Located in of one of the fastest-growing regions in the world and spurred on by increasing global oil demand, record commodity prices and the demands of a rapidly growing population, Saudi Arabia is experiencing an unprecedented programme of economic development.
With the oil & gas industry playing a critical role in the kingdom’s development, Saudi Arabia offers significant growth opportunities to companies looking to export skills and technologies or to establish a regional foothold in the Middle East.
In a country already blessed with the world’s largest currently known oil reserves, plus substantial gas resources, huge investments are being made in order to add incremental reserves, increasing output and adding value through production of refined products and petrochemicals.
In addition, a programme has recently been launched to establish a network of industrial clusters focused on adding value to the raw materials and refined products through the manufacture of finished goods targeted at specific sectors.
Saudi Aramco, the state-owned national oil company of Saudi Arabia, sits at the heart of this industrial development programme. Celebrating its 75th anniversary this year, Saudi Aramco was formed with the signing of a concession agreement with Standard Oil of California in 1933.
As the largest oil corporation in the world, it has the dual tasks of providing a reliable supply of energy to meet the world’s demands and continuing to satisfy its economic, industrial and social obligations domestically. Given its role in both the kingdom and the global economy, Saudi Aramco is a unique enterprise with a fascinating history and an important future.
Currently producing about 9.5million barrels per day of oil, Aramco has an aggressive upstream development programme aimed at increasing daily crude production capacity to 12million bpd by the end of 2009. As an example, the Khursaniyah field, with production of 500,000bpd, is due onstream H1 2008.
As the kingdom’s economy continues to grow and diversify, demand for gas in the domestic market has also gathered pace. 2003-04 saw the re-entry of international oil companies in the upstream arena through the creation of four joint ventures formed to explore for gas in the Rub al-Khali region (“Empty Quarter”), an area more than 12 times the size of Kuwait.
According to press reports, commercial discoveries are proving elusive and the recent withdrawal of Total from the South Rub al-Khali (SRAK) venture with Shell and Saudi Aramco has helped fuel that media speculation. However, the remaining participants are committed to their exploration programmes and are optimistic about their prospects.
In the refining and petrochemical sectors, Aramco is planning an investment programme totalling more than $70billion in the coming years. This includes a number of domestic and international joint ventures with strategic partners such as ConocoPhillips, Total, Shell, ExxonMobil, Sinopec, S-Oil, Sumitomo Chemical and Dow Chemical.
As a demonstration of the kingdom’s commitment to wider ownership and wealth-creation opportunities across the Saudi population, PetroRabigh (the integrated refining and petrochemical joint venture between Sumitomo Chemical and Saudi Aramco) recently underwent an initial public offering.
Saudi Aramco prides itself on its strong partnerships and collaborative approach to addressing some of the biggest challenges in the industry.
Partnerships are core to this giant group’s business model and offer significant opportunities to international companies looking to invest in one of the most important oil & gas markets in the world.
At the recent World NOC (national oil company) Congress, Abdulaziz al-Judaimi (VP new business development) talked about Saudi Aramco’s desire to “seek to stimulate greater job creation, greater economic diversification and greater collaboration with all stakeholders”, recognising that not only do these large capital projects generate employment, but that “the impact becomes almost exponential” by “extending the integrated business further down the value chain”.
There are also opportunities to stimulate economic development through increased local content in the upstream sector. These include the engineering, construction, oilfield services, manufacturing and materials supply in support of both upstream and downstream activities.
The market currently features a number of international providers, together with smaller, often privately owned, domestic businesses. One of the historic challenges has been stimulating the creation of domestic businesses large enough to support Aramco’s mega-projects. Partnerships with international partners across the oil & gas value chain are seen as an important component of a solution to this challenge.
The group’s new business development department provides the single point for external business partners approaching Saudi Aramco or approaching the hydrocarbon-intensive industries in general in the kingdom. Its people are actively promoting development of the local contracting community, while recognising the important role international partners can play through introduction of technical and management expertise, and encouraging participation of international companies in the domestic marketplace.
It is clear that Saudi Arabia has established itself as a land of growth and opportunity for the oil & gas industry. However, entering the kingdom for the first time introduces a number of procedural, regulatory and cultural challenges. For example, commercial registration and business regulations can be onerous to the uninitiated. Also, despite the fact that the business visa process has improved in recent months, it can still be time-consuming and should be initiated well in advance of planned activities.
As with entering any new market, preparation is key. There are many sources of information and advice (www.sagia.gov.sa, for example). In addition, the extensive expatriate network can provide invaluable personal guidance and first-hand experience.
The prevalence of private conglomerates and family businesses results in a unique in-kingdom transaction environment. Local knowledge, together with strong professional and personal networks, is central to execution of non-organic growth plans.
While the country enjoys a wealth of economic development and boasts exploration and production opportunities, it also faces the common skills shortage. For companies keen to invest, this is a promising environment, and Saudi Arabia should be considered carefully as part of any geographic expansion planning activities.
Paul Squire is an oil&gas partner with Ernst & Young. He is based in Al-Khobar, Saudi Arabia
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