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

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.
3. 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.
4. 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.
5. 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.