Saudi Aramco

Background

Saudi Aramco is the most influential oil company in the world and the world’s largest producer of oil. It supplies more than ten percent of global oil demand. Aramco is charged with the management of 98 percent of Saudi Arabia’s oil reserves, which comprise of 25 percent of the total global oil reserve.

In the year 2006, Saudi Aramco extracted 8.9 million barrels of oil in one day. Saudi Aramco manages several refineries, international oil markets and domestic distribution of oil in Saudi Arabia. The company also owns several fleets of oil tankers and it also has distribution network of refineries.

Saudi Aramco operates ventures in petrochemical industry. The company has its headquarters in Dhahran and supplies natural gas to other Saudi industries. It has been consistently ranked as the number one oil producer since its establishment. This ranking is based on the size of its reserve, its output in terms of oil and natural gas, refining capacity, volume of sales, net income and asset base (Aramco 14).

Introduction

Since 40 percent of Saudi Arabia’s Gross Domestic Product (GDP) comes from the petroleum sector and that oil accounts for 85 percent of Saudi’s export and 70 percent of the total government revenue, it is evident that the company is the core of Saudi economy. Its importance also emanates from its strong asset base.

The strong size of the company makes it an important asset in Saudi economy and thus it is in a better position to influence the policies and the strategies of Saudi Arabia kingdom. In the development of the company’s corporate plans, it should factor not only its commercial goals but also Saudi’s foreign policy requirements and the economic goals for the kingdom’s economic future (Jaffe and Elass 12).

Saudi Aramco plays an important role in Saudi society. The critical element of its mission is to play a redistributive function in the management of the Kingdoms oil reserves and assets. The company subsidizes the domestic fuel supplies as an act to benefit the consumers and the domestic industries.

It is also the main employer and it provides training for the Saudi workers. Saudi Aramco facilitates industrial development (Jaffe and Elass 13). Saudi Aramco and the role that the Saudi Arabian Kingdom plays in influencing the activities of this company shall be the focus of this paper. What the company owns, its global position, how the company developed, its revenues, where it makes its money and the activities it engages in shall be discussed.

What they own

Aramco is a government owned company, and it is the world’s number one in outputs and management of crude oil reserves. Aramco specializes in exploration, production, and the distribution of crude oil, natural gas and petrochemicals.

The company runs five domestic oil refineries with the capacity to supply and meet the oil consumption demands of the kingdom. In 1993, it acquired the ownership and the interests of the Saudi Arabian Refining and Marketing Company (SAMAREC). Saudi Aramco has ownership control over the chain of hydrocarbon in Saudi Arabia through the transference of Petromin equity in its two lubricant companies.

Consequently, through its majority shares in Petrolube and Luberef, Saudi Aramco is responsible for the production and the distribution of lubricants in the country. Through its subsidiary Aramco Gulf Operations Company, Saudi Aramco took over the off shore oil and gas fields in the neural Zone from Arabian Oil Company of Japan. Saudi Aramco is the major oil supplier to Europe and US and controls Saudi Arabia’s oil and pipeline terminals (Valerie 47).

The Saudi Arabia Oil Company also known as Saudi Aramco is an oil company whose owner is the Saudi Kingdom. This company is positioned among the largest crude oil and natural gas liquids producers and exporters. It is a fully-fledged company with most of the operations such as production, refining and distribution of these products being done by the company.

The company has over 51,000 employees. The major areas where shipping terminals are found include the Arabian Gulf as well as the Red Sea. The company has expanded its venture in overseas countries such as in Philippines and in the United States. Saudi Aramco works towards a continued delivery of petroleum and other petroleum related products to people both locally and globally. For the time it has been operational, Saudi Aramco has been able to live up to this commitment.

The barrels of oil and natural gas reserves are what the company relies upon entirely for its success. Since the company is depended upon by a significant percentage of people in the world, it is important for it to exercise discreet stewardship of the oil reserves that they control.

At a local level, Saudi Aramco owns several refineries, which are very vital in the overall supply of the kingdom’s energy requirements. The company also partners with other players in this field to ensure that there is enough supply of the energy needed nationally.

