Middle East Economic Survey

 

VOL. LII

No 16

20-Apr-2009

 

Saudi Aramco’s Role In Industrial Development

 

By Khalid al-Falih

 

The following article is an edited version of a paper presented by Saudi Aramco President and CEO Khalid al-Falih at the ‘2009 Local Content Forum’ in Dammam, Saudi Arabia, on 23 March.

 

Cooperation in the private sector and other concerned sectors represents the best vehicle for developing and diversifying the national economy to make it competitive globally. Cooperation also provides citizens with ways and means for self-development and promotes high productivity. The solid growth of the gross domestic product over recent years, coupled with reduction of the public debt from 80% to 10%, are encouraging signs. Although our gross domestic product per capita grew significantly between the years 2000 and 2008, this number is still less than half the contribution made by individuals in advanced industrialized countries, which are characterized by an integrated package of development components, including the incubation of knowledge and technology, and reliance on a diversified economy where industry constitutes the backbone.

 

Relying on oil revenues, which make up 90% of our income, requires us to take a hard and serious look at the inevitability of diversifying income sources and minimizing the impact of oil price fluctuations on the economic cycle. I regard this as a good opportunity to address the concept of local content as an objective that deserves exceptional attention from all of us, considering its strategic role in attaining sustainable and total development for our generation as well as future generations.

 

Encouraging Innovation

Many countries have allocated large percentages of their domestic income, some of them in excess of some 3%, for development of research activities and creation of indigenous technology. Meanwhile the developing countries, including the Kingdom, have been primarily handicapped by importing new technologies rather than inventing them, and have relied on petroleum resources as their key source of income, coupled with export of other commodities basically derived from their natural resources. The Kingdom’s expenditure on research and development has not gone beyond one-quarter of the amount expended by the developed countries.

 

As far as Saudi Aramco is concerned, we strive to make the company a prominent global source of innovative technologies in the oil and gas industries. The model embraced by the company depends on the continuity of the research and technological development cycle in all corporate operations. The starting point is concepts and ideas generated by communication and interaction among our research and development scientists, our engineers and our partners, as well as our customers and our employees, after which the promise of such ideas and concepts undergoes the research needed to yield and generate new technologies. Saudi Aramco places at the top of its priorities the need to be a pioneer in the area of the development and exploitation of oil technologies, especially those technologies which target smart solutions to the geological, producing and geographical challenges in our work environment in the Kingdom.

 

The company’s technological development programs are founded on fostering the spirit of innovation and creativity in all employees. In this area, Saudi Aramco employees offered over 75,000 innovative ideas, all of which have been evaluated, and more than 4,000 ideas have been approved for use in many of the company’s operations, spawning hundreds of Saudi Aramco technologies. Saudi Aramco has indeed earned 88 patents and registered more than 120 other technologies with international offices for issuance of patents. These patents are regarded as a key requirement for creation of employment opportunities that will contribute to the prosperity of the community.

 

Creating Indigenous Industries

Economic development is regarded as a challenge because of our dependence on oil revenues as a key source of income. There is a need to develop other important sectors, such as tourism and services. It is even more important to create indigenous industries, with added value to the Kingdom, in which we have a competitive advantage, including petrochemicals, mining and the conversion industries that rely on them. The establishment of infrastructure for the gas industry by the Kingdom’s government serves as the basis for achieving the goal of economic diversification and provides the vital life blood for the industrial cities of Jubail and Yanbu' cities and most recently Rabigh. This has enabled the Kingdom to establish major industries in petrochemicals and metals. Recently, the company increased natural gas supplies for the next five years by more than 30% to 8bn cfd, and boosted ethane and NGL supplies to 1bn cfd and 850,000 b/d respectively.

 

The industry sector’s contribution to gross domestic product has reached 9%, which is good progress, but it is still modest compared to the advanced industrialized countries. The reason why the Kingdom’s industrial sector is essentially standing still is that it is largely content to have basic industries that export commodities of relatively low added value. Within this context, there is ample opportunity. The private sector must not fail to benefit from the Kingdom’s industrialization strategy, recently endorsed by the Council of Ministers, as well as from the National Program for Industrial Complexes established several years ago by a decision of the Council of Ministers. The purpose of the latter program is to transform the domestic market from a net importer to an exporter, through development and construction of industrial complexes that provide value-added products capable of competing in international markets, and beyond the direct scope of petroleum and petrochemical products.

