Aramco’s new tangent more rational than it looks

Published February 13, 2019
The kingdom’s Vision 2030 strategy hinges on shifting the domestic economy away from a reliance on oil and gas revenues.— AFP/File
The kingdom’s Vision 2030 strategy hinges on shifting the domestic economy away from a reliance on oil and gas revenues.— AFP/File

ABU DHABI: Aramco is heading off on another tangent. Saudi Arabia’s national oil champion is shifting its strategy from focusing solely on domestic oil and gas exploration projects to developing business overseas as well, its Chairman Khalid al-Falih revealed in an interview published on Tuesday.

That is a relatively rational strategy camouflaged as a loopy one.

Admittedly, it is quite a good disguise. The kingdom’s Vision 2030 strategy hinges on shifting the domestic economy away from a reliance on oil and gas revenues.

Read more: Saudi promise of ‘moderate Islam’ shifts power

Heading overseas risks the worst of both worlds ignoring the looming threat that peak demand poses to oil prices, while producing in more expensive locations than its famously low-cost domestic operations.

Aramco is no stranger to dramatic strategic shifts. With its long-awaited IPO stalled, the company has been obliged by Riyadh to plan to pay $70 billion for the 70 per cent stake in chemicals group SABIC, owned by the Public Investment Fund.

Given consultant Rystad Energy forecasts that Aramco will usually be able to generate more than $60bn in annual cash flow after investments, the company is hardly struggling.

But it probably would not be doing the deal if PIF did not need money to diversify the Saudi economy.

Even so, there are some rational reasons to look overseas. If Aramco’s foreign focus were to be mostly on gas rather than oil, that would chip away at Saudi’s carbon footprint. In 2017, gas accounted for only 12pc of Aramco’s energy reserves, Rystad estimates.

Much of that is used for domestic consumption or potentially as feedstock for SABIC chemicals, so expanding overseas would be one way to keep up as liquefied natural gas grows in importance.

And partnering with Russian groups like Novatek and Gazprom has geopolitical strategic value in a world where Russia and Saudi are effectively running the Organisation of the Petroleum Exporting Countries, even though the former is not a member.

Aramco may have one final motivation. Given the company is often seen as a state within a state, entering foreign joint ventures as an international oil company might be a way to insulate itself from the influence of its own government. Assuming, of course, that it picks the right projects.

Published in Dawn, February 13th, 2019

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.