Precisely, Saudi Aramco runs independently or is partner with seven other oil refineries in Saudi Arabia. The company also deals with exportation of products overseas. This is made easier by the eight marine workstations that the company operates. The area of operation of this company extends to the red sea as well as the territorial waters in the Arabian Gulf.

Gas, as a source of energy, has been termed as the largest growing source of energy globally. The consumption of gas globally over the past ten years has increased significantly with an estimated 1.7 percent growth rate annually. This arte is expected to increase to 3.2 within the next twenty years. Saudi Aramco is one of the companies that got into gas production business earlier than any other company in the Middle East. This gives it a competitive advantage over the rest of the companies

The company furthermore owns and operates the Master Gas System (MGS) which is instrumental in ensuring that the country is self-sufficient in fuel and gas. MGS is also among the largest exporters of gas liquids in the globe.

The company has substantial stake and interests in refinery and marketing activities in countries like USA, Korea, Japan and china. Consequently, through its affiliate company called Vela International Marine, Saudi Aramco has the ownership and the operation of the world’s largest fleet of tankers (Saudi Aramco World 42).

Position in Global System

Besides its pivotal role in the Saudi economy, Saudi Aramco has a strong influence in the global economy. It is the only oil firm from Saudi Arabia and also in the world that has a global sway in the production of oil.

Its possession of spare crude production capacity in the world gives it leverage over other oil companies and it is argued that it is in a position to replace the oil exports of a medium oil producing nation within few days and can also pull a significant volume of oil from the market to guarantee shortage. Its spare capacity is necessary for Saudi Aramco to assert its role as the global and regional leader and also as a reliable oil producer in the world in times of conflict and instability.

With the ever rising prices of oil and oil being an international commodity, the global influence of Saudi Aramco is at its peak. Consequently, since the company is the biggest oil producer in the world and due to the fact that it equipped with the weapon of spare oil production capacity, the company has an unmatched power in the international energy and financial markets.

This therefore implies that in order to understand the international corporate culture, the process of decision making and future strategies in the international oil market, it is imperative for one to analyze the future of the energy market by using Saudi Aramco as a reference point.

For analysts to identify and make an evaluation as to whether or not Saudi Arabia will be in better position to produce oil that will be enough to meet the global needs, the operation and the position of Saudi Aramco must be first evaluated since it plays a critical role in the implementation of oil policies and the expansion of the production capabilities of Saudi Arabia (Marcel 32).

The strategies and the objectives of Saudi Aramco have been intentioned towards meeting the foreign policy requirements of the state. This was evident in the 1980s when the Saudi government and the royal family argued that an oil price war was a requisite for capturing the Saudi market share from emerging oil producers like Norway and United Kingdom.

The royal family also engineered a low price regime during the Iraq and Iran war as a measure of ensuring that the cash strapped Iran could be denied of resources to wage a strong war against Iraq. The politics of oil was also used as a measure to pressurize Soviet Union to stop its forays and influence into Afghanistan (Anderson 67).

Saudi Aramco has been at the apex of Saudi Arabia’s foreign policy priorities. In order to influence its foreign policy towards the United States and to influence the America public opinion regarding the US-Saudi relationship, Saudi Arabia has projected itself as the number one oil supplier to the US.

Furthermore, to assert its role as a strategically in the international coalition, through superlative efforts, Saudi Aramco replaced in less than three months the Kuwaiti and Iraqi oil production that was lost in the event of Iraq’s invasion of Kuwait (Saudi Aramco 3).

The management structure of this company is similar to that of private organizations. This is owing to the fact that initially, the company was privately owned before it was acquired by the government. Yergin (67) records that the structure was not completely dismantled after change of ownership.

The company has a board of directors and a senior management that makes most of the decisions in the company. However, even though the management of Saudi Aramco may seem to relatively independent in terms of its decision making and the general running of this company, it should be understood that the king of the Saudi Arabia kingdom wield a lot of power over Saudi Aramco.

The company has no authority to ask any question concerning any decision that the king may make which pertains to the company; even if the management thinks that it is not the right thing to do at that particular moment. The king therefore, has final word concerning all oil-related matters. This includes all external and internal policies regarding the activities of Saudi Aramco.

This scenario concerning oil and the decisions being made by a single person has been an issued of concern to many people who believe that there should be room for negotiation if any decision is to be made because these decisions have a significant impact on the entire kingdom.

