Nowadays, Saudi Arabia, and ARAMCO in primis, are at a crossroads: they have to adapt to a post oil world, which poses numerous challenges in different areas. As a matter of fact, lower oil prices and the “flat” forecast of futures (oil price is expected to remain roughly stable at $60 per barrel) might entail the growth of Saudi debt and rather stable margins on crude oil for ARAMCO1.

Moreover, given the medium and long term forecasted decrease in oil demand, rather than oil reserves depletion, due to the increasing relevance and efforts of decarbonization policies and climate change worldwide, diversification of Saudi and ARAMCO production and revenues from oil has become a priority. McGlade and Ekins, following the publication of the Paris Agreement, have estimated that roughly 40% of oil reserves in the MENA region will not be exploited2 . Also, the IEA has outlined two scenarios: the Current Policies one, in other words the business-as-usual scenario where no emission curtailment is taken into account, and the 450 Scenario, which includes the goal of keeping the global temperature “well below the two degrees”. While in the former case, MENA oil-rich countries would keep increasing their exports, in the latter case, MENA countries, would drastically see their oil exports reduced, so that export and fiscal diversification from oil revenues becomes a priority, even though they would be able to export until roughly 2040 thanks to their low breakeven prices.3 450 Scenario might make the future of ARAMCO rather challenging, but at the same time, it might create a great opportunity to adapt its business model, as it has already started doing, and to remain on the frontline of the energy sector worldwide.

This article will primarily analyze the diversification strategies of ARAMCO, especially following the publication of Vision 2030 in 2016 with a main focus on the efforts carried out in the energy sector.

In order to offset the aforementioned challenges, ARAMCO, within the goals and targets of Vision 2030 has set out a new strategy, which envisages the expansion and diversification of both upstream and downstream activities as well as the utilization of venture capital in promising start-ups, which, for instance, link high-tech solutions with “cleaner” mobility. The most striking move of ARAMCO to adapt to a post-oil era concerns the $25.6 billion IPO, consisting of 1.5% of its shares, which took place on Saudi Tadawul stock exchange at the end of 2019.4 This decision will not be particularly be dealt with, since this paper will focus on the decisions of ARAMCO specifically regarding the energy sector. However, it goes without saying that the IPO showed the world the high value of ARAMCO and it contributes financially to the adaptation of Aramco to a post-oil era.

ARAMCO horizontal diversification strategy for a flexible adaptation to a post-oil world

Regarding diversification strategies within the energy sector, the so-called “horizontal diversification”, ARAMCO has considerable invested in activities with a forecasted high growth in the coming years, such as gas and petrochemicals/refineries both in Saudi Arabia and abroad. As a matter of fact, OECD countries are forecasted to externalize petrochemical activities in order to be in line with their decarbonization policies and targets. However, such downstream activities within OECD countries are expected to increase in the coming decades and to account for more than a third of oil demand growth in 2030 and roughly 50% in 2050.5 

Thus, ARAMCO is also considerably investing in refining activities: it has set a goal to increase its refining capacity from 4.9 billion barrels per day to 10 billion barrels per day. It is particularly investing in Asia and, by doing so, it is able to adapt these refineries to the quality of Saudi crude so that it manages to maintain and even enhance its market share. A primary example includes ARAMCO acquisition of 20% of stakes of the Indian Reliance Industries’ refining and petrochemical business, which amounts to one of the largest foreign investments in India.6 Within this framework, the merger between Aramco and SABIC, formally signed in March 2019, is of considerable relevance and scale: the purchase price of SABIC amounted to $69.1 billion. SABIC is the fourth largest chemical company for sales, owned 70% by PIF and it usually employs natural gas to produce its chemicals while Aramco employs liquids derived from crude oil.7 By doing so, ARAMCO is striving to expand also in chemical downstream activities, coupled with natural gas and general downstream (refineries etc.) activities to become a world player in numerous fields. Moreover, by focusing on non-combustion activities of oil and gas, ARAMCO is able to reduce its vulnerability with respect to climate actions and decisions.

