The world’s top oil producer is following a diversification blueprint that opens up massive trade and investment potential to UK companies. Martin Clark reports.

Saudi Arabia looks beyond oil for future growth

The largest economy in the Middle East, Saudi Arabia is the UK’s top trading partner in the region, with a long track record of trade and investment.

The UK’s total goods exports to Saudi Arabia in 2017 reached £4.2 billion (US$5.5 billion), which spanned a mix of products: from machinery and cars, through to aircraft and arms.

After a challenging period, the kingdom is now enjoying a gentle rebound in terms of growth — underpinned, as ever, by its strategic oil and gas industry.

Oil and gas wealth remains integral to the kingdom’s prosperity — it has been pumping oil since 1938, bringing with it a comfortable standard of living for its 34 million citizens — despite clear intentions to diversify away from hydrocarbons more recently.

This has meant moves into related areas, such as downstream petrochemicals and renewable energy, as well as pushing manufacturing, services and other sectors, as part of a government Vision 2030 diversification blueprint.

But a lingering dependence on oil means that any slide in crude prices can still bring with it serious consequences.

According to the International Monetary Fund (IMF), about 60% of the Saudi Government’s revenues are oil-based.

It meant the economy shrank in 2017, the first time it has done so since the global financial crisis almost a decade before.

Low oil prices and the financial meltdown triggered strict government austerity measures aimed at reducing the State’s budget deficit, stifling growth.

But things have rebounded more recently, as the energy sector again expands.

In 2018, the economy grew by 2.21% for the year overall, according to government data published in January this year.

Encouragingly, it was accelerating more rapidly in the latter part of 2018, with fourth quarter gross domestic product (GDP) expanding by 3.59% from a year earlier.

While oil prices remain as volatile as ever, demand for energy broadly remains steady.

Moreover, in high-growth Asian markets it is growing, creating further potential for any additional Saudi output, as well as from other Gulf oil producers.

Oil and gas sector

Indeed, the scale of Saudi Arabia’s natural resources are truly immense and has provided a rich stream of business for the UK and other international firms across the energy sector.

According to the US Energy Information Administration (EIA), the country sits on 16% of the world’s proved oil reserves, which equates to roughly 266 billion barrels.

It is the largest producer in the Organisation of the Petroleum Exporting Countries (OPEC) group.

Production capacity stands at a massive 12 million barrels of oil per day (bopd), a figure only matched by Russia, which falls outside of the OPEC oil cartel.

While the country has over 130 known oil and gas fields, more than half of its reserves are contained in just eight strategic fields.

That includes the world’s largest oil field, the super-giant Ghawar field, which is estimated to hold remaining reserves of some 75 billion barrels and stretches over a vast area 174 miles long.

Though, here, there is immense speculation on the kingdom’s most prized economic asset.

Recent figures published by state oil concern, Saudi Aramco, stated that Ghawar’s output capacity is 3.8 million bopd — far below the 5 million-plus that had become conventional wisdom in the market.

The extent of the kingdom’s reserves and its production levels — which essentially provide a guarantee to the smooth functioning of the world’s oil markets — have long been a source of fascination to energy analysts around the world.

Discovered by an American geologist in 1948, the Ghawar field alone is of fundamental importance to the kingdom and has accounted for more than half of the nation’s total cumulative crude oil production through the decades.

Even today, it continues to churn out millions of barrels of crude to meet world demand.

Saudi Aramco

Needless to say, Aramco plays a pivotal role in managing these key assets and has been a major trading partner for years for British and other international firms.

Despite the ups and downs of the market, it has remained active in maintaining and expanding production, not only in terms of oil output, but also natural gas too.

This has been a priority in recent years, not only to unlock the nation’s massive but largely untapped gas deposits, but also in the transition of Saudi’s power industry.

The country depends heavily on its own oil for electricity generation but is shifting to cleaner-burning natural gas, as well as other energy and fuel sources, notably renewables and even nuclear power.

Yet the state oil company is facing a defining moment in its history, with a planned initial public offering (IPO) set to open it up to external investors for the first time.

This transaction has been repeatedly delayed, however, with Saudi’s Energy Minister Khalid al-Falih stating earlier this year that the sale would still go ahead by 2021.

The much-hyped IPO began a gradual opening up of what has historically been a highly secretive company, with the publishing of a prospectus and previously unseen financial data.