 

As part of its strategic trend, Saudi Aramco recently established specialized organizations, including the New Business Development organization. Its duties include looking toward an innovative future, by encouraging and supporting the private sector in the establishment and development of national industries with guaranteed returns. This organization has managed to devise several mega-projects and attract investments from international companies in excess of SR200bn ($53,3bn), including the Rabigh Refinery Development project in collaboration with Sumitomo Chemical Company of Japan, and the establishment of two export refineries with Total in Jubail and ConocoPhillips in Yanbu'. It gives me further pleasure to inform you today that Saudi Aramco is on the verge of signing a memorandum of understanding with Sumitomo Chemical for establishment of Rabigh Phase II. This is in addition to the upcoming mega-project with Dow Chemical of the US for the establishment of petrochemical industries in Ras Tanura, which targets investment to the tune of SR100bn ($26.7bn) upon completion. The investments do not stop at the fences of these grassroots facilities, but include supplemental industries in Rabigh and Ras Tanura, where these projects involve establishment of integrated industrial cities for the private sector’s investment in conversion and support industries.

 

Accelerated Development Of Oil And Gas Services

As part of our industrialization strategy, our focus must shift to accelerated development of the oil and gas services sector in order to transform the Kingdom from an importer of commodities, services and technologies related to oil and gas to an exporter and pioneering country in these fields. I wish here to applaud the experiments of a number of oil producers such as Norway, Malaysia and Brazil. These countries managed to establish local industries which were capable not only of supplying the oil and gas sector with all its requirements in equipment, materials, supplies and services, but also became exporters of this technology, which contributed to upgrading local oil and gas procurement in these countries to 70%. The private sector in these countries, with the cooperation of national petroleum companies, played a pivotal role in the realization of this vision.

 

For our part, we have had pioneering initiatives to encourage the private sector. These initiatives covered development of the capabilities of local vendors by procurement of the bulk of our requirements from the domestic market whenever possible. More than 90% of company purchases are now procured from local vendors and manufacturers. However, despite many incentives, the national industrial sector has failed to keep pace with the company’s growing demands and its contribution to meeting these demands does not exceed 20 to 25%.

 

In recent years, Saudi Aramco’s New Business Development organization has played a pivotal role in supporting the private sector, resulting in the construction of 70 factories with investments of more than SR10bn ($2.7bn), providing 13,000 new employment opportunities. The company’s efforts have extended further: we recently launched a new initiative to develop an integrated industrial complex which embraces several plants for oil- and gas-related equipment and materials, in addition to service companies that adopt the cluster model. The complex will host 30 factories, provide 5,000 jobs at a cost of SR20bn ($5.3bn), and will serve as an important building block of the Kingdom’s industrial base.

 

Greater Role For Private Sector

Notwithstanding Saudi Aramco’s efforts in support of local industries, these industries are hardly adequate. It is our hope that the private sector will play a greater role in promoting the industrialization sector. The economic activity of most of the small and medium sized companies is limited to importing and contracting, thereby missing out on the opportunity to harvest the abundant fruits of recurrent corporate expenses and high capital yield. Here I wish to laud the experiment of some local companies, which have managed to exit this circle and have demonstrated high efficiency.

 

The time has come for the private sector, in cooperation and coordination with the strategic sectors in the Kingdom, to concentrate greater attention on the development of national industry and to embark on long-term investment instead of focusing on conventional projects such as commerce and real estate. There are many key factors that should encourage the private sector to engage in local investment in general and in local manufacturing in particular:

The current international crisis has revealed the vulnerability of the credit and speculation markets that have spread over recent years in global financial houses, and it has demonstrated once again that bold investment ventures establishing institutional entities and qualified companies, at the forefront of which are manufacturing companies, constitute an intelligent option for lucrative returns characterized by minimal risk over the long run.

 

We are concerned that the current international crisis has impacted the preparedness of some investors to engage in bold local investments at the moment. For this reason, I wish to draw attention to two important issues: