The oil market and, more generally, the production and export of hydrocarbons, is still struggling to show signs of balance, despite the speculation of a possible agreement between the members of Organization of Petroleum Exporting Countries (OPEC), the foundations of which were laid on September 28 at the informal meeting in Algiers. In this climate of uncertainty, various countries, deeply affected by the oil price crisis, are changing their strategies for the future of the industry. The most dynamic producers are increasingly moving towards a diversification of supply, favoring an energy mix over dependence on a single resource, and the development of the entire production chain, in order to place high added value products on the market. In this framework, Saudi Arabia and Iran present themselves as two realities that have an opportunity to influence, through their actions, the future of the energy market.
Riyadh, the main OPEC petroleum producer, is working towards both a listing on the stock exchange of certain assets of the energy giant Saudi Aramco, and towards strengthening the diversification of its products, aiming to increase the production of refined products and to develop the gas sector, including that of shale oil bitumen. Tehran, after the lifting of the sanctions linked to the nuclear program, is instead heading rapidly towards a recovery of its production which, from January to August, increased from 3.3 to 3.85 millions of barrels and, according to estimates, could reach 4 million in the coming months. This growth in production has gone hand-in-hand with the accelerated development of extraction wells in the South Pars gas field, the increase in refining capacity and the signing of new cooperation agreements to ensure exports of crude oil, gas and petroleum products. In addition, the approval of new Iranian petroleum contracts (IPC), the details of which were presented privately to certain selected foreign companies, and which could soon allow the country to recover the time lost during the period of sanctions.
The concerns and strategies of Saudi Arabia
The competitive gap between Iran and Saudi Arabia is still huge, but the former’s industrial fabric, with ample room for growth and its special relations with neighboring Iraq, Russia and Asian countries are worrying Riyadh. In addition to the competition in economic terms with its neighbors, the kingdom of al-Saud also has to deal with the approval, by the U.S. Congress, of the law against sponsors of terrorism, known by the acronym “JASTA‘ (Justice Against Sponsor of Terrorism Act), which would allow families of victims of the attacks of September 11, 2001 to sue the Saudi authorities, endangering several thousands of millions of dollars invested in the U.S. economy. The ambitious reform plan “Vision 2030‘, announced in April by the deputy crown prince, Mohammed bin Salman, and the slow opening of the rigid Wahhabi society represent a potential lever for growth in the medium to long term, but not in the short term, due to the persistence of low oil prices and the fierce competition in the energy industry. At the end of September, Saudi King Salman signed a royal decree aimed at introducing austerity measures, unprecedented in the country’s history, with a cut in the salaries of officials, civil servants and members of the Shura Council. The cuts are consistent and provide for a 20 percent reduction in the salaries of ministry officials and a 15 percent reduction in the annual subsidies received by members of the Shura Council for transport, accommodation and expenses for fuel and furniture. The cuts also affect high-ranking officials of the ministries, including the heads of departments, from whom, in the tax year 2017-2018, the vehicles provided by the state for their travels will be withdrawn. Another example of short-term measures to tackle the crisis and counter the competition is Aramco’s decision to offer investors access to its accounts in view of the presentation of its initial public offering (IPO), scheduled for 2018, drastically changing the regime of secrecy and opacity that, to date, has characterized the state-owned company, the value of which is estimated at around $2000 billion. According to some analysts, in 2014, before the oil price crisis, Saudi Aramco generated a turnover greater than the sum of that of Apple and Microsoft. The most interesting, but at the same time worrying figure for the energy industry players, is that of the oil reserves owned by Aramco.
On September 27, speaking to the media at the sidelines of an industry event in Bahrein, the company’s CEO, Amin Nasser, emphasized that the oil company is considering selling shares in all divisions of the company, and not only those concerning the downstream sector, namely refining, distribution and sales. The listed value will remain equal to 5 percent of the company, but the decision to extend privatization to the mining sector reveals Saudi Arabia’s need to collect as many liquid assets as possible. According to Nasser, Aramco will “very soon‘ announce a list of banks and consultancy firms engaged in the IPO, without however giving a precise date. The shares could be listed on both the Saudi stock market and on the London, Hong Kong and New York stock exchanges. Aramco’s plan to sell a share of approximately 5 percent could increase the company’s value, but its complexity makes the listing process particularly delicate. “We need to do a lot of internal work to prepare us to achieve this profile‘, said Nasser. “We are listing a part of the entire company, not just the downstream sector‘, he added, suggesting that all elements of Aramco’s production chain, not only the refining, marketing and distribution processes, could be included in the list of assets. Analysts estimate a potential market entry of Aramco shares in early 2018, in the hope that, by that time, oil prices may have climbed to at least above $50-60 per barrel. From the IPO, the Saudi government hopes to collect approximately $100 billion, which will be used to support ambitious structural reforms in the country. Riyadh therefore also hopes to counter the moves of its rival Iran which, with the introduction of the new Iranian petroleum contracts (IPC), could see the return of the large foreign oil companies on its territory, not only further increasing the production of crude oil and gas but also developing the production chain. Aramco is producing oil at record levels, reaching, in September, 10.58 million barrels per day. On October 5, the company cut the price of its November sales to Asia and northern Europe, in an attempt to sell as many barrels as possible in a climate of excess supply that is hard to put an end to. Nasser has, in recent weeks, repeatedly assured that to date Aramco is still one of the few oil companies that has not reduced its investments, with an increase in drilling rigs. The real challenge, however, is the refining of crude oil and the production of natural gas, the latter resource being necessary to increase the efficiency of the industrial system and the growing internal electricity demand, whose network is currently powered mainly by power stations fueled by diesel and other petroleum products. The company seeks to double its total production capacity of natural gas, reaching, by 2020 a daily production of 481.3 million cubic meters, compared with the current 339.8 million. To further increase the production of gas, Aramco intends to launch, by the end of 2017, the production of gas from shale bitumen with a project already launched in Wa’ad Al-Shamal, in the northwestern region of the country, while in 2018 production will be launched in the basin of Al-Jafurah, in the eastern province of the kingdom.
