December 18, 2018
Saudi Aramco: A brief history
Saudi ARAMCO, formerly known as ARAMCO, which is the acronym for the Arabian American Oil Company, was founded in 1933 when a Concession Agreement was signed between Saudi Arabia and the Standard Oil Company of California (SOCAL). The oil production took off rapidly passing from 500,000 barrels per day in 1949 to 5 million barrels per day in 1962. Present day production is 12.5 million barrels per day. The company’s interests were gradually bought off by the Saudi government. In 1973, while the Saudis held 25% of the company’s interests, the following year this rate went up to 60%. In the 80s, the Saudis held 100% of the interests of the oil company. In the 70s gas exploration and extraction was incorporated into the company’s area of specialisation. In 1977, the Berri Gas plant began its operations. According to a report by Bloomberg, the Saudi Aramco was the most world’s most profitable company in the world, with $33.8 billion in net income the first six months of 2017, easily outstripping U.S. titans like Apple Inc., JPMorgan Chase & Co. and Exxon Mobil Corp.
While the company’s initial product scope was supplying oil to the world market, product scope later incorporated natural gas. Ever since, concentration has expanded to the following areas:
- Refined Products: through a network of wholly-owned refineries or joint venture refineries with international partners, the company produces critical feedstock for industry and essential fuels.
- Chemicals: Since 1998, Aramco has been producing chemicals. For chemical production, the company has entered into joint ventures with ExxonMobil, Lanxess, Shell, Sinopec, Sumitomo and Total.
- Base Oils: Downstream affiliates of Aramco (LUBEREF, Motiva and S-Oil) have been major suppliers of quality Group I, Group II and Group III base oils.
- Converge Polyols: Converge is manufactured from carbon-dioxide. This technology provides a high-performance, cost-competitive and more sustainable alternative to conventional petroleum-based polyols used in coatings, adhesive, sealant, and elastomer (CASE) applications. Aramco has recently acquired this technology.
Future concentration in Chemicals
Ever since expanding specialization to chemicals, the Saudi Aramco has created a diversified portfolio of non-oil revenue streams for the company. In December 2018, the company was in talks to buy a controlling stake in Saudi Basic Industries Corporation (SABIC), a diversified chemicals giant. As the demand for petrochemicals (the building blocks for plastics) is likely to grow, the CEO of Aramco, Amin Nasser, signalled that Aramco would be transforming from a giant oil producer into a vertically integrated energy company. Aramco has recently announced that it is aiming to invest $100B in chemicals . In this regard, the company wants to accelerate its acquisition of other companies. These purchases are expected to be in addition to Aramco’s planned purchase of government controlled chemicals producer, SABIC.
Possible Initial Public Offerings (IPO)
The Saudi crown prince has promised to sell shares of the oil giant Aramco by 2021. At an interview with Bloomberg, the crown prince said the investor would decide the price on that day while estimating it to be above $2 trillion For the past 2 years, the country has planned to place up to 5% of its national oil company on the stock market, either in NYC or in London. This promised economic overhaul, at a targeted value of $100 billion, could be the world’s biggest IPO ever.
With China expressing interest in the IPO as well, and if the public or private offering indeed goes through, the geopolitics of Gulf region will reconfigure once again. The downward slide of oil prices, especially bellow the $60 threshold is having an adverse affect on valuation. Nevertheless, the IPO might become a necessity by 2020 due to infrastructure funding and economic diversification requirements in the Kingdom.