Saudi Aramco: A Global Presence for Oil Market Stability

Possessing a quarter of the world's proven oil reserves, Saudi Arabia and its national oil company, Saudi Aramco, are committed to preserving the security and stability of the world oil market.
In May of 1933, King Abdul Aziz Bin Abdul Rahman Al-Saud, who had founded the modern Kingdom of Saudi Arabia the previous year, listened attentively as the text of a draft agreement was read to him. After a pause, he turned to his Finance Minister Abdullah Sulaiman and said: "Put your trust in God and sign."

The agreement he was referring to authorized Standard Oil of California (Socal) to explore for oil in what is now the Eastern Province of the Kingdom - the starting point for a decades-long venture that would make Saudi Arabia the largest oil producer in the world. It would also set the stage for the close Saudi-U.S. relations that would grow rapidly in coming decades and extend into all areas of cooperation.

King Abdul Aziz (third from left) inspected the Dammam Number 7 well in 1938. The well was the first to produce oil in commercial quantities in Saudi Arabia's Eastern Province.

At a time when oil was abundant and cheap, with crude selling at approximately ten cents a barrel in Texas, the Saudi-Socal venture seemed less than promising. Initial studies had failed to determine the existence of oil in commercial quantities and other oil companies had demonstrated little interest in searching the vast deserts of the Kingdom in what most thought was a hopeless endeavor. Yet the recent discovery of oil in nearby Bahrain and the existence of certain geological formations pointed to the possibility of oil reserves. Neither the Saudi nor the American sides wavered in their determination to find oil. Four months after the concession agreement was signed, two American geologists arrived at Jubail on the Arabian Gulf and immediately set out into the vast interior.

From those humble beginnings arose the Arabian American Oil Company (Aramco), later named the Saudi Arabian Oil Company (Saudi Aramco). Today, Saudi Aramco is the world's largest oil company, with operations spanning the globe. As was demonstrated during the Gulf Crisis of 1990-91 when it stepped in to make up for the loss of oil exports from Iraq and Kuwait, thus averting a catastrophic global energy shortage, Saudi Aramco is, as Petroleum Intelligence Weekly noted, a guarantor of the "stability and security to world oil markets that is now the hallmark of Saudi policy."

The discovery of oil transformed Dhahran from a desert oil camp in the 1940s to a modern city, the site of Saudi Aramco's headquarters.

spectacular accomplishments in the face of long odds. It took five years of hard work under harsh conditions in the desert before the well known as Dammam Number 7 hit oil in commercial quantities. On May 1, 1939, King Abdul Aziz boarded the tanker D.G. Scofield in Ras Tanura to turn the valve that let the first barrel of Saudi oil enter a tanker for export.

Though Saudi crude oil was of great strategic value to the Allied war effort during World War II, and could have been produced in relatively larger quantities, the problems associated with shipping oil during the hostilities severely limited Aramco's operations. As a result the development of Saudi oil fields progressed slowly during the war years, with production averaging 58,000 barrels per day (bpd) at the end of the war. During those years, however, Aramco dedicated its efforts to exploration and development of an infrastructure to handle future expansion. It built a refinery and a tank farm, and enlarged the marine terminal at Ras Tanura.

Saudi Aramco operates a Kingdom-wide network of producing wells, pipelines, refineries and plants.

The history of the company is one of close Saudi-U.S. cooperation and spectacular accomplishments in the face of long odds. It took five years of hard work under harsh conditions in the desert before the well known as Dammam Number 7 hit oil in commercial quantities. On May 1, 1939, King Abdul Aziz boarded the tanker D.G. Scofield in Ras Tanura to turn the valve that let the first barrel of Saudi oil enter a tanker for export.

