SAUDI ARABIA

Though the production of crude oil and natural gas in Saudi Arabia is strictly a function of its state-owned oil company, the kingdom has liberally sprinkled its downstream enterprises at home and abroad with private participation.

This is part of a strategy of global integration that has already given Saudi Arabia's state company a major position in U.S. refining and a toehold in Korea. It is also eyeing Europe and seeking a major venture with Japanese refining interests. The countries on the Pacific rim are where the major markets for oil lie, Saudi Arabian planners believe.

As a result of this strategy, state-owned Saudi Arabian Oil Co, more commonly known as Saudi Aramco, is being expanded to a size and capability that will match, and probably surpass in a few years, the world's mightiest majors, such as Exxon Corp. and Royal Dutch/Shell.

By virtue of its recent crude production of some 8 million b/d, Saudi Aramco is by far the world's largest producing company. Capacity for sustainable production should reach the 10 million b/d level in a couple of years.

Over 60 commercial oil and gas fields have been discovered in the kingdom since the major strike in the "Arab Zone" at Dammam No. 7 in 1938. The finds have brought recoverable crude oil reserves to 260 billion bbl (26% of world total) and natural gas reserves to 180 tcf. The oil reservoirs include the largest onshore field (Ghawar) and the world's largest offshore field (Safaniya).

But it is not all crude oil and geology in Saudi Arabia anymore. Downstream is hot. In June, Saudi Aramco acquired the refining network of its sister company, Saudi Arabian Marketing & Refining Co., or Samarec (OGJ, June 21, Newsletter, p. 24, and pp. 39-46). Following completion of the current expansion program, Saudi Aramco will rank as one of the world's 10 largest refiners. This merger is part of a continuing process, that includes "Saudiazation" of the workforce, to restructure the oil industry in Saudi Arabia.

Even farther downstream, the kingdom, N,ia Saudi Arabian Basic Industries, has also moved aggressively into petrochemicals, becoming a major world player in such commodities as ethylene and its derivatives, and in methanol and methyl tertiary butyl ether. Most of the petrochemical plants are in the two modem, planned industrial areas-jubail on the Arabian Gulf and Yanbu on the Red Sea.

The kingdom has used its oil wealth to diversify its industry and to vastly expand its educational system; build highways, harbors, and airports; and install a world class communications system.

In short, in less than 20 years Saudi Arabia has moved from being a third world country in an inhospitable desert region, to one that is on the threshold of joining the ranks of developed nations.

The kingdom's complex and unique network of state-owned hydrocarbon enterprises is both a product of and a catalyst for this development.

These operations are unique, in that the country's king, Fahd Ibn Abdulaziz Al-Saud, can have the final say on major policy matters regarding these companies, which along with all mineral resources are owned by his government. Such major policies as the organization of these companies, incentives for their development, and environmental standards are dictated by Royal Decree. For example, the king was personally involved in setting the current retail domestic price of gasoline and diesel at, respectively, 33/gal and 10/gal.

At a more focused policy level, King Fahd is chairman of the Supreme Council of Saudi Aramco, which oversees the board of Saudi Aramco. Currently, members of the council are four ministers, including the minister of Petroleum and Mineral Resources and the minister of Finance and National Economy, the president and chief executive officer of Saudi Aramco, representatives of two banks and two companies, and a former deputy minister.

However, the decision to merge Samarec with Aramco came from an even higher authority, the Council of Ministers, which the king heads as "President." The First Vice-President of the council is Crown Prince Abdullah Ibn Abdulaziz Al Saud. He is also head of the National Guard.

The king's advisor and executive officer in petroleum matters is the Minister of Petroleum and Mineral Resources, Hisham M. Nazer (see picture). He is also chairman of the board of the General Petroleum & Minerals Organization (Petromin) and Saudi Aramco.

