Aramco: Oil Giant Feels the Heat
Can the world's largest oil company adapt to a world that has lost its love for hydrocarbons?
“The role of energy in global economic development is undeniable, but so is the environmental sustainability of the planet. For Saudi Aramco, addressing climate change is a critical objective,” Amin Nasser, President and CEO of Saudi Aramco – October 2016[i]
One could argue that no single company in the world has more to lose from climate change than Saudi Aramco (Aramco). Besides being the world’s largest company, with an estimated value exceeding 2 Trillion dollars, it presides over 266 Billion barrels of proven crude oil reserves (18% of global capacity) and produced an average of 10.2 million barrels/day in 2015[ii] (14% of global production). This is significant because the burning of oil derivatives (gasoline, diesel, kerosene) generates, among other things, CO2 the now infamous greenhouse gas that has been identified as a leading cause of climate change. The war on climate change has placed Aramco in a challenging position that will likely get worse in the near future when more stringent emissions policies come into effect.
Saudi Aramco brands itself as a “fully integrated energy and chemicals company”[iii] and it certainly lives up to that description. It is one of the largest refiners in the world, and has significant interests in power generation and bulk chemicals production that are integrated within its global network of operations. But just as our bodies rely on the flow of blood, Aramco relies on the flow of oil. Oil production remains the core of the company’s operations, and with costs of production around $5 per barrel, by far its most profitable. Aramco thus realizes that it cannot ignore the threat of climate change, and the impact it can have on its most critical product.
What are the key threats?
The threats climate change poses to Aramco are inter-related but follow a specific sequence.
- Regulations are imposed
First, emissions regulations are agreed on and imposed. This is not a new phenomenon but support for more stringent regulations has increased dramatically due to the findings from climate change research. These regulations can vary from caps on sulfur content in diesel products to caps on emissions by nation. These regulations present several operational challenges in terms of meeting an ever changing bar of standards imposed on Aramco’s products. Meeting those standards are both a technical challenge and a financial burden which require significant capital investments. Collectively, these regulations increase the cost of products to the consumer, incentivizing investments into alternatives.
- Alternatives emerge
Investments in alternative energy and research to develop more cost effective, and environmentally friendly, methods to harness renewables are fueled by the increases in price of traditional sources of energy, namely hydrocarbons. The increase in availability of cost-effective alternatives ultimately eats away at demand.
- Demand decays
Ultimately, the real existential threat to oil producers is that demand for their commodity will erode. This not only results in fertile ground for price wars, but will lower the value of their reserves. In the long run, this could lead to a scenario where it would simply be too costly to extract oil from the ground given the pricing environment.
What is Aramco doing about it?
In a keynote speech at the Energy Dialogue Conference in Riyadh (October 2016), Saudi Aramco President and CEO Amin H. Nasser outlined the key strategies Saudi Aramco is pursuing to minimize the carbon footprint of energy.
- Play an active role in the conversation
Nasser cited the Global Methane Initiative, Mission Innovation and the Carbon Sequestration Leadership Forum, or CSLF, as examples where Aramco is part of the global mission to address climate change and reduce greenhouse gas.
- Adopt a comprehensive carbon management strategy
“..helping to support the Kingdom’s efforts in energy efficiency that is focused on all end-user sectors; expanding gas supplies; focusing on developing renewables; and boosting research and development of win-win technologies that could dispose of carbon while turning it into beneficial products.”
- Invest in renewables
“In renewables, we plan to play a role in helping the Kingdom achieve its ambition to become a solar powerhouse,”
- Forge strategic partnerships
Nasser said that, “as part of a leading industry response to climate change, Saudi Aramco has partnered with nine international oil companies to form the Oil and Gas Climate Initiative, or OGCI, whose members represent 20% of the world’s oil and gas production.”
What else can be done?
While I find the plans detailed above to be quite thorough, I do believe the following points would also help in achieving the stated objectives:
- Capability building
By investing heavily in R&D and building the capabilities required to succeed in a clean fuel regulatory environment, Aramco can position itself to take advantage of new opportunities that will emerge with stricter regulations.
- Integrate more fully and further downstream
Integrating down the value chain into refining and distribution will allow Aramco to protect its market share in downward cycles and more volatile markets.
- Self-impose stringent emissions standards
By imposing on itself the highest environmental standards, Aramco will be able to access different markets that may have more stringent regulations at any given time.