The period immediately following the end of World War II was one of intense activity. New deposits were being discovered with increasing regularity, pumping, pipeline and treatment facilities were expanded and new offices, warehouses and housing were built. By 1949, the company's production capacity had reached 500,000 bpd. To circumvent the cost and time of shipping oil to Mediterranean ports via the circuitous route around the Arabian Peninsula and through the Suez Canal, the company built Tapline, a 31-inch pipeline that initially carried 320,000 bpd of crude from the production facilities in the Eastern Province through northern Saudi Arabia, Syria, Jordan and Lebanon to the Mediterranean. Although the pipeline was expanded in later years, the civil war in Lebanon, coupled with the construction of other pipelines across Saudi Arabia and the development of more cost-effective ultra-large oil tankers led to cessation of its use to deliver oil to the Mediterranean.

As the company and its production capacity continued to grow, so did its requirements for highly-skilled and well-trained manpower. Whereas the original geologists, engineers and technicians who helped start operations in the 1930s were primarily American, by the 1950s, the majority of company employees were Saudi Arabians. In the 1960s and 1970s, tens of thousands of Saudis were sent to training centers established in the Kingdom and thousands completed their education at universities. By the end of the latter decade, Saudis were in most of the management and technical positions in the company.

Finance Minister Abdullah Sulaiman and Socal's Lloyd Hamilton sign concession agreement on May 29, 1933.

The training of large numbers of Saudis to take on leadership posts in the company enabled it to expand operations across the board to meet growing demand for Saudi oil during the 1960s and 1970s. Production reached two million barrels per day by 1965 and grew to more than eight million barrels per day when the oil shortages of the mid-1970s sent demand for Saudi oil soaring.

To achieve such production rates required a mammoth undertaking that touched all areas of the Saudi oil industry. Exploration was the core of the effort. The initial search for oil in the 1930s began in the Dammam Dome. New deposits were discovered not only at Abqaiq and Qatif, but also at 'Ain Dar and Haradh, which were later determined to be part of the Ghawar field, the world's largest oil deposit, almost 160 miles long and 20 miles across at its widest point. Other fields followed, including the Arabian Gulf's Safaniya, the world's largest offshore oil field. The discovery of these and other fields required extensive field operations backed by photogeology and exploration laboratories using the latest technologies.

A Saudi Aramco crew prepares well casings for an offshore drilling project.

A network of pipelines carried crude from producing wells to the marine terminal at Ras Tanura. Originally a single pier capable of handling two small tankers, the terminal was enlarged over the years. Today, four sea islands, a series of steel-loading platforms welded together and standing in deep water, can accommodate eight super tankers. A second terminal was later built at Ju'aymah, about 15 miles north of Ras Tanura. Among the facilities built at the new terminal is a tank farm for storing oil before transfer to tankers, with 19 tanks that are the largest in the world, some capable of accommodating a 30-story building on its side. Loading lines transfer the oil to platforms mounted on piles some seven miles offshore. Between them, the Ju'aymah and Ras Tanura facilities can transfer as much as ten million barrels of oil per day onto the largest tankers afloat.

In 1975, Aramco initiated work to design, build and operate a master gas system to gather and process the natural gas produced in association with crude oil for use in the Kingdom's industrialization program. By the early 1980s, the system was producing and piping natural gas to petro- chemical plants and other industrial plants in the twin industrial cities at Jubail on the Gulf and Yanbu on the Red Sea. Using the natural gas as feed stock, the plants manufactured products that both fed other industrial operations and were exported. The natural gas collected by the master gas system was also used to generate electricity for urban and industrial use, to run desalination plants and to provide natural gas liquids for export abroad.

In 1989, the company began to explore for hydrocarbon reserves in previously unexplored areas, including the Rub' Al-Khali desert, leading to the discovery of new oil and gas reserves.

Throughout its first half century, the company, in addition to its oil and gas operations, was also involved in building housing, schools and other amenities for its growing work force.