Regarding the energy sector more broadly, ARAMCO, through its subsidiary Saudi Aramco Energy Ventures (SAEV) is aiming to considerably invest in R&D regarding hydrogen fuels, higher efficiency for internal combustion engine limiting carbon-emission and CCS technology for “cleaner” mobility. They are expected to launch a $500 million funds for renewable projects and energy efficiency. Moreover, SAEV is considerably exploiting venture capital to help minimize CO2 impact in oil and gas sector, which is one of the main strategies of ARAMCO nowadays.8 For instance, SAEV has also invested in Zouk, which is a European equity fund for the so-called cleantech startups, so that ARAMCO is also acquiring expertise in related fields, which might generate an increasingly added value in the coming decades.9

ARAMCO contributes to the diversification of Saudi energy mix for its own diversification

Within its broader diversification efforts, ARAMCO is also rightly trying to expand its trade and activities in the gas sector. ARAMCO has always been the only provider of gas for domestic consumption in Saudi Arabia for especially water desalination and high energy intensive industries (steel, aluminum etc.). The Kingdom is the seventh largest gas market worldwide, so it does not come as a surprise that ARAMCO has not quite managed to export substantial gas volumes.10 However, it has recently embarked on new projects in order to have a global outreach also in the gas market. It has chosen the “right” moment since nowadays gas markets are oversupplied so deals have more beneficial clauses and terms. As a matter of fact, in May 2019, ARAMCO has signed with a US company Sempra Energy a 20-year contract stipulating that it would buy 5 million tons of LNG per year. Moreover, it has also acquired a 20% equity in an LNG facility, currently under construction, in Port Arthur in Texas.11 These moves on the part of ARAMCO are mostly dictated by the forecasts of especially LNG market, which is expected to increase of roughly 5% per year up to 2030 and from 2023-2024 demand will outgrow supply.12 Thus, in November 2019, ARAMCO and the Saudi ACWA have signed a deal with Bangladesh Power Development Goal, a country with an expected LNG growth of 4% per year, to build a 3600MW LNG power plant and LNG storage with LNG being delivered by ARAMCO and ACWA to transform gas into power.13 To sum up, ARAMCO by trying to become a major LNG player is successfully diversifying its portfolio in a field that is expected to grow over time, since gas is deemed an indispensable component of the energy transition and whether it will be a “transit” or “destination” fuel is yet to be seen as well as. Also, the so-called “developing countries”, in particular in Asia, are the main drivers of growth of gas demand over the coming decades so that ARAMCO investing especially in the East is expected to be a winning move.14

Renewables in Saudi Arabia are also expected to play a pivotal role for the Kingdom, as highlighted by Vision 2030. In the last decade, the Kingdom of Saudi Arabia has periodically set and later revised renewable energy targets, with a focus on solar energy. As a matter of fact, in 2013 the King Abdullah City for Atomic and Renewable Energy (KA-Care) published a white paper establishing a target of producing 54GW of renewables by 2032. However, this target was scaled down in 2016 with the publication of Vision 2030, which envisaged a first target of 5.9GW of solar energy and a total 9.5 GW of clean energy by 2023.15 Within the framework of Vision 2030, the Renewable Energy Project Development Office (REDPO) was created, which operates under the Ministry of Energy, Industries and Mineral Resources, with the aim of carrying out the National Renewable Energy Project (NREP). The development of renewable energy is also expected to create spillovers in other sectors, such as the domestic manufacturing industry, in line with Vision 2030, which aims at increasing both the diversification of the economy from oil and the competitiveness of the local economy. Moreover, the Public Investment Fund (PIF) Program is set to complement the REDPO one, with the former expected to deliver 70% of the total capacity and the latter the 30%. While REDPO adopted a competing tendering strategy to choose the projects, PIF has to negotiate with international actors and it has to rely on the domestic manufacturing industry to develop the projects.16 At the beginning of 2019, the targets of renewable energy in Vision 2030 have been revised upwards. REDPO has announced that new targets were set, which include 20GW from solar energy by 2023 and 40GW from solar energy, 16GW from wind energy and 3GW from CSP by 2030, with thus a total of 59GW from renewables.17 Thus, these new targets demonstrate the primary role of photovoltaic solar power in renewable projects in the Kingdom. As a matter of fact, Saudi Arabia possesses large, uninhabited and desertic territories, where solar power infrastructures may well be constructed. The Kingdom can also take advantage from its strategic location since it is close to the Sun Belt and the solar rays cross the Saudi soil also perpendicularly,18 maximizing therefore the solar energy capacity. Within this framework, ARAMCO has invested in 2GW wind turbines in the Turaif Governorate and one of its main buildings, Al-Mitra, is supplied with PV panels, which clearly expresses the ambition of the company to play a pivotal role also in this field for both to diversify its business portfolio and to contribute to reaching Vision 2030 targets and for its image as a leader in “green energy”.19 Overall, ARAMCO has the potential to fully exploit Saudi expansion in renewable sector, especially PV, and to become a pivotal actor in this field in the Kingdom.