OIL-RELATED COMPANIES

Prior to June 14, 1993, five major state companies and their numerous subsidiaries and joint ventures were deeply involved in Saudi Arabia's state-owned oil and petrochemical operations. One of these companies, Samarec, was, as mentioned, merged into Saudi Aramco on June 14.

By Royal Decree of July 1, 1993, Petromin's interests in the joint venture refineries with Mobil, Shell, and Petrola were also transferred to Saudi Aramco. During the next 4-6 months, all Samarec functions will be fully integrated into Saudi Aramco.

Interestingly, Samarec, although created early in 1989, was never legally formed. Its chief executive officer, Hussein A. Linjawi, was titled "president designate." Samarec, though merged into Saudi Aramco, is for reasons of practicality treated in this article as an existing entity. This will illustrate the size and complexity of the company that Saudi Aramco will have to integrate into its system.

The five major companies and their headquarters are:

Saudi Aramco, Dhahran: The world's largest producing company had one 300,000 b/d simple topping refinery at Ras Tanura but extensive refining interests elsewhere. Its refining capabilities have increased dramatically with the acquisition of Samarec. The company could end up with some 60,000 employees as a result of the merger. Also as a result of the merger, Saudi Aramco will raise its net domestic and foreign refining capacity to 1.5 million b/d.
With its own capacity and through joint ventures it will be associated with 2.25 million b/d of total refining capacity and would, of course, have the inside track for supplying all this capacity with crude oil. It will also inherit from Samarec domestic distribution and overseas product marketing, including NGL, which it now produces but does not market.
Ali I. Naimi is the president and chief executive officer of Saudi Aramco (see picture).
Abdelaziz M. Al-Hoikail (see picture), the Saudi Aramco executive vice-president for industrial relations and affairs and a member of the company's board, heads the taskforce that is implementing the merger of Samarec with Saudi Aramco.
Samarec, jeddah: Samarec was established Jan. 1, 1989, with the mission to unite the kingdom's semiautonomous domestic and joint venture refineries into a single, efficient refining arm with coordinated planning and functions (OGJ, June 21, pp. 3946). It, and its affiliate companies, passed an acid test during the Gulf war when they supplied all allied air, land, and sea forces with their total fuel needs.
Samarec was also well into planning for an ambitious modernization and expansion program of its refining network-the kingdom refining upgrading program (KRUP)-when the Council of Ministers moved to merge it into Saudi Aramco. Official reasons given for this were operating advantages, development of the refining sector, and training advantages for personnel. It is not clear yet whether KRUP will be changed as a result of the merger.
Fig. 1 shows the structure and scope of the current domestic refining industry in Saudi Arabia prior to the merger. The 50/50 joint venture companies shown on this chart are independent organizations with their own boards and managements. As noted, the Petromin interest in those refineries was transferred to Saudi Aramco.
Petromin, Riyadh: This was the first national oil company in Saudi Arabia. It was created by Royal Decree in 1962 with the support of the then Crown Prince and Prime Minister Faisal ibn Abdulaziz Al-Saud, who later became king. Petromin has never produced any crude, but marketed and distributed products in the kingdom, built the first state-owned refinery at Jeddah, spawned a variety of oil industry service companies, and participated in the formation of the three joint venture export refineries with foreign companies.
In recent years it has become primarily a holding company for Samarec (Fig. 1). Its role after the merger is unclear, but some observers feel if will have a place in the hierarchy.
Petromin Lubricating Oil Refining Co. (Luberef), jeddah: Mobil Oil Corp. holds a minority interest in this company, which provides base oils from its refinery at Jeddah for the country's lubricating oil company. Luberef plans a new base oil refinery adjacent to the former Samarec Yanbu refinery, which will be expanded.
Petromin Lubricating Oil Co., Jeddah: Petrolube, also a joint venture with Mobil, gets its feedstock from Luberef and blends a full spectrum of lubricating oils and greases under its own brand name for domestic use. It also exports its products to some 40 countries. It does not have a monopoly, but also blends for other lube companies marketing in the kingdom.
Both Luberef and Petrolube have their own boards and managements. Ahmed M. Al Khjereiji has been chairman of the board, president, and chief executive officer of Petrolube since it was restructured in 1988.
Bakr A. Khoja is chairman and executive managing director of Luberef.
Saudi Arabian Basic Industries (Sabic), Riyadh: Sabic represents another organizational variation for Saudi Arabian state-owned enterprises. The company was created by Royal Decree in 1976 and placed under the Ministry of Industry and Electricity. Its objective is to expand the kingdom's industrialization beyond oil. The company, which is 70% owned by the government, 30% by the private sector, has emphasized petrochemicals. Abdulaziz A. Al-Zamil, Minister of Industry and Electricity, is chairman of Sabic's board. Ibrahim A. Ibn Salamah (see picture) is vice-chairman and managing director.

