 2017 the Kingdom produced around 11.95m barrels per day (bpd) of crude oil and NGLs, compared to approximately 12.4m bpd in 2016 and 11.99m bpd in 2015. In 2017 Saudi Arabia consumed some 3.9m bpd of oil and its refinery output increased by 5.7% over the previous year to 2.8m bpd. BP data on oil trade found Saudi Arabia exported 8.2m bpd inter-regionally in 2017, second only to Russia with 8.6m bpd, and 357.5m tonnes of crude oil, which was the highest total for any country in the world and equivalent to around 16.4% of the global total. In the same year Saudi Arabia also exported 50.7m tonnes of refined oil products.
In 2017 Saudi Arabia produced 111.4bn cu metres of natural gas, a 6.1% increase from the previous year when it produced 105.3bn cu metres. Natural gas production in the Kingdom grew by 4.2% from 2006 to 2016. All the natural gas produced in Saudi Arabia is consumed in the country.
Structure & Overnight
The oil industry in Saudi Arabia was established in 1933 when the Standard Oil Company of California signed the first concession agreement. Five years later, the first oil in commercial quantities was discovered in 1938 at Dammam. By 1949 the company was called the Arabian Oil Company (Aramco) and produced 500,000 bpd. At the time, it was also conducting test drilling at what would be the world’s largest onshore oil field, Ghawar, which is around 240 km in length and more than 30 km across at its widest point. The country also began offshore activities with the discovery of the Safaniya field in 1951. The Ras Tanura Marine Terminal exported more than a billion barrels of oil in a year for the first time in 1971.
In 1973 the government of Saudi Arabia purchased a 25% stake in Aramco, increasing its share to 60% a year later, before taking full control in 1980. It was officially renamed as Saudi Aramco in 1988. Ali Al Naimi was made the company’s first Saudi president in 1984, also becoming its CEO in 1988. He would also serve as the country’s oil minister for two decades. In March 2016 the chairman of the board of directors at Saudi Aramco, Khalid Al Falih, became the new minister of energy, industry and mineral resources, while retaining his position at Saudi Aramco. Amin Nasser has been the firm’s president and CEO since 2015.
Al Falih plays a critical role in the oversight of Saudi Arabia’s energy sector and is responsible for delivering key objectives of Vision 2030, the blueprint for the transformation and diversification of the country’s economy. Under the long-term strategy, Saudi Arabia aims to transition Saudi Aramco from an oil-producing company to a global industrial conglomerate through a strategic transformation programme, while at the same time increasing the use of local suppliers in the oil and gas sectors from around 40% to 75%. A key part of the strategy is to list up to 5% of Saudi Aramco’s shares on the Saudi Stock Exchange (Tadawul). The initial public offering (IPO) of the company is expected to attract both Saudi and international investors, with the proceeds going to the Public Investment Fund (PIF), the sovereign wealth fund that will also hold the government’s remaining share in the company. In the process Saudi Aramco will be transformed into a holding company and a number of its subsidiaries will also be listed.
The possibility of a Saudi Aramco IPO was first announced in early 2016 and it is hoped the shares will raise $100bn to be invested in diversification strategies. This would make the company almost three times the early 2019 value of Apple. In January 2019 Al Falih announced that the IPO would take place in 2021, with the primary listing on the Tadawul and a secondary listing on another international bourse. During the same month Saudi Aramco stated it would issue bonds to raise capital to help finance the purchase of a controlling share of Saudi Basic Industries Corporation (SABIC), the state petrochemical company, in the first half of 2019 (see analysis).
The pivotal role played by Saudi Aramco in the country’s wider economy was demonstrated in 2018 when the Royal Court instructed the company to buy the PIF’s 70% stake in SABIC, the Tadawul’s most prominent listed company and the world’s fourth-largest petrochemicals company, with a market capitalisation of approximately SR356bn ($94.9bn). It is anticipated that the deal will be closed in 2019 and raise as much as $70bn for the PIF, providing the necessary finance for the sovereign wealth fund to make new strategic investments. The General Authority for Social Insurance owns a 5.7% stake in SABIC, with the remaining equity floated on the exchange and owned by Saudi or GCC investors. The merger with the Middle East’s largest non-oil industrial company will also enable Saudi Aramco to fulfil the role outlined for it in Vision 2030, which envisions it becoming a global industrial conglomerate with significant interests beyond oil and gas.
Oil & Gas Value Chains
It has long been a strategic aim of Saudi Arabia to optimise the value of its oil and gas through refining and the use of by-products as feedstock for its petrochemical industries as domestic demand for crude and refined products increased. An outlook report on Saudi Arabia’s refining industry produced by Jadwa Investment in 2018 noted that in the 10 years leading up to 2013 domestic demand for crude oil and refined products surged from 1.5m bpd to 2.2m bpd, representing an average annual increase of 4%. Factors fuelling domestic demand included rising living standards, increased use of automobiles and industrial development. Although refining capacity reached 2.5m bpd by 2013, older Saudi refineries were unable to meet demand for newer fuel grades, resulting in a reduction in refined product exports and increase in the import of diesel and gasoline. Starting in 2014 a new generation of refineries, built as joint ventures with international partners, came on-line. By 2017 Saudi refinery capacity reached 2.8bn bpd, with Saudi Aramco’s share at 1.9bn bpd.
