Saudi Aramco faces challenges

Saudi Aramco may be the largest oil and gas company in the world but it faces a whole heap of obstacles in the coming years, explains President and CEO Khalid Al-Falih.

Saudi Aramco is the world’s largest producer and exporter of oil and is among the leading players in the global oil industry. For 20 years it has been ranked by Petroleum Intelligence Weekly as the number one oil company and is run as a modern international corporation, competing successfully with the best in the business; and it is this qualitative aspect of our standing in the global oil industry that is the focus of our efforts and the source of our pride. Equally important to the company is our critical obligation to support the Kingdom and its people. We consider talent, technology and teaming to be the three most important success factors for Saudi Aramco and for any global energy enterprise, for that matter. Saudi Aramco comprises more than 57,000 men and women, 87 percent of whom are Saudi Arabs, with 13 percent expatriates employed in highly skilled professional disciplines; almost the entire management of the company consists of Saudis.

Our businesses range from exploration and production of oil and gas, oil refining, chemicals and shipping to sales and marketing and support in industrial, personnel, medical, finance, law and planning disciplines. We maintain world-class expertise in all these areas. We believe that talent will increasingly become a differentiating factor among more and less successful companies in the future. Consequently, recruiting, developing and retaining talent is one of our key corporate strategies. We regard learning as a lifelong process and operate programs to enable this pursuit for our employees. We maintain one of the world’s largest corporate training programs, having in-house training of operators, craftsmen and administrative staff.

We currently sponsor more than 2000 students for undergraduate and graduate degrees and specialised programmes at more than 200 local and leading international universities.
Talent thrives only in an environment that rewards excellence, effort and achievement.

Throughout its history, Saudi Aramco has maintained a corporate culture which encourages individuals and teams to excel; where advancement is based on merit, skill and work ethic; and where employees have the opportunity to go as far as their expertise and drive will take them. That kind of working environment continues to be vital for our business success. We also believe that technology is a great enabler of more efficient, more reliable, safer, lower cost and more profitable operations. Therefore, we utilise the world’s best technologies in our operations. In fact, we are among the industry’s leaders in deploying new, cutting-edge technologies in our operations. To remain among the leaders in technology, we have two advanced research and development laboratories: one for sub-surface called the EXPEC ARC and the other for surface facilities, the R&D Center. Many of our technologies are also developed collaboratively in partnership with service companies, technology developers and academic institutions. This partnering model sets the stage for a brief discussion of our teaming strategy.

Teaming refers to our collaboration with partners, suppliers, customers, and other stakeholders. Whatever the extent of a company’s capabilities, no company can or should go it alone these days, simply because the business is just too complex and too multifaceted for any single organisation to excel at everything. We have pursued joint-venture partnerships with leading global petroleum companies and now with top-flight chemical enterprises. We also look at our dealings with suppliers, vendors, contractors and service providers as mutually beneficial partnerships. When it comes to teamwork, we look to partner with leading institutions which also take a strategic, long-term view of building capacity and capabilities, and whose strengths and expertise fit well with our own thus creating synergies. Regardless of companies’ past record of achievements and possession of talent and resources, bad governance can ruin company reputations and indeed put them into peril, as the examples of Enron and many others tell us. Such risks can be avoided only by strictly adhering to good governance, and practice of the highest business ethics. We not only attach great importance to governance and business ethics ourselves but demand the same of our employees as well as our business partners.

Oil and the Economy

Despite a lot of discussion in the media about the rapidly rising role of energy alternatives, we believe that alternatives are starting from a very small base and realistically speaking, their contributions will grow only gradually due to technology, economics, infrastructure and consumer acceptance issues. Oil will continue to play a key role on the world’s energy scene for the foreseeable future. We subscribe to the consensus view that oil demand will rise from about 86 million barrels per day currently to between 105 and 110 million barrels per day by the year 2030. Even if the share of oil and fossil fuels falls in the energy mix over the coming years due to alternatives gradually gaining ground, the demand for oil and fossil fuels is expected to rise in absolute terms. To respond to the anticipated growth in oil demand, and taking a long- term view of the business, we have recently completed an upstream expansion program that brought our oil production capacity to 12 million barrels per day, with a spare capacity of roughly four million barrels per day. This spare capacity alone equals the exports of two typical large producers of oil, and helps assure oil market stability during unforeseen circumstances.