Sabic is involved in the manufacture of petrochemicals through a wholly owned company, Saudi Arabian Petrochemical Co. (Petrokemya), and numerous joint and minority-owned ventures. Petrokemya's ethylene plant at Jubail is rated at 650,000 metric ton/ year ethylene with expansion underway to 1.15 million ton/year this year. Sabic also holds 50% interests in other major ethylene units at Yanbu and jubail with, respectively, Mobil Oil Corp. and Shell Oil Co. These units crack ethane from Saudi Aramco. This feedstock gets to Yanbu via a cross-country NGL line.

Sabic has marketing subsidiaries in Hong Kong, London, Singapore, and Stamford, Conn. A customer service company, Sabic Services America Inc., is based in Houston.

The impetus given to the development of the petrochemical and refining industries by the Royal Commission for jubail and Yanbu cannot be underestimated. This commission has created model industrial/residential cities in once-barren areas with first class ports and the necessary infrastructure, services, and government administration for all industrial and civil activities.

Following is a closer look at some of the more important elements in Saudi Arabia's state-owned oil industry.

SAUDI ARAMCO

The roots of modern Saudi Aramco go back 60 years to 1933 when the Saudi government signed the basic concession agreement with Standard Oil Co. of California (Socal), now Chevron Corp. Socal assigned the concession to a subsidiary, California Arabian Standard Oil Co. (Casoc).

In the following years, Casoc changed its name to the Arabian American Oil Co. (Aramco) and the forerunners of today's Texaco Inc., Exxon Corp., and Mobil Oil Corp. took an interest in it.

In 1973, the Saudi Arabian government acquired a 25% participation interest in the Arabian American Oil Co. (Aramco). It increased that to 60% in 1974; 100% in 1980. Aramco, however, continued to operate the concession for the government until November 1988 when a Royal Decree created Saudi Aramco to own and operate the former Aramco assets.

The decree also set up the Supreme Council, chaired by the king. The council was given authority to approve the company's 5-year work plan and 5-year plan for future capital investment, to appoint the president of Saudi Aramco at the recommendation of the board of directors, to approve the board of directors' annual report, and to decide on all other matters presented by the board.

According to the Royal Decree, the Saudi Aramco board of directors will be chaired by the minister of petroleum and mineral resources. The board will include at least eight members to be appointed by a royal decree based on a proposal of the minister. Four out of the eight members will be executives in charge of managing the company, one of which will be the president of the company.

The current board has 11 members. In addition to the stipulated four members from Saudi Aramco management, two come from the Saudi government or educational institutions, Three, including the former chairmen of Exxon Corp. and Chevron Corp., come from the business world. One is a U.S. banker.

NEW STRUCTURE

Saudi Aramco's board of directors late last year established a new upper management structure for the company. The company was divided into four business centers, each of which is coordinated and directed by an executive vice-president reporting to Ali I Naimi, the president and chief executive officer.

The four executive N,ice-presidents (see picture box) are Nabil I. Al-Bassam, finance; Abdelaziz M. Al-Hokail, industrial relations and affairs; Sadad I. Al-Husseini, oil operations and Abdallah S. Jum'ah, international operations.

