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Page added on February 13, 2019

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Here’s Why Saudi Aramco May Be Coming To An Oil Field Near You

Production

Saudi Aramco is now planning to explore oil and gas resources outside of the Saudi Arabian kingdom. This is according to a recent interview given by the oil minister, Khalid al Falih, to Financial Times. Falih said that, “Going forward the world is going to be Saudi Aramco’s playground,” referring to the national oil company of Saudi Arabia. Al Falih was the CEO of Aramco from 2009 to 2015.

This path marks a shift from Aramco’s previous upstream strategy. The highly profitable company has been expanding and diversifying for about 30 years, but it has never before sought to exploit natural resources outside of Saudi Arabia . In fact, when I last asked Aramco executives whether they had any such plans just over a year ago, they denied that they did. In fact, they seemed rather surprised at the idea that they might pursue upstream oil investment outside of Saudi Arabia.

It might seem counterintuitive to some for Aramco to produce oil outside of its home country. After all, Aramco has exclusive rights to Saudi Arabia’s reportedly huge oil reserves—268.5 billion barrels of oil in the ground—and the geological properties of the Saudi reserves allow Aramco to produce at between $2 and $10 per barrel. This is the cheapest cost of production in the world. Aramco also enjoys relatively few regulatory constraints compared to what it would face abroad.

So why would Aramco even be interested in producing outside of the kingdom?

    1. Lower transportation cost and access different oil types. For over 30 years Aramco has been growing its global downstream footprint. It owns Motiva, the largest refinery in the U.S. and it has interests in multiple refineries across Asia. Producing oil in other locations would reduce transportation costs. Furthermore, different types of crude oil are produced in different locations. Different types are needed at certain refineries or blended downstream. Producing oil in other geographic locations will give Aramco access to different types of oil at the source.
    2. Preserve the kingdom’s reserves. At current production rates, it is estimated that Aramco will run out of oil in Saudi Arabia in a little over 70 years. If Aramco can produce oil elsewhere and keep more Saudi oil in the ground, it will prolong the natural wealth of the company and the kingdom. Moreover, over-production can hurt the health of oil reserves, so by producing oil from other sources Aramco can conserve Saudi oil while still maintaining current production rates.
  1. Become an IOC. Since Ali al Naimi became the first Saudi-born CEO of Aramco, the company has built itself into an international operation. In many ways, it is modeled after the typical international oil companies (IOCs) like Exxon, Chevron, Shell, etc. Yet, Aramco is different: it is government owned, its operations are weighted more towards upstream than downstream, and all of its oil resources are located in one country. In the recent Financial Times interview, al Falih acknowledged that the global upstream strategy will help make Aramco more like an IOC. Moreover, whether Aramco ever proceeds with an IPO—which al Falih continues to insist is on track—or whether Aramco sells bonds, the diversification of Aramco’s sources of crude oil production will be a bonus to investors and creditors.
  2. Bypass OPEC quotas. Saudi Arabia is the most powerful member of the Organization of Petroleum Exporting Countries (OPEC), but it is also committed to observing OPEC’s designated quotas. The quotas indicate how much oil a country can produce, not how much a company can. For example, if an OPEC quota for Saudi Arabia is set at 10 million barrels per day (mbpd), right now Aramco would be forced to cap production at 10 mbpd. However, in the future, Aramco would be able to add to that 10 mbpd with production outside of Saudi Arabia. It could also increase Saudi Arabia’s influence on the oil market by increasing the kingdom’s spare capacity.
  3. Increase independence from Saudi Arabia. Aramco is owned by Saudi Arabia, but it has been run with a large amount of independence since it was first purchased by the kingdom from American oil companies in the 1970s. As the company continues to expand internationally it becomes less and less dependent on the whims of the bureaucracy or the political and economic situation of just that one country. Aramco is still owned by Saudi Arabia and still ultimately controlled by the king of Saudi Arabia, but its growing portfolio of international interests increases its protection from being overly correlated with short-term situations in Saudi politics or economy.

Aramco is also planning an international upstream expansion because it believes there is a future in oil. For all those who believe that peak demand is near because of electric vehicles and alternative energies, Saudi Aramco disagrees. The company sees a profitable future in oil, and Aramco is willing to bet on it.

Forbes



6 Comments on "Here’s Why Saudi Aramco May Be Coming To An Oil Field Near You"

  1. Anonymous on Wed, 13th Feb 2019 8:57 pm 

    You could also add two other possible benefits:

    1. Learn something. Aramco is technically actually pretty decent company. Best NOC. Way better than Pemex for instance.

    2. Political engagement (by being invested in other countries).

    A good example is the Qataris investing in US LNG for instance. Sure US LNG crashed their market and is a competitor. But getting a finger in the pie gives you a taste of the filling.

    Aramco doesn’t need to be extreme here. They can do smaller working interest investments (not control, leadership) where they still get full transparency and learn something. In all likelihood, they will lose their shirts and just be more rich foreign suckers investing in the US. But you never know. And if they keep the investment reasonable, who cares. You’re learning. And you don’t have to get completely in bed with the enemy (e.g. Permian crude). But sinking some money into Tellurian to be involved in LNG and even transport and E&P would be pretty reasonable step. Heck, the founder even speaks Arabic.

    The one potential other benefit (from an Aramco management standpoint) is actually the ability to get a little bit of cash out of the greedy prince’s hands. If you look at China, the NOCs were not allowed to give money back to shareholders (aren’t any) but they could go and “buy things”. And they did a lot of that. I don’t think Saudis will give Aramco the freedom Sinopec had to play those games. But a little bit of it, maybe.

  2. Anonymous on Wed, 13th Feb 2019 9:37 pm 

    Maybe they could even think of it as screwing the Qataris over by competing with them. I donno. Just really surprised that this match has not already been made.

  3. print baby print on Thu, 14th Feb 2019 5:12 am 

    Hahahahah this is for laughing they couldnt find Ghawar without help from outside . and now They will search for oil on the north pole and under the pacific ocean, or maybe they will exploit cloogies trillions of tons of coal under the sea hahahhahahh. Sorry cloog you are ok but sometimes you amazed me

  4. CAM on Thu, 14th Feb 2019 7:40 am 

    There could be other reasons as well:
    1. Maybe they don’t have near as much oil as they claim.
    2. Maybe it is becoming a lot more expensive to produce than they claim. (Growing water cut?)
    3. Maybe the house of Saud is looking to move its money out of Saudi Arabia in case of revolution.

    If they truly had 70 years of production left it would be unlikely that they would be in any rush to diversify. Humans don’t plan that far in advance.

  5. Too Stupid to Believe on Thu, 14th Feb 2019 7:53 am 

    KAISER JEEP

    Whenever I encounter this screen name on PO.com I cringe with laughter at the poster who thinks he is intimidating others by naming himself KAISER or CAESAR-EMPEROR. No German would EVER adopt this name. Talk about an overly-inflated sense of ego. Yeah, bow down to me you provincial peasant for I am your EMPEROR and CAESAR.

  6. Sissyfuss on Thu, 14th Feb 2019 9:33 am 

    Cam, I think you’re on to something there. There’s something rotten in Mecca.

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