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This article was translated from Arabic.
Saudi Aramco in August announced record profits of $87.91 billion in the first half of 2022, compared to $47.17 billion during the same period last year. This substantial year-on-year profit increase of 86.35 per cent witnessed by the Saudi oil and gas reflects record levels that the company has not witnessed since its listing on the stock exchange.
The magnitude of the profits achieved in the first half of 2022 can best be understood by observing that it is equivalent to about $175 billion if calculated as an annual average, or approximately 21 per cent of the entire Saudi GDP.
Furthermore, the profits Aramco was able to achieve in the first half of 2022 were alone equal to 51 per cent of the revenues of the general budget of Saudi Arabia, indicating the importance of these profits for the Kingdom’s economy. Aramco represents Saudi Arabia’s National Oil Company, in which the state owns a 98.18 per cent stake, with the remaining traded among investors on the stock exchange, meaning the recent financial results will have a significant impact on the state’s general budget.
Aramco’s financial and strategic importance
Aramco’s stellar results this year are a reflection of the significant rise in global oil and gas prices, with the price of a barrel of oil (OPEC basket) increasing from $41.47 at the start of 2020 to $69.89 at the beginning of 2021, and rising to $105.43 a barrel at the start of 2022. Consequently, as Saudi Arabia’s national oil and gas company, Aramco represents the arm through which the Kingdom was able to reap the fruits of high oil and gas prices, and increase its revenues from the sale of these commodities.
Furthermore, the Aramco profit growth was due not only to the rise in global oil and gas prices, but also the bigger profit margins after extraction and refining, as well as the increase in the quantities sold in international markets.
Thus, the Kingdom benefited greatly from Aramco’s varied activities, ranging from exploration operations, investments and developing oil and gas fields to refining, marketing and selling. As activities are diversified, so too are sources of profit, with increasing margins.
However, Aramco’s importance to the Kingdom does not stem solely from its financial returns, but also from the company’s large production capacity and its ability to influence global markets. Saudi Arabia on its own represents 41 per cent of the OPEC’s oil production, which affords it great influence within the group and its decisions. This allows the Kingdom to impose its conditions on the oil and gas markets and determine production rates with its partners in the OPEC group, as per its interests.
While the United States has attempted since the beginning of the year to press for increased oil production in a bid to control international oil prices, the Saudi leadership content with the modest increases in Aramco’s production, has refrained from responding to these requests.
Saudi Arabia and Russia, its partner in OPEC +, were able to arrive at an understanding to limit increases in production and propel other oil-producing countries in this direction. As a result, international oil prices continued to rise with the rebound in global demand for oil after the effects of the Coronavirus pandemic subsided – in contrast to supply shortages due to a lack of production – and this was reflected in the increase in Aramco’s revenues.
Aramco’s production capacity was pivotal in affording Saudi Arabia the required negotiating power in the oil markets to reach this result. It should be noted that Saudi Arabia’s large oil reserves on their own would not have sufficed to wield this negotiating power had Aramco not had the production capacity needed to optimally invest in these fields.
This production capacity stems from the strategic investments typically made by oil companies that focus on installing extraction equipment to increase their maximum capacity, searching continuously for new reserves, and entering into new partnerships to market the oil sold internationally with greater efficiency.
The Aramco story: From founding to nationalization
The existence of national oil companies such as Aramco is a common trait in the vast majority of oil-producing countries, especially once these countries realized the importance of owning such ventures to secure control over their oil resources.
This stands in stark contrast to the situation in the first half of the 20th century as most oil-producing countries in the Middle East and North Africa relied on foreign companies to carry out exploration, investment and extraction activities in the oil and gas sector. At the time, these operations were conducted according to what was known as concession contracts, which grant foreign companies the right to explore for oil and subsequently extract it in return for a limited percentage of the profits obtained by the host country.
At that time in particular, Saudi Arabia possessed no such national oil company. In fact, the Kingdom signed a concession agreement in 1933 with the American company Standard Oil of California (SoCal), which granted the latter the right to explore oil and gas, and extract if found. In order to make these investments in the Kingdom, SoCal established a local subsidiary under the name “California Arabian Standard Oil Company (CASOC).”
Thus, CASOC began drilling several exploratory wells in 1933 but was initially unable to find profitable commercial quantities of oil. In 1938, the company finally “struck oil” by finding commercial quantities in “Dammam Well No. 7,” transforming CASOC into a profitable and productive company. The company’s business later expanded throughout the country, and its name was changed to Aramco (Arabian American Oil Company).
However, it remained a private American-owned company still operating under the concession system with Saudi Arabia. Over the years, Aramco eventually became a Saudi national company (i.e. owned by the Saudi government) but in several stages. In 1973 the Saudi government acquired a 25 per cent stake in the company. A year later it increased its share to 60 per cent, and in 1980 the government decided to nationalize the company and own it completely.
The name of the company was subsequently changed to “Aramco (Saudi Arabian Oil Company)” as we know it today, and has since been serving as the national oil company in the Kingdom of Saudi Arabia.
The role of the national oil companies
Saudi Arabia is not a unique case in regards to controlling the domestic oil and gas sector through a national oil company that owns exploration and extraction rights, as well as the right to partner in these operations with other foreign companies.
Besides Aramco in Saudi Arabia, national oil companies that were founded include the likes of the Kuwait Petroleum Corporation, the Qatar Energy Company, the Emirates National Oil Company (ENOC), the Venezuelan National Oil Company and the Norwegian Equinor (formerly Statoil).
All of these companies represent state-owned national oil and gas companies founded for the purpose of investing in oil and gas fields within their respective countries and representing governments in concluding agreements with foreign firms.
The importance of these national companies is due to the fact that they allow the government to maintain control over local oil production levels and the amount of investments in developing oil and gas fields, as opposed to granting extraction rights to foreign companies that can control production on their own. These companies also play a role in transferring exploration and extraction expertise to the producing countries, which would otherwise have to rely on foreign companies to perform these tasks.
Finally, these companies play a major role in directing investments to benefit the local economy by relying more on local industries and labor instead of leaving operations in the hands of foreign companies that may prefer expertise and materials from abroad. In short, national oil companies are established to enable countries to implement their own petroleum policies through investment tools designed to implement their agendas.
In 2019, Saudi Arabia offered 1.5 per cent of Aramco’s shares to the public. However, this was not meant to pave the way for the Saudi government to relinquish its power over the company in the future. Rather, the ambitions of Saudi Vision 2030 were limited to plans to privatize just 5 per cent of the company’s total shares.
As the budgets of the first half of 2022 demonstate, Aramco represents a source of financial strength for Saudi Arabia that ensures the Kingdom will continue to cling to its dominance over the company’s activities and its financial returns. In addition, Saudi Arabia will undoubtedly cling to ownership of Aramco due to the strategic role the company plays in the global oil markets, and in the political power afforded to the Kingdom.