How they developed

Saudi Aramco developed as one of America’s largest overseas investment. Aramco is the symbols for Arabian American Oil Company and it was fully established as the company that was in charge of Saudi concession. It was founded by two of the world’s biggest oil companies namely the Texaco and Chevron.

After World War II, Aramco was reinforced by two other oil companies: Exxon and Mobil. At its inception, Aramco was used by the US as an instrument to control oil (Vitalis 9). Saudi Aramco was established in 1933 through a concession with the standard oil cooperation of California. In 1988, the royal king signed a degree that led to the conversion of Aramco to Saudi Aramco and it was fully made a government owned enterprise and for profit.

During the early 20th century, it was not known whether Saudi Arabia had petroleum. Around the 1920’s, there were some speculations that this kingdom contained some petroleum. The then king of Saudi Arabia was hopeful that experts could discover water and not oil in his kingdom.

However, exploration of oil in this kingdom was greatly opposed by some British and Persian oil companies, which feared that such a discovery in Saudi Arabia would present them with a lot of competition. Brown (30) notes that the attempts to explore this area for oil by the Americans were hindered by the British, who also had some interest in gaining control over these regions which had oil. It was not until 1932, when a company known as SoCal, unearthed that Bahrain, a region in Saudi Arabia, had oil.

The structure of leadership in the present day Aramco is organized a manner such that there is a management committee and also, a board of directors (Lebkicher 25). It is these two bodies that oversee that day to day running of this company.

Decisions such as who the company is to sell oil to and the price at which to sell their products are determined by these professional bodies. In order to ease its operations, Saudi Aramco is divided into several lines of business. They include: exploration and production and gas operations. Others are refining, marketing and international as well as engineering and operational services.

Finance and industrial relations are also part of these lines of business in Saudi Aramco. There are senior vice presidents drawn from the leadership of these lines of business. They are part of the corporate management committee. The committee is usually chaired by the president of Saudi Arabia. Moreover, there is a general counsel as well as a corporate planning arm involved in the running of this company.

The two are directly accountable to the president and the chief executive officer of the company. However, there are times that the chairman takes it upon himself to make decisions solely, without consulting the team. Although the rest of the members of the senior management a re recognized as vital in the process of decision making, the chairman has the ultimate authority concerning any decision that needs to be made.

Saudi Aramco also has established a strategic planning department that takes care of all the affairs involving corporate planning. This department does economic analysis in order to to help the existing business units within the company.

The department is also mandated with the evaluation of investment projects and their commercial rates of return assessed critically in order to determine the viability of the investment. Again, the department evaluates hoe effective the company has been in meeting the set targets. The targets are usually set by the king of the Saudi Arabian kingdom and also the ministry in charge of oil within this kingdom.

Vasssiliev (30) notes that promotion in Saudi Aramco is based on merit. This is especially so in crucial departments such as exploration and production, which require technical expertise. The company also seeks to improve the skills of young executives within the company.

This usually happens through an executive department that has been established to cater for training and offering of special assignments to them, in order to improve their skills. In the recent past, the merits for promotion have constantly been changing and other factors, other than education, are being considered for one to be promoted. They include factors such as family background and loyalty to the Saudi Arabian government.

Major decisions dealing with the operation of this company are made by the board of directors. The company has an experienced board of directors, who can safely be entrusted with the decision making duties of the company.

They are usually drawn from experienced people, such as former heads of international oil companies. Also, the board of directors is charged with the mandate of high level planning and making the budget of the company within the financial limits of the company. It is also involved in making decisions concerning any project that is about to be carried out within the company.

The major advantage that Saudi Aramco has as compared with the rest of the national oil companies is that it is relatively autonomous in terms of the control it exercises over its operating revenue.

The company has enjoyed this privilege since its establishment, when it was under private ownership. This was not changed when it was acquired by the kingdom of Saudi Arabia. Part of the company’s earnings is paid to the government as dividend. However, the amount that the company gives to the government is not constant and depends on its earnings.

What remains after the company has paid part of its earnings to the government is used in the everyday operations of this company. To enable the company continue with operations such as expansion of infrastructure as well as programs for investment, Saudi Aramco is considered during the allocation of money to various sectors in the national budget. This is how it is able to accomplish these developments.

