Market changes prompt Gulf State oil firms to explore new business models

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State-owned companies such as Saudi Aramco and ADNOC are adapting to the new challenges of the energy market and becoming more like international oil conglomerates.
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State-owned companies such as Saudi Aramco and ADNOC are adapting to the new challenges of the energy market and becoming more like international oil conglomerates.
Updated 02 May 2018

Market changes prompt Gulf State oil firms to explore new business models

  • Several Gulf NOCs have set up energy trading operations or are about to do so
  • NOCs, as much as their international oil company (IOC) counterparts, must move with the times, or risk extinction

LONDON: The Gulf’s national oil companies (NOCs) are becoming increasingly corporate-savvy, diversifying business models and expanding global footprints, motivated by two over-arching aims: To generate more cash from each barrel of oil they produce, and to achieve demand-security in a market rocked by change from one end of the planet to the other.
After years of comfort brought about by high oil prices, times have changed. Faced with a series of game-changers — lower prices, climate change, the green energy revolution, the rise of US shale, the advent of electric vehicles — NOCs, as much as their international oil company (IOC) counterparts, must move with the times, or risk extinction.
The region’s largest NOCs, including Saudi Aramco and ADNOC, have not been blind to such threats, and are overhauling their business models to move closer to the IOC model exemplified by the likes of Royal Dutch Shell, BP, Total and Chevron.
Several Gulf NOCs have set up energy trading operations or are about to do so. This mimics something IOCs have done for years with trading desks buying and selling oil — when the price is right — chasing new customers in different locations, creating fresh demand and deepening portfolios. Some will handle both the NOC’s barrels and those from third parties, meaning less reliance on direct sales via contracts at fixed prices and for fixed terms.
“Trading gives (NOCs) greater scope to generate additional revenue in a more volatile world than yesteryear,” said Adrian Del Maestro, oil and gas strategy director at PwC in an interview with Arab News. Last month, for example, UAE’s ADNOC announced it was setting up a “non-speculative” trading unit to “maximize value from our domestic and, over time, international downstream operations,” according to Dr. Sultan Al-Jaber, ADNOC Group chief executive and UAE minister of state.
Such a move makes sense, of course, with oil prices “lower for longer” and taking into account the push toward a lower carbon future. In short, NOCs are looking to optimize revenue. But the strategy is not about Gulf NOC traders trying to create value through specific arbitrage opportunities, or going after positions. PwC energy partner Robert Turner told Arab News: “The strategic driver is uncertainty around long-term demand, and the need to underpin your market share. If you have a lot of oil, you want to know you can place it effectively into the global oil market at an optimum price. You want demand security.”
An early move into trading was taken in 2006 by Oman, which set up a 50/50 venture with global trader Vitol called Oman Trading International. Oman bought out Vitol in 2015, and the business is today wholly owned by Oman Oil.
Oman’s decision to go it alone illustrates the new-found confidence within many Gulf NOCs, said Turner.

“There are a lot of talented people in some of these companies, and there is no pressing need to go on a hiring spree or always link with a partner,” he said.
Aramco set up a unit, Aramco Trading Company (ATC), in 2012 to market refined products, base oils and bulk petrochemicals. Crude trading was not initially in its mandate, but ATC now plans to trade non-Saudi crude mainly to feed Aramco’s international joint ventures, such as the US-based Motiva refinery, and S-Oil in South Korea.
The trading fits in with Aramco’s aim of becoming the world’s largest integrated energy firm, with plans to expand its refining operations and petrochemicals output.
“Moving into trading is a logical progression to Aramco’s strategy to capture value across the entire oil and products chain,” Sadad Al-Husseini, a former Aramco executive told Reuters recently.
The move into petrochemicals marks another shift by the region’s larger NOCs. Aramco has been particularly proactive, with an agreement with SABIC in November to build a $20 billion oil-to-chemicals facility on Saudi Arabia’s Red Sea coast. Earlier this month, Aramco signed a deal with a consortium of Indian refiners to build a $44 billion refinery and petrochemicals project in the country’s Maharashtra state. ADNOC plans to increase domestic petrochemicals output to 11.5 million tons a year by 2025, and boost international investment in the sector.
“The use of refined products provides opportunities to produce more sophisticated petrochemical materials that are needed to extend the value chain and generate employment opportunities,” said a spokesman for the Oxford Institute of Energy Studies. He added: “For NOCs in the region, stiffer competition in export markets represents a challenge, but also opportunities to establish and develop their trading arms and to play a bigger role in the global petroleum products markets by opening new markets, enhancing their expertise and skills in trading petroleum products and creating trading hubs.”
Trading desks and increased downstream investment mean that NOCs are taking a leaf out of the strategy book of IOCs. But does this mean that the likes of Saudi Aramco and ADNOC will one day look like Exxon Mobil, Shell, BP, Conoco Phillips, Total and Chevron?
There is definitely “a lot more focus on capital discipline and this emulates IOCs in terms of a focus on cost,” said PwC’s Del Maestro. But there are limits to how far NOCs will move to the IOC model.
Valerie Marcel, an NOC specialist at London think tank Chatham House, told Arab News that NOCs were becoming “more commercially savvy”, and will take on a bit more risk by engaging in trading, and developing assets overseas.
“But they remain focused on being national entities with concern for the economic benefit to their countries,” she said. For IOCs, by contrast, “profit tends to trump everything.”
She said a more corporate approach by Gulf NOCs mean they are going some way toward the IOC model, but will never be entirely like them, “as their prime concern is with the national wellbeing of their countries.” Marcel added that most NOCs would continue to be instrumental in providing financial support for government programs. NOCs may never fully become IOCs, but they are more than happy to increasingly partner international counterparts to develop relationships and experience, helping them adapt their business models to a changed market.”NOCs are looking to leverage global supply and demand to place products where they are needed, and are happy to enter into strategic partnerships to facilitate access to new markets worldwide,” Mark Andrews, UK head of oil and gas at KPMG, told Arab News.”Once they adopt this mindset they start to build both laterally and vertically across the market.”
Such partnerships come hand in hand with Gulf NOCs’ investment plans to expand at home and abroad.One of most interesting recent stories came from the Wall Street Journal when it reported Aramco has inquired about acquiring assets in the two biggest US oil and gas shale basins, Permian and Eagle Ford. That would be a first: Aramco owns refineries throughout the world, but it does not produce oil or gas outside of Saudi Arabia.
Andrews suggested shale exposure for Aramco would more likely be beneficial as a learning experience as there are significant shale deposits in the Gulf that remain unexplored.
Other international moves are not difficult to find. Abu Dhabi-owned Mubadala Petroleum, Malaysia’s state-owned Petronas and Anglo-Dutch oil major Royal Dutch Shell have agreed to spend $1 billion on a shallow-water gas project in Malaysia. Aramco is also helping to build a 260,000 barrel-a-day processing plant in China, the world’s second-biggest crude consumer. It has also teamed up with Asia’s biggest refiner on another plant in Fujian province.
France’s Total is to build a $5 billion petrochemicals facility with Aramco in Saudi Arabia, while Kuwait plans to invest $113 billion to boost oil exploration and production activity both inside and outside the country, reported Kuwait News Agency (KUNA). Finally, Gulf NOCs such as Aramco are looking at initial public offerings (IPOs) that will mean they will have to become “less secretive and more transparent when it comes to their accounts and data relating to their reserves,” said Marcel. IPOs could make NOCs more closely resemble Western multinationals, but that depends how much of the company is owned by outside shareholders. As Aramco is to sell only 5 percent to outside shareholders, it will remain a state-controlled company, and its core business will remain getting oil out of the ground in its home territory at the lowest possible cost.
But that doesn’t mean Aramco or other Gulf oil groups will be reluctant to embrace change. Increasingly, they have global ambitions, and with their market clout, particularly Aramco’s, their actions will continue to have the potential to shake up energy markets around the world.

First IT-related company starts trading in Saudi bourse

Updated 24 April 2019

First IT-related company starts trading in Saudi bourse

DUBAI: Shares of Al-Moammar Information Systems Company started trading at the Saudi Stock Exchange (Tadawul) on Wednesday, the first IT-related entity in the bourse’s roster of 201 listed companies.

Al-Moammar Information Systems Company has been assigned a trading symbol of 7200. The trading symbol is used by investors and traders to transact orders.

Shares were up 3.2 percent to 48.2 riyals in late trade, with 1,038,877 counters changing hands.

The company held a five-day public offering last March and opened for subscription 4.8 million ordinary shares, at an offer price of 45 Saudi riyals per share, representing 30 percent of its paid-up capital.

Saudi Fransi Capital was assigned as financial advisor, lead manager, bookrunner and underwriter of the offering, while Riyad Bank, Saudi British Bank and Banque Saudi Fransi were tasked as receiving agents.