Oil is a volatile business. You saw this vividly during the past two years as the oil prices shot toward US$150 per barrel; then fell below US$35 as the world economy was hit by the financial and economic crises; and has since then recovered to exceed US$80 per barrel. Oil exports remain the largest source of export revenue for the Kingdom. Depending on oil prices and our export volumes, oil still accounts for 80 to 90 percent of total revenue. This major dependence on a single commodity, oil, is not desirable. This is why it is imperative on all of us to work hard on diversification and indeed transformation of our economy.

However, economies take time to transform. Oil will continue to play a major role in the Kingdom’s economy for the medium term, which I would consider to be the next several decades, while industrialization steadily increases and economic diversification grows.
While energy is a key enabler of the Kingdom’s economic development and a major competitive advantage, we need to make sure that we use our precious oil and gas resources efficiently, wisely and minimising waste. The total domestic energy demand is expected to rise from about 3.4 million barrels per day of oil equivalent in 2009 to approximately 8.3 million barrels per day of oil equivalent in 2028, or a growth of almost 250 percent.

We estimate that through improved efficiency, while maintaining the same economic growth, the increase in energy demand can be cut into half. This is a highly desirable goal because increasing domestic consumption of oil reduces the export availability. If no efficiency improvements are achieved, and the business is as usual, the oil availability for exports is likely to decline to less than seven million barrels per day by 2028, a fall of three million barrels per day while the global demand for our oil will continue to rise.

Saudi Aramco and the Kingdom’s economy

The challenge to accelerate creation of high quality jobs in the Kingdom is tremendous. Six of every 10 Saudi citizens are under 25 years old. To absorb the influx of young people entering the labour market, Saudi Arabia will need to create nearly four million jobs over the next 10 years. The Kingdom’s economy historically has grown between thee and five percent, while to generate the number of well-paying jobs required for our youth, the economy needs to grow in excess of eight percent. This is a tall order. Saudi Arabia’s per capita GDP was US$20,300 in 2009, about half of the US per capita GDP of US$46,400. We’ll need to increase our per capita GDP to close the gap with developed nations, or at least make sure that the gap does not open up further. Saudi Aramco is well aware of this challenge, and is making a variety of efforts to contribute for the economy to grow more strongly. The company’s activities have a major impact on the Kingdom’s economy, well beyond providing a large share of export revenues.

In our country, the transition to a knowledge-based economy cannot happen instantly; it will take time – certainly decades and perhaps generations to take hold, the more reason we should start now. It will be an added challenge that other nations are ahead of us and moving faster towards the knowledge economy, but with commitment and dedication we can overcome these hurdles. Clearly, high quality education is essential to lay the foundation for future growth in select knowledge based areas that can be targeted for investment. With four out of every 10 Saudi citizens 14 years old or younger, improvements must begin in primary school where a large proportion of our population needs to receive a high quality basic education before it is too late. And the improvements must continue at every stage through higher education. A measure of the challenge before us is that Saudi Arabia has fewer than 500 engineers per 100,000 citizens. Jordan and Kuwait have about twice as many engineers per capita; the United Kingdom has about 10 times as many per capita. A comparison of 8th-grade maths and science scores shows that Saudi Arabia lags badly behind the average of the top 20 countries in math and science rankings.

I am convinced that this is a moment the Kingdom can seize to leverage our current strength in petroleum to help our youth become world class participants in the global workforce, to diversify our economy, to improve energy efficiency and productivity, to accelerate and sustain economic growth, and to establish Saudi Arabia as the global leader in selected knowledge-based industries. These are not easy goals, but with hard work they can be attained. Just as today’s Saudi Arabia has achieved prosperity and cultural development few could have imagined two or three generations ago, so too can we prepare the way for an even brighter and more exciting future for our nation.

This article is based on speech given by Khalid Al-Falih given at the MIT Club of Saudi Arabia Dinner.