At the same time, the subsidy reforms that were introduced in the 2016 and 2018 budgets were designed to dampen domestic demand levels by increasing prices for petrol, diesel, crude oil, natural gas and fuel oil. Jadwa Investment noted in its March 2018 outlook that domestic consumption of diesel fell by around 11% and 16% in 2016 and 2017, respectively; although this was partially offset by annual increases in the consumption of petrol, which grew by 1% and 6% over the same respective years. The net result for total domestic energy demand was a decrease of approximately 5% in 2016 and 1% in 2017.
Saudi Aramco owns three refineries: Ras Tanura, with a capacity of 550m bpd; Riyadh, with a capacity of 126m bpd; and Yanbu, with a capacity of 245m bpd. Yanbu is home to two 400m-bpd refineries, Saudi Aramco Mobil Refinery Company (SAMREF) and Yanbu Aramco Sinopec Refining Company (YASREF). Saudi Aramco and ExxonMobil each have a 50% share in SAMREF, while Saudi Aramco owns 62.5% of YASREF with Sinopec of China. There are two joint-venture refineries in Jubail, with Saudi Aramco owning a 50% stake in the 305m-bpd Saudi Aramco Shell Refinery and a 62.5% share in the 400m-bpd Saudi Aramco Total Refining and Petrochemical Company. In 2019 Saudi Aramco’s fourth wholly owned refinery, the 400m-bpd Jazan refinery, is set to launch operations. The facility is part of a wider joint venture with Air Products and ACWA Power to produce power, hydrogen and other utilities for Saudi Aramco on a 25-year basis at Jazan. Air Products will hold 55% of the venture with the remainder shared by Saudi Aramco and ACWA Power. Saudi Aramco will supply feedstock and will receive $8bn from the joint venture for the purchase of the facility when it is completed in 2019.
Saudi Aramco has a 37.5% share in Petro Rabigh, a refining and petrochemical centre located on the Red Sea between Yanbu and Jazan. The facility was established as a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical in 2005 and at the time it was the largest single-phase refining and petrochemical complex in the world. In 2008 an IPO for the site was held, with the two companies each reducing their share in the venture to 37.5%. In 2017 the second phase of the development, the $8bn Petro Rabigh II project, was completed. Adjacent to the site are two industrial parks that house converter industries, with a combined area of almost 8 sq km.
On Saudi Arabia’s Gulf coast near Jubail is the $20bn Sadara complex, which is comprised of 26 petrochemicals manufacturing plants with annual capacity of approximately 3m tonnes. Established in 2011 as a joint venture between Saudi Aramco and Dow Chemical, full commercial operations were launched in September 2017.
In October 2018 Saudi Aramco and SABIC announced that Yanbu would be the site of a revolutionary crude oil-to-chemicals plant that will process 400,000 bpd of crude oil, producing 9m tonnes annually of chemicals and base oils. In the same month Saudi Aramco and Total announced plans for a $5bn petrochemical factory near Jubail. The Amiral complex will produce 2.7m tonnes of chemicals per year and is due to open 2024.
Saudi Aramco also has interests in four overseas plants where its crude oil is refined closer to its customers. It owns and operates the largest oil refinery in the US, the 630,000-bpd Port Arthur plant in Texas, through its wholly owned subsidiary Motiva. Saudi Aramco has shares of 63.4%, 14.9% and 25% in refineries in South Korea with partner S-Oil, Japan with Showa Shell and China with the Fujian Refining and Petrochemical Company, respectively. The four overseas refineries have a combined capacity of 2bn bpd, 1.2bn bpd of which is Saudi Aramco’s share. In 2017 Saudi Aramco’s total combined domestic and overseas refinery capacity was 3.1m bpd.
Global Oil Prices
Saudi Arabia plays a leadership role in attempts by OPEC to balance oil prices by reducing output during periods of lower global demand. After meetings in early December 2018 OPEC members, including Saudi Arabia and other oil exporters such as Russia, agreed to a 1.2m-bpd reduction in output for a six-month period starting in January 2019. The decision came despite a series of tweets from US President Donald Trump calling on both Saudi Arabia and Russia to maintain production in order to keep prices low for consumers. While President Trump advocated for low gasoline prices, some economists suggest that low prices could have mixed outcomes for the US, with thousands of jobs relying on the sector. The oil price collapse between June 2014 and February 2016, during which prices fell from $115 per gallon to $35, resulted in a $149bn slump in investment in the oil industry in the US.
In Saudi Arabia global oil prices have a much more direct impact on GDP, government revenues and expenditure. According to Jadwa Investment’s analysis of the 2019 fiscal budget, the anticipated oil revenue of SR662bn ($176.5bn) in 2019 outlines an anticipated Saudi oil price of $70 in 2019. According to the US Energy Information Administration, Brent crude averaged $71.40 in 2018 but was expected to decline to $61 in 2019. Although the first three quarters of 2018 saw a strong improvement on Brent crude prices compared to previous years, rising from $66.65 in January to peak at $85.16 in October, the price slumped in the final quarter, closing the year on $51.49.
