Submitted by Gaurav Agnihotri via OilPrice.com [7],
In a move that could shake up the dynamics of the global oil and gas industry, the desert Kingdom is restructuring its national oil company, Saudi Aramco.
With revenues [8] of more than $1 billion per day, Saudi Aramco is easily the largest energy company in the world in terms of both production and company value. According to reports from Saudi Arabia’s Al Arabiya News Channel [9], the Saudi King is separating Saudi Aramco from the country’s powerful Oil Ministry. The restructuring plan, which was proposed by the King’s son, Deputy Crown Prince Mohammad Bin Salman, includes the creation of a Supreme Council of Saudi Aramco. The Deputy Crown Prince will head up the Supreme Council.
Why Restructure Saudi Aramco?
As the biggest global exporter [10] of petroleum liquids, Saudi Arabia is considered by many as the undisputed king of oil and gas, as it possesses nearly 16 % of the world’s proven oil reserves. But it has a competitiveness problem, with the company’s operations often used to pursue political objectives. In 2014, Sadad Al Husseini, a former top executive at Aramco, said, “Aramco produces almost 9.5 million barrels a day [11], and if it needs to replace these reserves it needs to add almost 35 billion barrels of new reserves every 10 years. That's a very large challenge."
One of the biggest reasons for Aramco’s restructuring would be to become a more commercially-driven organization [12], whose aim is to maximize its financial value and compete directly with big oil firms on a global level. The separation from the Oil Ministry could reduce political meddling and provide more leeway for the company to make commercial decisions. Also, the restructuring of its oil ministry would signify a generational shift and create a new vision for how the government develops its future energy and economic strategies.
What Are The Consequences Of This Restructuring?
The restructuring of Aramco could change global oil and gas dynamics. The biggest energy company in the world may become even more aggressive in its oil exploration spending. According to Saudi Aramco’s 2014 annual report [13], “[t]he bulk of this spending (exploration and production) will be in our upstream activities to ensure we maintain adequate spare crude oil production capacity to help stabilize the world oil market whenever disruptions occur.”
By moving away from its oil ministry, Aramco will have the operational flexibility to pursue growth along commercial lines. Saudi Arabia is already producing 10.3 million barrels a day [14]. If Saudi Aramco succeeds in increasing its production levels, it could exacerbate the glut in global supplies and push down prices. Aramco had earlier embarked on a $10 billion investment plan [15] that prioritized the development of domestic shale gas resources. The company will likely pursue this more aggressively in the years ahead, using lessons learned from the US shale patch. That will allow the country to use more natural gas for domestic electricity purposes, freeing up more oil for export.
Saudi Arabia budget insulated from effects of low oil prices
Image source: EIA [16]
Along with upstream growth, Saudi Aramco also has ambitious goals for its downstream sector. It is already the world’s sixth largest refiner [17]. Along with its equity interests in domestic and international refineries, one of Aramco’s objectives is to become the second largest exporter of refined products after United States by 2017. The current restructuring could result in a formal division of its upstream and downstream business resulting in better financial and commercial control.
Who Stands To Gain The Most From This Move?
The service providers and international suppliers of Saudi Aramco could be the biggest beneficiaries of this restructuring as increased spending on exploration and production activities would mean more business for these players. Companies like Sembcorp Marine Limited, Keppel Corporation Limited and others could profit from the reshuffling [18]. So far, more than 75,000 oil and gas jobs have been lost [19] globally in 2015 due to volatile oil prices. Aramco has been one of the few companies that have actually increased their head count. One can expect the oil giant to step up its hiring process [20] even further, especially in the E&P sector.