Oil operations are divided into four business lines headed by the following senior vice-presidents: A.S. Al-Saif, exploration and producing; A.A. Saleh, manufacturing, supply, and transportation; S.A. Al-Ashgar, operations services, and A.G. Al-Ghanim, engineering and project management.

This last business center is broken down into two major administrative areas: engineering services, headed by Vice-President I.Y. Kooheji, and project management, headed by Vice-President, S.L. Sharr.

Several management sectors are each headed by a general manager (GM) and broken down into refinery projects (C.E. Adams, GM); northern area projects (R.C. Gerrard, GM); central area projects (M.M. Salama, GM), and southern area projects (A.O. Al-Ajaji, GM).

Figs. 2 and 3 diagram the exploration and producing and the manufacturing, supply, and transportation organizations under oil operations. Fig. 4 details international operations.

Saudis hold nearly all of the company's management positions. "Saudiazation" is a primary objective of the company. Some 75% of the employees, according to recent figures, are Saudis, and the number of expatriates is diminishing each year.

SAUDI ARAMCO SUBSIDIARIES

Table I lists Saudi Aramco subsidiaries. One of the most active is Aramco Services Co. in Houston, which provides a wide range of services to Saudi Aramco. This includes the administration of major engineering design project teams in the U.S., the evaluation of vendors, the procurement of materials, contract administration and controls, and recruitment and training.

Aramco Overseas Co. B.Y., Leiden, The Netherlands, has similar responsibilities as Aramco Services.

Saudi Refining Inc. is a subsidiary of Aramco Services and holds the 50% interest in Star Enterprise joint venture with Texaco in the U.S. Saudi Refining also buys and sells crude oil refined by Star.

The New York and London Saudi Petroleum companies listed in the table are marketing companies that schedule, load, store, and arrange transportation for the large amounts of Saudi crude oil that go to North America, Europe, and the Far East. Saudi Petroleum Overseas Ltd. (SPOL), London, was separated from the New York organization in 1990. SPOL set up a Tokyo branch in 1991.

These three offices work closely with Vela International Marine Ltd., Dhahran. This company is expanding and is symbolic of another element of Saudi Aramco's global integration strategy: Getting the capability to transport its crude to any market it wants.

Vela now operates eight very large crude carriers (VLCCS) owned by Vela subsidiaries and charters others to meet demand. Vela subsidiaries also have 15 vessels on order or under construction. The objective is to have 25 vessels by 1995.

SAMAREC ORGANIZATION

Fig. 5 shows Samarec's basic refining organization prior to its merger into Saudi Aramco. The senior vice-presidents are Yahya Al Zaid, refining; Mohammed I. Al Abdan, distribution; and Ghazi M. Habib, planning, information, and engineering.

Where to put Samarec's fleet will be another of the basic questions facing the merger task forces. Although Saudi Aramco is the world's leading producer of LPG, making from 8 to 11 million tons/year (90 million to 130 million bbl/year), Samarec has the responsibility of selling and moving it from the Ras Tanura and Al Juaymah terminals on the East Coast and Yanbu on the West Coast.

The marine department has three LPG carriers under term charter carrying gas to overseas buyers. The company owns four clean product carriers that operate in the kingdom's coastal waters carrying petroleum products and 13 under charter to move clean or dirty products. Samarec is responsible for all distribution of refined products in the kingdom. It also uses tanker trucks and product pipelines for this.

The General Petroleum & Mineral Services Ltd. (Petronal) administers Samarec's overseas offices in New York, Tokyo, London, and Singapore. It provides market information and analysis, sales strategies, and commercial support.

It is clear that Saudi Aramco has the expertise and personnel to implement its strategy of global integration.

But does this eventually include exploration by Saudi Aramco in other parts of the world, such as the former Soviet Union, which are ripe for the technical resources and money Saudi Aramco could put into such venture?

Ali 1. Naimi answers this question with a question.

"If you could explore for oil any place in the world, where would you look for it?"