With the IPO delayed, Aramco now has plans for a mega US$10 billion bond issue that underscores its future ambitions.

Ahead of its debut bond issue, the company declared core earnings of US$224 billion last year — that’s almost three times as much as US technology giant Apple.

The bond issue, and the release of detailed financials, shows that Aramco is serious in transforming itself to be a modern energy player on the world stage, analysts believe.

It is essentially moving from an upstream oil producer at home to an international powerhouse across the oil and gas value chain, from refining to petrochemicals.

“Diversifying its business is critical to Aramco’s long-term success, and the ambition aligns [with] Saudi Arabia’s Vision 2030 economic diversification,” commented Stewart Williams, Vice President, Middle East & North Africa upstream, at global natural resources consultancy Wood Mackenzie.

Indeed, the slow opening up of Aramco can be seen to reflect that of the nation itself.

Downstream moves

The recent US$69 billion acquisition of Saudi Basic Industries Corporation (SABIC) — Saudi Arabia’s flagship downstream petrochemicals entity — by Aramco was also a major step in this direction.

The deal sees Aramco land a 70% in SABIC, marking one of the biggest deals ever seen in the global chemicals industry.

SABIC manufactures in the Americas, Europe, Middle East and Asia Pacific, making all kinds of products from chemicals and plastics, through to agri-nutrients and metals.

Williams said that the debut US$10 billion bond issue would help to fund the transaction.

“Aramco now wants to become an undisputed global energy champion, not just the world’s leading oil producer,” he said. “It aims to be the leading player in refining and marketing, trading, petrochemicals and global gas. By 2030, it could be the world’s premier integrated oil and gas company.”

This includes aims to increase its already large refining capacity to match its huge oil production amid plans to convert up to three million bopd into petrochemicals by 2030 — generating higher value receipts compared to crude exports.

But this will take sustained investment and perhaps more large-scale mergers and acquisitions (M&A) activity.

Potentially, it means that the SABIC deal could be only a first step, with more big takeovers on the cards.

According to analysts, Aramco is well placed to succeed on the back of its low-cost, cash-generating oil business, which gives it huge financial firepower to direct towards new business development.

“There will be challenges. Oil prices are still critical,” said Williams. “But Aramco is right to focus initially on the SABIC acquisition. But with its finances there for all to see, many will be now asking what’s next on Aramco’s shopping list.”

Diversification drive

The strategic direction of Aramco is significant as it underlines the general shift in Saudi policy, aimed at expanding and diversifying away from an over-reliance on oil receipts, and gradually opening up the country itself.

There are plenty of other motivations too, including the provision of more homegrown jobs for the country’s youthful population — around one-third of Saudi Arabia’s population are under the age of 15.

The Government has been the prime mover in engineering this shift, investing massively in new infrastructure, transport, technology, housing and other services to support this evolving and modernising economy.

At the same time, it is navigating difficult social and cultural shifts too, in what remains a very strict and conservative Islamic nation.

This includes granting new freedoms to its people, notably, allowing women to drive cars for the first time in 2018.

The recent acquisition of SABIC by Aramco could inject billions of dollars of additional funding into the Public Investment Fund (PIF) and other state entities to boost these diversification and expansion plans.

And, as ever in Saudi Arabia, there are plenty of grand plans and ambitions ahead.

They include the development of Neom, a futuristic city in the northwest of the kingdom with an estimated price tag of US$500 billion, where work is now underway.

The first phase residential development is set for completion next year, but the ultimate vision includes a high-end tourism destination, a hub for business, creativity and innovation in sectors such as technology, media and health.

A symbol of Crown Prince Mohammed bin Salman’s hopes for life after oil, infrastructure plans even include a bridge spanning the Red Sea, connecting the state-of-the-art sustainable city to Africa.

Other big-ticket plans include Qiddiya, an entertainment resort that could ultimately be twice the size of Florida’s Disney World and attract 1.5 million visitors annually when the first phase opens in 2022.

And, in a further sign that Saudi authorities are keen to open the kingdom to outsiders, plans are also moving ahead for the development of multiple resorts on dozens of islands off the Red Sea coast, with an emphasis on ecotourism and luxury.

These are changing but exciting times in Saudi Arabia.

Despite any complexities of operating there, in terms of language and culture, it is a place ripe and ready to do business with UK firms.

Last reviewed 17 April 2019