For any project to be implemented, Saudi Aramco considers profit maximization as the initial goal. This is the first test that the project has to pass in order to be implemented. However, there are some instances when political reasons become the overarching reasons as to why a certain project is to be implemented.

According to Elass (48), the other body that is very influential in the running of Saudi Aramco is the Supreme Council for Petroleum and Mineral affairs. It is this body that has the mandate to approve or disapprove the policies that this company comes up with.

These include strategic plans as well as investment plans which the company could have prepared and is supposed to meet after certain duration of time. This body is also responsible for restructuring the Saudi economy. It also encourages privet investors to invest in energy sectors. This body has also had a great impact in the reformation of laws dealing with foreign investments.

However, it is worth noting that the present king of Saudi Arabia is responsible for most of the final decisions that the company adapts. Once the king has decided on a certain matter, it becomes the final decision that the company has to adapt, with no one to raise any question.

Also, senior members of the royal family are considered vital in the decision making processes of this company. In order to remain in power, the government usually solicits for opinion from people it considers important and loyal to it such as weal thy business men, large tribes and key religious figures.

In so doing, the king is assured of immense support to remain in power and continue ruling as well as influence the running of major oil companies within his kingdom such as Saudi Aramco. The educated members of the king’s family are known to pursue professional careers, after which they form groups comprised of the elites.

Their revenues

Saudi Aramco has its own independent operating revenue. Through the kingdom’s ministry of finance, the company is allocated funds for its expansion and investment programs. Revenue wise, Saudi Aramco has retained the top spot and it has experienced an unprecedented profit due to rise in its revenues in the Organization of Islamic Conferences. Their increase in revenue is due to the increased demand of oil especially from the East Asian region (Europa Publications Limited 29).

Where they make their money

Saudi Aramco make their money primarily though the sale of oil and gas. Through their infrastructure, they also make money by drilling and exploration of oil. Saudi Aramco also makes their money through the selling of petroleum products and natural gas in Saudi Arabia and its subsidiaries in the world. The preciousness of oil as an international commodity is enough to generate substantial income for Saudi Aramco (Saudi Aramco 1).

Saudi Aramco does not only play a major role in the economy of Saudi Arabia but also in the global economy. It is the only state owned company that has hit the global market in oil production and export. In terms of crude oil product ion, it is recognized globally because of its pivotal role. Analysts are of the opinion that the company has the potential to produce more oil than it is currently doing.

The company itself has confirmed the analysts’ sentiments by saying that it is able to produce more than what is currently in its reservoirs. It had been predicted that by the year 2009, the company would be able to produce over 12 million barrels per day if everything went on well. A plan on how to achieve this vision was drawn and the company invested its resources in ensuring that it exceeded the set limits of production within the time frame it had set.

The investment in this plan was termed by media reports as one of the programs that the company has ever spent huge amounts of resources on. Part of what was its driving force was the desire to become a leader in oil production both locally and regionally. This was especially targeted towards taking the place of Iran, which had not been able to continue with its oil market because of political reasons. Saudi Aramco therefore sought to grab this opportunity, hence the huge spending.

Saudi Aramco is involved in various activities geared towards helping the people of Saudi Arabia. For example, the company tries as much as possible to sell its products to the people of Saudi Arabia at a subsidized rate. Moreover, the company is a major employer of many jobless people in the society where it operates.

It also offers training to people who might be interested in working there. Another venture that the company engages in attempt to help the public is provision of cheap natural gas. This is especially to major industries such as the electricity company. This means that the population is able to access other services such as electricity cheaply because the cost of production is minimized due to the provision of cheap natural gas.

The major role that Saudi Aramco has played in the construction of the infrastructure can not be underestimated. The company owns and runs numerous domestic owned refineries. These refineries supply their products locally hence, meeting the consumption needs of the people locally.

Saudi Aramco is involved in various activities geared towards helping the people of Saudi Arabia. For example, the company tries as much as possible to sell its products to the people of Saudi Arabia at a subsidized rate. Moreover, the company is a major employer of many jobless people in the society where it operates.

It also offers training to people who might be interested in working there. Another venture that the company engages in attempt to help the public is provision of cheap natural gas. This is especially to major industries such as the electricity company. This means that the population is able to access other services such as electricity cheaply because the cost of production is minimized due to the provision of cheap natural gas.