As the company approached the end of its first 50 years in operation, it was undergoing a dramatic change. Starting in 1973, the Saudi Arabian Government began purchasing Aramco's assets from its shareholders, Socal (later Chevron), Texaco, Exxon and Mobil. By 1980, the Government owned 100 percent of the company's shares, although Aramco continued to operate and manage Saudi Arabia's oil fields for a time. In 1984, Ali Al-Naimi, who had worked his way up from a clerical job, was named the first Saudi president of the company. The process was completed when on November 8, 1988, a royal decree established the Saudi Arabian Oil Company - Saudi Aramco - to take over the management and operations of Saudi Arabia's oil and gas fields from Aramco.

Super tankers load crude oil at Ras Tanura's Sea Island in the Arabian Gulf for transportation to distant markets.

The transition from Aramco to Saudi Aramco has proven to be more than a mere change of name or key management. It has proved to be a milestone in the way Saudi Arabia operates its oil industry, one that has ushered in a new philosophy and method of managing the Kingdom's key resource.

Although Saudi Arabia already possessed a quarter of the world's known oil reserves at the time of Saudi Aramco's establishment, the company immediately launched a search for new oil and gas deposits. The purpose of the effort was to determine if additional hydrocarbon reserves existed outside Aramco's original concession area, which was largely restricted to the Eastern Province. Such new deposits could maintain the Kingdom's reserves at a high level. Indeed, despite the billions of barrels of oil produced by Saudi Arabia, the Kingdom's proven oil reserves have increased since the exploration program was begun in 1989. Another objective of the exploration effort was to seek to discover reserves of higher grades of petroleum than those being produced in the Eastern Province.

Saudi Aramco places great emphasis on manpower training and education.

The first new deposits were discovered in central Saudi Arabia, south of Riyadh. By the beginning of 1995, eleven new oil and gas fields had been discovered in this area. The crude oil from these fields is largely super-light and sulfur-free, allowing refining into high-value products at relatively low cost. In 1991, the company discovered natural gas deposits in northwestern Saudi Arabia and in the following two years found oil and gas fields at several sites along the Red Sea coastal plain.

The year after its establishment, the company also launched a five-year campaign to return Saudi crude oil production capacity to ten million bpd. Although it had been at that level a decade earlier, the decline in demand in the intervening years had forced the company to shut down several facilities. While actual production fluctuated with market demand and has historically been lower than the company's production capacity, Saudi Aramco felt that by raising its production capacity to the ten-million-barrel-per-day level, it would be capable of stepping in to meet any sudden rise in global oil demand and thus avert possible crises. In short, the higher production capacity would better position the Kingdom to more effectively implement its policy of ensuring market stability.

A Saudi Aramco environmental protection team practices spill containment in the Arabian Gulf.

As Saudi Aramco was in the process of recommissioning oil wells, gas-oil separator plants and associated gas-compression and crude handling facilities, the Gulf Crisis of 1990-91 resulted in the loss of 4.6 million bpd of crude exports in the international embargo on Iraq and occupied Kuwait. Within five months, the company raised its crude production by more than 60 percent to 8.5 million bpd, making up for about 75 percent of the lost Kuwaiti and Iraqi crude, and reversing a sharp increase in oil prices that was taking place during the winter of 1990-91.

In 1994, Saudi Aramco completed its program to raise production capacity to ten million bpd. As part of that program, it undertook to expand the East-West Crude Oil Pipeline, which transports oil from Abqaiq in the Eastern Province to Yanbu, 745 miles away. The pipeline's capacity was increased from 3.2 million bpd to five million bpd.

A company area planner draws plans for a pumping station and support installations for the East-West Crude Oil Pipeline.

To handle the increased volume of oil coming through the pipeline, the company built a fourth super tanker berth, additional storage tanks and other facilities at the Crude Oil Export Terminal in Yanbu, increasing its capacity by 60 percent to 4.2 million bpd.