Gains from hydraulic fracturing, or fracking, allowed the US to overtake Russia and Saudi Arabia as the largest oil producer in the world in 2018. In February 2018 US crude oil production surpassed Saudi Arabia and Russia for the first time in two decades. In its December 2018 monthly market report, OPEC estimated demand for the oil produced by its member countries in 2019 would moderate to 31.4m bpd, down from 32.3m bpd in 2018. It anticipated global demand would reach 100.1m bpd in 2019 with demand for oil from non-OPEC countries estimated to grow from 60m bpd to 62.2m bpd.
Foreign Direct Investment
At the second Future Investment Initiative, a gathering of senior global and domestic business and policy leaders held in October 2018, Saudi Arabia signed $50bn worth of deals, with Saudi Aramco alone agreeing to $34bn worth of memorandums of understanding with 15 international firms from eight countries. “These agreements support investments in strategic sectors which will further expand the company’s business portfolio while they contribute to the realisation of Saudi Vision 2030,” Amin Nasser told press at the event. “The memorandums of understanding will contribute to such areas as refining, chemicals, conversion industries, localisation and related new investment and training opportunities, and job creation. They will also help enable a vibrant energy services sector through the development of the King Salman Energy City, an anchor project which will increase the efficiency and reliability of the supply chain capabilities of the company and that of the Kingdom’s industrial base.”
Among the multinationals that signed deals with Aramco were Schlumberger, Halliburton, Baker Hughes and Total. Total’s agreements included the start of the front-end engineering and design process for the Amiral petrochemicals complex in Jubail, as well as for support on Saudi Aramco’s planned network of retail petrol stations.
Exploration & Production
Saudi Aramco discovered two new oil fields and a new gas reservoir in 2017. The new oil discoveries were at Sakab, south-east of Haradh, and in Rub Al Khali in Zumul, and the new gas find was in the Sahba field at Jauf. The firm has focused on improving recovery rates at existing sites by using advanced well-completion technologies and de-bottlenecking production systems. It has also upgraded offshore platforms and installed new tie-in platforms in the Safaniya field. At the offshore Zuluf field the firm embarked on a sixmonth development to repair and reutilise a gas-oil separation unit that had been mothballed in 1995.
In 2018 Saudi Aramco aimed to boost crude oil production by approximately 300,000 bpd at the Khurais field, and increase output from its Fazran and Dammam fields in order to expand combined capacity by 100,000 bpd by 2021. In 2017 Saudi Aramco also invested in improvements to its gas-processing plants, facilities that handled an average of 12.4bn standard cu feet per day (scfd) of raw gas during the year. In 2019 the Fadhili plant, with a capacity of 2.5bn scfd, is due to commence operations, and an expansion at the Hawiyah gas plant is expected to increase output by 1.1bn scfd.
The King Salman Energy Park, also known as SPARK, is the cornerstone of Saudi Aramco’s strategy to enable broader economic growth in the Kingdom. The new energy city is being built on a 50-sq-km site between Dammam and Al Hasa and forms a part of Saudi Aramco’s In-Kingdom Total Value Add programme designed to create supply chain opportunities for Saudi businesses. SPARK will target manufacturing and service firms offering expertise to support drilling, electrics and liquid treatments, as well as essential components including pipes, vessels, tanks, valves and pumps. The first phase is due to be completed in 2021 with expansions continuing to 2035, and the facility is expected to result in 100,000 direct and indirect jobs.
In addition to diversifying the economy there are plans to diversify Saudi Arabia’s energy production mix. Vision 2030 set an initial target of 9.5 GW generated from renewable energy sources. The King Salman Renewable Energy Initiative, launched in 2016, was created to oversee the development and in November 2018 King Salman attended the ground-breaking ceremony for the first solar project under the initiative, the 300-MW Sakaka power station. ACWA Power is building the SR1.2bn ($319.9m) independent power producer, which is expected to supply 45,000 homes in Al Jouf with power when it opens in 2019.
Although a number of anticipated tenders for renewable projects failed to materialise in 2018, in December of that year Al Falih insisted the PIF and Japan’s SoftBank are still working closely to create the world’s biggest solar project, a $200bn plant capable of producing some 200 GW by 2030. The solar segment is also attracting interest from investors in Saudi Arabia, including family businesses with broad portfolios across multiple sectors. “In my opinion, family businesses should be looking at sectors such as solar energy, as well as tourism and entertainment, as more traditional forms of investment are seeing lower returns,” Adil Dahlawi, managing partner at Mathouq, told OBG.
Saudi Arabia may experience some shortterm delays as it seeks to implement far-reaching reforms to its economy, but it seems certain that the energy sector will have a dominant role in funding and forging the change agenda. The 20% yearon-year fall in Brent prices witnessed in December 2018 may have served as a reminder that greater diversification in both the national fuel mix and the wider economy can cushion future generations of Saudis from the market volatility that has proven challenging today. Vision 2030’s long-term reforms must weather troughs, as well as peaks, in oil prices.