The major role that Saudi Aramco has played in the construction of the infrastructure can not be underestimated. The company owns and runs numerous domestic owned refineries. These refineries supply their products locally hence, meeting the consumption needs of the people locally.

Their activities

Among the activities of Saudi Aramco include exploration of oil, international marine shipping and production of oil. Saudi Aramco is an integrated company with tanker and refinery operations. The company also participates in the marketing of crude oil, natural gas, refined oil products and petrochemicals (Cordesman 468).

In exploration, the company has 104 fields of oil and gas reserve. Drilling is also another activity that is undertaken by Saudi Aramco. In shipping, it has contracted tankers together with their fleet to ship oil to other countries. Saudi Aramco particularly undertakes this activity of shipping through its subsidiary the Vela international marine which is responsible for shipping to North America, Europe and Asia continents where they have markets (Jones 23).

Saudi Aramco has numerous internal resources that can be used to its advantage. This means that it has some strength that it can capitalize on in order to increase its returns from the oil products it markets locally and internationally.

These are the resources that the company should capitalize on because they are the things that give it a competitive advantage over its rivals. According to Broson (50), one of the strength of Saudi Aramco is the fact that it is a one of the largest producers of oil and gas products.

Again, the company has access to assets involved in gas and oil production at relatively low costs. Moreover, the company has embraced technology and is therefore able to run most of its operations using equipment that is technologic ally viable. This saves it a lot of time and resources that can be used to improve the company’s productivity.

The employees are also known to be highly motivated. This means that they are able to work towards maximum productivity. Another important strength that this company has is the excellent relationship it has with the government. This enables it to operate without any hitches that would arise due to a sour relationship with the government. All its operations are approved by the government making it easier for the company to meet its targets.

On the other hand, there are internal resources found within the structure of Saudi Aramco that may work against the company. These are what could be referred to as weaknesses. The management of this company should look for ways to minimize the negative effects that may arise as a result of the weaknesses present in the company. One of the major weaknesses faced by Saudi Aramco is the over dependence on the proceeds from a single commodity. This means that there is no diversification of the products sold by this company.

Sampson (98) states that; there are also external factors that work for Saudi Aramco and against this company. Saudi Aramco should strive to capitalize on the external resources that can be beneficial to it.

These are commonly referred to as opportunities. This means the company should be very swift to grasp any opportunity that presents itself and the company sees that it is wise to do so. With the rising demand for petroleum products globally, Saudi Aramco has numerous opportunities that it can use to its advantage.

The external environment plays a very important role in growth of a company. This could be political, social, technological as well as economical. Saudi Aramco should therefore look for opportunities to market their products in other countries taking advantage of any favorable environment that may present itself for marketing of their products.

The current high prices of crude oil and its products globally is an opportunity that Saudi Aramco can grasp to have high returns. There is also a high demand for oil globally and particularly in Asia. Saudi Aramco can also make use of the opportunities it has due to the country being a member of the World Trade Organization.

However, the company is also aware that the external environment can also work against it. Therefore, ways to eliminate or minimize the threats that the company could be facing should be formulated. One way that Saudi Aramco can reduce the threats it could be facing is through taking advantage of any opportunity that is available. The major threat that Saudi Aramco may face is the decline in global oil demand that is as a result of high prices.

Most of the people may feel that oil is becoming very hard to afford and thus, the demand for the products may decline drastically. This is a major threat for this company because oil is the single product that the company relies on. Another threat may be faced due to other upcoming companies that are working towards meeting the increased demand for gas supply. This would mean the Saudi Aramco has competitors who put more effort towards outdoing this company in this venture.

Conclusion

Saudi Aramco is a perfect example of how national oil companies, through their behaviors, objectives and strategies can serve foreign policy roles as well as domestic responsibilities.

Oil being an international commodity, it is indisputable that Saudi Aramco is one of the top ranking company in the globe and the fact that its operations are significant to create an artificial shortage in the international market makes it a critical player and fundamental actor in global affairs and an instrument of foreign policy for the Saudi government.

Saudi Aramco has undeniably been influenced by the government of Saudi Arabia and this has had both positive and negative influence on the company.

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