Riyadh is working towards both a listing on the stock exchange of certain assets of the energy giant Saudi Aramco, and towards strengthening the diversification of its products
Production and refining: Iran's figures
For its part, Tehran has the largest gas reserves in the world and operations to develop the extraction fields of the South Pars gas field are progressing at great speed. On September 21, the director of the National Iranian Gas Export Company (NIGEC), Alireza Kameli, declared that the country exports approximately 32 million cubic meters of gas per day. Currently, the output of Iranian crude gas is 735 million cubic meters per day, of which approximately 35 million cubic meters are lost in the distribution network, while 90 million cubic meters are reinjected back into the oil wells to maintain the current production levels. According to Tehran’s authorities, the increased efficiency in production will therefore result in an increase of 120 million cubic meters per day.
For 2020, the authorities hope to export 68 billion cubic meters of gas. In the refining sector, Tehran has a 13 percent share in Middle Eastern exports and in 2016, for the first time in 11 years, the country has become a net exporter of refined products, with a record level of 400,000 barrels of oil equivalent per day. The government plans an increase to 600,000 barrels of oil equivalent per day by March next year. On September 17, in an interview with the Iranian press agency “Mehr‘, the CEO of the Arak Shazand refinery of the company Persian Gulf Star, Ali Jamshidi, said that Iran is ready to produce Euro 5 diesel. According to the official, efforts are underway to achieve self-sufficiency in the production of catalytic fuel and, within the next two years, the import of highly-refined products could cease. Tehran is collaborating with certain leading countries in the petrochemical industry, including Japan, and on October 8, the National Petrochemical Company (NPC) signed a memorandum of understanding with the Japanese company Sojitz, for a feasibility study aimed at verifying the future construction of a plant for converting methanol into propylene.
Tehran has the largest gas reserves in the world and operations to develop the extraction fields of the South Pars gas field are progressing at great speed
The goals of Saudi Arabia and Saudi Aramco
In terms of refining, Iran’s capacity is clearly not comparable with that of Saudi Arabia and the giant Aramco, but it presents a further obstacle to a Saudi economy in crisis. Saudi Aramco has a refining capacity of 2.9 million barrels of crude oil per day, with a refining production of 2.4 million barrels of oil equivalent. Exports of refined products for 2015 stood at around 1.154 million barrels of oil equivalent and the company’s plan, ahead of the listing, is to increasingly focus on the on-site production of refined and petrochemical products, in order to develop the entire production chain on home soil. In this context, the words of the CEO of Aramco, Amin Nasser, pronounced at the end of September as part of the Middle East Petrotech 2016 industry forum, held from September 26 to 29 in Manama, Bahrein, are significant. In his speech, Nasser recalled that the region needs focus on petrochemical processes, in order to directly convert crude oil into exportable finished products. According to the CEO of Aramco the sector has huge potential for growth and added value. Nasser recalled that the production of ethane in the region is limited, despite approximately 50 percent of proven crude oil reserves being located in the territories of the Gulf countries. In order to facilitate this process, the Saudi official emphasized that Saudi Aramco has adopted a two-phase approach for its research activities in the production of products derived from oil. The first phase aims to improve existing technologies and maximize the yield of petrochemical products, while the second phase aims to eliminate the entire refining process stage, in order to be able to introduce crude oil directly into the petrochemical production process. “In this way, we not only save time and money but we also eliminate the need for new plants and the development of costly and extensive infrastructure‘, said Nasser. The CEO of Aramco added that the company is working with the local company in the sector, SABIC, for a joint feasibility study that could lead to an integrated system for converting crude oil. The Saudi company is currently pursuing four strategic lines for the development of the petrochemical industry, which is underdeveloped in the Gulf, with regional revenues of just $100 billion per year, equivalent to 2.5 percent of the world total. The four strategies specified by Nasser are: the improvement of existing plants; the extension of the production chain in the areas where raw materials are extracted; the launching of production of special chemical products, the world leaders of which are Japan and Germany; the downstream construction of manufacturing industries and conversion into high added value products. There are two pilot projects for this strategy: the plants managed by the companies Sadara and Petro Rabigh that produce differentiated petrochemical products from raw materials and a list of special petrochemical products. The two companies have created opportunities for conversion and production in their industrial parks. In the coming years, Aramco plans for investments and collaborations with organizations in the industry. According to Nasser, 29 customers have already signed agreements with the Rabigh industrial park, while five new companies have been identified as potential partners for the Petro Rabigh’s phase two. At the same time, the team responsible for the development of plants owned by Sadara continues to work with the Royal Commission to develop industrial parks in the cities of Jubail (east of the country) and Yanbu (west), with 32 projects already approved by the Minister of Energy, Industry and Mineral Resources. Like Iran, Riyadh’s goal is to exploit the rich market of finished products derived from oil, worth approximately $4,000 billion, exporting mainly to countries with high economic growth rates, such as China, India and Japan, but also Vietnam, South Korea and Thailand.