(797 words)
References:
[i] Saudi Aramco Press Release, 11/1/2016 (www.aramco.com)
[ii] OPEC Statistical Bulleting, 2015 (www.opec.org)
[iii] Saudi Aramco 2016 Annual Report (www.aramco.com)
I want dive a little bit deeper into your “Invest in Renewables” point. When working at an oilfield a few years back. I noticed that the field itself had a net carbon output as it was powered on conventional energy. At the same time the field was spread out and away from an urban population. A report I wrote suggested using solar to power the general functioning of the oil field in itself. In this case there could also be a positive NPV on this investment as additional oil could be sold into the market. While this may not make ARAMCO carbon zero, I feel this could be a potential step in the right direction.
Self-imposing more stringent standards is an interesting point. On one hand, by doing this, Aramco would stay ahead of regulation and avoid penalties for lagging behind. It might also be forced to innovate faster, giving the company a competitive advantage going forward. However, my concern is that by imposing more stringent standards it might make the company less competitive in the short run (more resources used than competitors). In addition, a technological breakthrough available to the entire industry in the future (e.g. an efficient carbon capture technology) could nullify the self-imposed work that Aramco has done. My guess is that Aramco is best off balancing these possibilities – imposing stricter self regulations without overdoing it.
As stated in the blog post, Aramco plays in an industry that is heavily affected by the ramifications of climate change. Aramco’s livelihood is at stake, which makes me wonder to what extent any oil company will fight regulations to climate change versus actually taking measures to adapt. When reading this blog post, I wondered what exactly it means for Aramco to “Play an active role in the conversation” as I imagine there is a clear conflict between pushing for stringent emission measures versus considering the company’s viability and profitability. Furthermore, I would like to understand how urgently oil companies are truly attempting to adapt their processes to climate change, given that currently, any renewable energy is far from able to supply energy anywhere close to what oil companies are generating. I am very curious how this plays out in the next few years, and this blog post helped gain insight into the dilemmas and opportunities oil companies are facing.
I’d like to re-visit Shiv’s point a bit, around investing in renewable energy, though from a more macro / KSA policy angle. One of the more interesting debates in the Kingdom over the past few years has been the ongoing turf war between KA-CARE and Saudi Aramco over who exactly has mandate authority to develop renewable energy in the Kingdom, especially since one is explicitly charged with developing renewable energy products, and the other is national crown jewel hydrocarbon company. It seems, and your post (by not mentioning KA-CARE), more or less acknowledges that Aramco has won this dispute. It’ll be very interesting to see how the rights and responsibilities for renewable energy development in the country evolve, and what role exactly Aramco is allowed to play.
Ahmad, interesting article. I am sure that the effects of the climate change go beyond the specific oil producers and affect whole economies. That´s the case of countries such as Venezuela, Russia, Brazil and Angola, for example. As you said, Aramco is able to produce oil at a cost of $5 per barrel and this operational efficiency allows the company to undertake several initiatives to mitigate the GHG emissions. However, some of the other countries mentioned above are not able to achieve such performance and, as a consequence, they need to innovate. For example, Petrobras – the Brazilian national oil company – just developed the Technological Program for Climate Change Mitigation (Proclima), which helped the company to reduce CO2 emissions by 11% in one year whereas didn´t require large investments. In addition to that, Petrobras is also sponsoring some environmental projects designed for water conservation, carbon fixation, and emission mitigation. Those projects contribute to create an environmental friendly culture in the country that is expected to generate good results in the future. Great discussion.
Ahmad, this was an interesting read. From the outside and from hearsay it always seemed that like other NOCs, Aramco was not quite interested in climate change. I think this perception was based more on the energy habits in the Middle east than the actual operating strategies. I am curious about the self-imposed stringent regulation standards. It is surprising that as the largest oil company in the world, this is a future step. I am a bit skeptical about Aramco trying to penetrate other market and using their emissions related strategy as a lever.
I think it will require a change in the mindset of a lot of the stakeholders in the O&G industry before the benefits can be realized. Aramco is serviced by a number of service companies which also have a huge carbon footprint. It would be a good idea, especially considering the amount of control that Aramco enjoys, to augment the HSE team with an HSE Audit team which can audit the various suppliers and impose standards on them to reduce their respective carbon footprints also.
Ahmad, thanks for sharing your oil & gas expertise with us! I wanted to press on one of your suggestions for improvement, “Integrate more fully and further downstream”. Would this initiative help Aramco curb the effects of climate change, or only help them protect their own profits? I can see both sides.
On one hand, controlling a larger part of the value chain could enable closer monitoring and enforcement of environmental standards.