ARAMCO focus on expanding its activities in gas and renewables might be considered as a strategic move on the part of the Kingdom. In fact, the development of gas and renewable energy sources would allow Saudi Arabia to diversify its energy mix and decrease its internal dependency on oil. 

Thus, attracting investments in the energy sector with other energy sources and developing the technology necessary would enable Saudi Arabia to acquire an increasingly higher autonomy from oil not only in the economic sector (industries, employment, revenues), but also in the energy one. Moreover, the electricity demand in the Kingdom continues to grow, mostly due the high subsidies as well as demographic and economic growth. As a matter of fact, Saudi Arabia, when OPEC output cuts are not present, produces on average 10 billion barrels of oil per day20 , but its oil exports are considerably lower, amounting to roughly 7 billion barrels per day.21 This substantial difference triggers lower revenues for the Kingdom, since it internally consumes around one third of oil consumption, which cannot be exported. Bloomberg New Energy Finance has estimated that Saudi Arabia can generate revenues amounting up to USD8 billion per year, if it is able to produce one-third of its electricity needs from solar energy.22

ARAMCO as a “clean” player in the energy sector

ARAMCO is also signaling its willingness to become “cleaner”, which is particularly relevant for its image nowadays, given the current movements of climate action. In fact, in the World Bank-led initiative of “Zero Routine Flaring by 2030”, it expressed its willingness to be part of such an initiative highlighting how Aramco is already flaring less than 1% of the total raw gas production and that its upstream carbon intensity is already one of the lowest worldwide (10.2 kg of CO2 per oil barrel equivalent).23 Moreover, when visiting Aramco, the 4IRC Department has emphasized the efforts made by the company to preserve natural habitats in the Kingdom, for instance it established a 600 km square preservation area in the desert for endangered species such as the Arabian Oryx and it planted millions of mangroves in the Eastern Province to prevent their extinction as well. Moreover, it keeps track of CO2 emission of every activity in the field or refinery and warns in case the level is too high for a specific facility.24 All these efforts of ARAMCO contribute to remain a world leader in the energy sector in a transit to a post-oil era.

Lastly, ARAMCO is also trying for a so-called “vertical diversification”, in other words the expansion of its non-oil directly related activities. As a matter of fact, ARAMCO, through its subsidiary Saudi Aramco Energy Ventures (SAEV), is aiming to considerably invest in R&D regarding hydrogen fuels, higher efficiency for internal combustion engines, limiting carbon-emission and CCS technology for “cleaner” mobility. SAEV has also invested in Zouk, which is a European equity fund for the so-called cleantech startups, so that ARAMCO is also acquiring expertise in related fields, which might generate an increasingly added value in the coming decades. By doing so, ARAMCO is able to keep selling crude oil taking into account the current climate policies.

In conclusion, Aramco strategy to not only diversify its fossil fuels, but especially to invest in high growth small companies through venture capital to find less carbon-intensive or even carbon-free solutions and then employ such solutions within ARAMCO itself, as a way to set an example and standard, is a winning strategy for such company. In fact, it is enabling high flexibility and a changing world without disrupting the system completely but by gradually adapting its business model to the current and future demand and needs.

KPMG International expects Saudi Arabia to become also a financial hub for renewable energy for emerging markets, since the majority of investments in his field in the next 20 years will be in these countries.25 On a final note, ARAMCO might take advantage of this opportunity and expand further its renewable portfolio both within and outside the Kingdom to have a truly diversified portfolio and take advantage of likely substantial investments so that the company’s future is brighter than ever.

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Benedetta Bonometti is a graduate student in public policy with a   specialization in energy, resources, and  development at Sciences Po Paris. Her research interests focus on fossil fuel policies in the Middle   East,  especially GCC countries.

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