Saudi Aramco, the world’s largest oil producer that Hong Kong has been trying to lure to list its shares in the city, is pursuing deeper diversification into natural gas, oil refining and chemicals production as the world consumes more alternative cleaner fuels.
The Saudi Arabian state-owned behemoth, which pumps one in eight barrels of the world’s crude oil, is also the lowest cost producer globally thanks to its vast and easily accessible resources and advanced drilling technology.
But as Saudi-led oil cartel OPEC adopted a strategy to support oil prices by giving up market share in the face of rapid production growth in the US, Aramco’s daily production fell to 10.3 million barrels per day last year from 10.7 million barrels per day (bpd) in 2016 with little prospect of growth.
“Cost reduction is a driver for us … but future [profit growth] will be more from diversification into integrated oil refining and petrochemicals, besides natural gas production and supply for both the domestic and international markets,” Mohammed Al Qahtani, senior vice-president for upstream operations at Aramco, said during a visit to the company’s site in Dhahran, Saudi Arabia.
Its US$2.8 lifting cost – the cost to pump each barrel excluding fees to find and develop the reserves – is one-fifth of the average of its non-state-owned multinational peers.
Its proved oil reserve of 226.8 billion barrels – enough to support 60 years of current levels of production – is second only to Venezuela’s and dwarfs those of its international rivals.
Its net profit of US$111 billion last year far exceeded ExxonMobil’s US$20 billion and smartphone and computer giant Apple’s US$59 billion.
While confident that oil demand will remain “robust” in the coming decades, Al Qahtani said Aramco was targeting to raise gas output by 39.4 per cent to 21.6 billion cubic feet per day – nearly the same as China’s overall production for all of last year – by 2023 from last year.
It is testing the development of some unconventional shale and tight sand gas resources in eastern Saudi Arabia, which he said has seen “significant” cost reduction to levels comparable to major North American projects.
Aramco will be able to produce billions of cubic feet per day from these fields in the next four to five years, he said, adding it aims to invest in the entire gas supply chain – from production to logistics and marketing – in the major producing regions of North America, Southeast Asia, Russia and Africa.
With Brent oil price benchmark hovering mostly in the US$55 to US$70 range this year – a far cry from the US$80 to US$115 range in the first half of the decade – Riyadh has projected a budget deficit of 4.2 per cent of gross domestic product for this year, the sixth consecutive shortfall.
Aramco’s impending initial public offering is part of Crown Prince Mohammed bin Salman’s Vision 2030 programme, which includes stake sales in state-owned enterprises to raise funds to improve its public finances and fund expansion of the nation’s non-oil industrial base.
Aramco could announce the float of 1 per cent of its shares on Saudi Arabia’s stock exchange later this month, targeting a US$2 trillion valuation that could make its IPO one of the largest in the world, which could be followed by an overseas listing next year or in 2021, Reuters reported.
Global bourses including the Hong Kong Stock Exchange (HKEX) are jostling to host the international listing, which would be a game-changer in the annual race to be the world’s top destination for fundraising.
The company, which has fully restored its production capacity two weeks after drone attacks in mid-September briefly cut its capacity by just over half, said that the IPO’s timing will depend on market conditions.
Cost reduction is a driver for us … but future [profit growth] will be more from diversification
Mohammed Al Qahtani, senior vice-president at Saudi Aramco
Global oil demand is projected to rise just 10 per cent to 4.89 billion tonnes in 2040 from 2017 compared to 42.7 per cent for cleaner-burning natural gas, according to the International Energy Agency.
If internationally agreed objectives on climate change, air quality and universal access to “modern energy” are achieved, oil demand could fall 28.8 per cent and gas consumption could rise 10.6 per cent in the period.
Fund managers are under increasing pressure from investors to take environment performance into consideration when allocating funds, prompting some to divest from oil firms.
Aramco has an edge on its environmental footprint, since it can produce the same amount of oil with one-tenth the required water and energy as its international peers, Al Qahtani said.
“Aramco is well placed to compete in a scenario of limited future oil global demand growth due to its low cost, low carbon, oil producing [assets] portfolio,” said commodities consultancy Wood Mackenzie research director Norman Valentine.
“Aramco expects to maintain rather than grow oil output, this is why it is focusing on gas, refining and petrochemicals for growth, which will provide diversification and [business integration efficiency] benefits.”
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