Conversely, one could argue that vertically integrating only protects market share but not the environment. Detrimental activities shift in ownership but are not actually reduced or diffused. I know this was just one of several suggestions you made to help Aramco – am just wondering if it helps them reduce footprint, protect market share, or both.
Interesting to hear about Aramco’s perspective on the issue of climate change. You mention a couple of times that one the of ways through which Aramco plans to minimize (or says so at least) the risk that the trend toward cleaner sources of energy poses, is by investing in the development of renewable energy technologies. How realistic is that? Do you really see Aramco diversifying away from fossil fuel by investing in wind and solar for example? Would they not be cannibalizing their own $2 trillion business?
I think that your post raises another interesting point around the role of the price of oil. In a high oil price scenario investments in certain renewable technologies – such as off-shore wind or biomass – become more attractive. How important of a role do you think that dis-incentivizing investment in these technologies played in Aramco’s decision to sustain a scenario of over-supply in the market? Also, do you think that the Paris agreement and the foreseeable regulatory changes that will come with it are helping keep oil prices low? Or is it a purely supply driven situation?
Aramco really does appear to have the most to lose with climate change. The company is blessed with market power as well as the persuasion power that comes with its size and importance globally, so it will be in a better position than anyone to defend its business. Most of the initiatives and recommendations in your excellent post, such as strategic partnerships and self-imposed standards, will be very helpful towards this goal. And I believe they’ll be very successful at this, but if you care to think over the super long-term, say 50 or 100 years, it is definitely challenging to see how Aramco can thrive. The option to invest in renewables and diversify away from oil is the best long-term solution I see, but as you say, oil is where the profit is. I assume that, from a decision-making standpoint, the company would struggle to invest heavily in that area when it effectively means eroding away at their core business.
Very interesting read Ahmad. I believe that it is upto some of the top energy companies in the world including Aramco to lead the charge in terms of significant energy efficiency initiatives. I have a question about the recent significant increase in supply to the market that Aramco has taken part in over the last year. As competition has increased from the American shale oil and gas producers Aramco flooded the market with oil to drive many of the American producers out of business, but in turn has created a supply glut that will see us have sufficient oil supply in the market likely through 2020. In effect this also drove a lot of renewable energy investments and companies out of business because the need for those companies in the near term is no longer there. Therefore, did Aramco’s flooding of the market with oil actually set us back in terms of renewable energy innovation?
Very well written. In addition, as oil companies face these regulations and threats, many have put their expansion plans on hold. Many have also stalled future projects. As a result, the entire food chain is being disrupted. EPC companies and heavy equipment manufacturers are also in a state of crisis as the orders are going down. With extremely few projects coming up, manufacturers also have to shift their focus towards equipment for alternative plants.
I agree with your suggestion for self-imposed, stringent emissions standards. In completing this assignment I was able to find surprisingly detailed climate change mitigation and adaptation goals outlined by multinational conglomerates. What gets measured gets managed, and it would be fascinating to see Aramco quantify the positive impact it could have on climate change. As seen in this video (https://www.youtube.com/watch?v=rEn05PGCmWQ), clear climate change mitigation and adaptation goals can be good for the planet, but also good publicity.
Interesting write up Ahmad; this is one of the companies that I am curious as to how they will react to climate change regulations and realities. The sequence of threats makes complete sense to me, however I wonder how much of the ways they hope to address the issue of climate change they are actually pursuing given the current context of the global conversation around the topic. Given that Aramco stands most to gain out of possibly anyone in the world when it comes to oil, I question to what extent they are willing to pursue any initiatives that push towards renewables and alternative sources of energy. I certainly do not judge them, given that the entire reason of existence of the company is to extract and produce oil, but I believe there is an interesting dynamic at play here.
Hi Ahmad, really appreciated the clarity of this article. I found the fact that Aramco has considered investing in renewable energies to be quite noteworthy given it’s present state of business. Given that much of the land in Saudi Arabia receives sunlight nearly every day during the year, it does seem perfectly appropriate that this type of option could be exploited. However, I’m curious at what point this type of investment would be economically practical for Aramco given its remarkably low cost of extracting the oil at $5/barrel? What type of advancements must solar panel technology make in order to lower its cost to make it competitive with oil extraction? Is the Saudi government considering any tax incentives to promote the further development of renewable energy?
Very cool article Ahmad, which takes on the same warning tone for Aramco that I did for ExxonMobil. It becomes increasingly clear that the oil giants have to start stepping up or get lost in the long run. How serious is nuclear an option for Aramco?