The success of these projects was largely due to a new Saudi Aramco facility, the Exploration and Petroleum Engineering Center (EXPEC). Opened by the Custodian of the Two Holy Mosques King Fahd Bin Abdul Aziz in Dhahran in May 1983, the facility has been expanded over the years and is currently one of the largest and most advanced earth science facilities in the world. EXPEC and its affiliated Laboratory Research and Development Center have enabled Saudi Aramco to eliminate dependence on foreign oil companies for exploration and production technological support. The facility brings together top Saudi computer, exploration and petroleum engineers and makes available to them the most advanced technology for data collection, processing and interpretation to oversee implementation of projects.

Perhaps the greatest contribution Saudi Aramco has made since its establishment is the transformation of the nature of the Saudi oil industry. The industry had previously been primarily dedicated to producing crude oil for export. Since taking over, Saudi Aramco has focused on transforming itself into a multifaceted, vertically-integrated company involved in all aspects of the oil industry - from the wellhead to the gas pump.

Minister of Petroleum and Mineral Resources Ali Al-Naimi.

Although the first steps were taken back in 1984 with the formation of subsidiaries to provide crude oil transportation services and to acquire oil-storage facilities abroad, Saudi Aramco took the effort to a new level.

In late 1988, the company formed a joint venture with Texaco called Star Enterprise. Under the agreement, a Saudi Aramco subsidiary owns a 50 percent share in Star's three refineries in the United States, which have a combined capacity of 615,000 bpd, and a distribution network covering 26 states in the eastern and southern U.S., including the District of Columbia. Saudi Aramco also undertook to provide 600,000 bpd of crude oil to the refineries.

In 1991, Saudi Aramco acquired a 35 percent interest in SsangYong Oil Refining Company, South Korea's third-largest refiner and leading lubricant manufacturer, as well as a strong marketing presence in the Pacific Rim region. Under the terms of the agreement, Saudi Aramco will supply at least 70 percent of the crude used by SsangYong's 525,000-bpd refinery at Onsan.

Saudi Aramco entered into a third joint venture in 1994, this time with the Philippine National Oil Company (PNOC). It purchased a 40-percent stake in Petron Corp., PNOC's refining and marketing affiliate. Petron has more than 1,000 retail outlets and owns a 155,000-bpd refinery. Saudi Aramco is to supply 90 percent of the refinery's crude oil requirements. In March 1996, Saudi Aramco acquired a 50 percent interest in Motor Oil Hellas and Avin Oil, the refining and distribution affiliates of Greece's Vardinoyannis Group.

Saudi Aramco President Abdullah Jum'ah.

While securing outlets for its crude oil through such ventures, Saudi Aramco was at the same time working to diversify its other operations. One such project called for expanding the operations of its subsidiary, Vela International Marine Limited, to more effectively provide tanker service to carry Saudi crude throughout the world. Vela's operations expanded dramatically, from four regular tankers in 1989 to four ultra-large crude carriers, 19 very large crude carriers and four petroleum product carriers in 1995.

Additionally, Saudi Aramco has established a global marketing organization with subsidiary offices in New York, London and Singapore. These offices help monitor market developments and market Saudi crude oil, refined products, natural gas liquids (NGL) and sulfur to customers worldwide.

Saudi Aramco's status as the world's largest integrated oil company was strengthened on July 1, 1993, with a royal decree which merged into the company all of the Kingdom's state-owned refining, product-distribution and marketing operations, as well as the Government's half-interest in three joint-venture refineries. The seven refineries which the company now operates in Saudi Arabia have positioned it among the ranks of the world's top refiners.

Over the past eight years, Saudi Aramco has entered into joint ventures with Texaco in the U.S. and companies in South Korea, the Philippines and Greece.

While undertaking the monumental tasks it has successfully accomplished since its establishment, Saudi Aramco has paid particular attention to other matters that form the nucleus of its corporate philosophy - manpower development, product quality, safety and environmental conservation. It has implemented long-term programs in each of these fields and won numerous international awards for excellence.

Built on a proud legacy, Saudi Aramco looks to the future to continue to provide a secure source of crude and petroleum products for the world and thus ensure the economic stability of both the Kingdom and the world.

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