Divisions among Libya’s political, security, and financial institutions remain a key obstacle to the political transition process, and foreign powers still stoke many of these divisions for their own strategic interests.
The scale of emerging collaborative efforts between Saudi Aramco and the Abu Dhabi National Oil Company illustrates the tremendous potential for further coordination between the two companies. Their overseas investment initiatives are beholden to a number of risks, but they could also serve to lay the framework for a Saudi-Emirati energy partnership that accelerates each company’s ambition of challenging global oil and gas majors.
Khalid al-Falih, Saudi minister of energy, industry, and mineral resources as well as chairman of Aramco, declared in February that Aramco aims to scale its operations to compete with the major international oil companies of the world. Almost a year earlier, a more subtle yet parallel vision was articulated by ADNOC Chief Executive Officer Sultan Ahmed Al Jaber, who announced that a drive to “enhance our commerciality” was taking shape at ADNOC. These statements indicate a changing dynamic in which the two national oil companies are striving to rebrand themselves as organizations that operate like powerful private international oil companies such as Exxon Mobil and Royal Dutch Shell.
Saudi Aramco dwarfs ADNOC in terms of its revenue and production capacity, but both companies share a long-term development strategy of downstream expansion primarily targeting Asian markets. What ADNOC lacks in size it makes up for with its ability to commit capital to overseas investments in downstream businesses. The most significant demonstration of this dynamic is a commitment to jointly hold a 50 percent stake in the Ratnagiri refinery in India’s Maharashtra state. This facility is expected to have a capacity of 1.2 million barrels per day (mb/d) when completed, and it would secure a massive customer for Saudi and Emirati crude – by 2035, the Indian market is projected to constitute the largest portion of global demand for oil imports. In April, unconfirmed reports claimed that Aramco and ADNOC had entered talks to jointly purchase up to 25 percent of Reliance Industries, the largest refiner in India and owner of the Jamnagar refinery, the world’s largest oil processing site. Since Aramco-ADNOC investment in India’s downstream sector is not unprecedented, the reports may indicate a strong likelihood that the companies will perpetuate this model in the future.
The return of U.S. sanctions on Iranian oil imports created a prime opportunity for Aramco and ADNOC to capture additional market share. Buyers rushed to secure alternate supplies upon learning that exemption waivers for sanctioned products would not be extended. Similarities between the grade of some Saudi and Iranian crude products may present Saudi supplies as an alternative, albeit pricier option. India has already begun to offset the loss of Iranian imports with increased purchases from Aramco. While China’s broader economic confrontation with the administration of President Donald J. Trump has hardened its attitude toward halting imports from Iran, it has nonetheless found a viable alternative in Saudi Arabia.
Exploiting these opportunities has allowed Aramco to continue its downstream expansion strategy by investing in Asian refining and petrochemical businesses. In April, Aramco purchased 17 percent of South Korean refiner Hyundai Oilbank for $1.25 billion as South Korea looked to replace its imports from Iran. With fully operational refining joint ventures in China, Aramco will likely expand this model to other areas of East Asia to secure buyers of its crude exports.
ADNOC has pursued its own strategy in capturing Asian market share outside of its commitments to joint downstream investments with Aramco, and its refined products have been an integral part of this plan. Prior to the return of sanctions on Iran, ADNOC made two announcements that it had secured long-term agreements to sell ADbase, its base oil product, to customers in India and China. In the near term, however, the company remains keen to present itself as a reliable supplier; Japanese refiners increased imports from ADNOC as they halted imports from Iran.
Despite its grand designs, ADNOC’s limited production capacity relative to that of Aramco means it may struggle to compete with a resumption of Iranian exports or other volatility from a more well-supplied market in the future. ADNOC may be trying to insulate itself from any such eventuality by building on relationships it has developed through awarding domestic concessions. ADNOC has also established an oil-trading joint venture with Italy’s Eni and Australia’s OMV. Its distribution arm has also begun opening service stations in Saudi Arabia, adding a unique regional dimension to ADNOC’s international ambitions.
European Union oil imports from Saudi Arabia have historically been low, and those from the UAE are negligible. However, Europe’s international oil companies have long-standing business relationships with Aramco, and the broadening and deepening of these ties is a sizeable component of downstream expansion. In August 2018, Aramco gained full ownership of its Arlanxeo subsidiary – a joint petrochemical venture with German firm Lanxess. Europe may be a potential venue for further cooperation between Aramco and ADNOC if the OPEC and non-OPEC, or OPEC+, agreement does not endure, and EU consumers lose faith in the quality and reliability of Russian energy supplies. A high-profile incident in which over 5 million barrels of hydrochloride-contaminated crude oil were pumped to Europe via the Druzhba pipeline has raised concerns about the quality of Russian supplies. This may provide enough incentive for refiners to seek alternatives while fallout from the contamination crisis continues. Aramco recently finalized a deal to supply Poland’s largest refiner, PKN Orlen, which had previously received crude from the Druzhba, and may expand on other European deals with the opening of a London trading office.
The emergence of the United States as a net exporter of oil has generated enormous competition for Aramco and ADNOC, but the U.S. industry is also ripe for Gulf investment. For example, the Motiva refinery in Port Arthur, Texas is the largest refinery in the United States and is now fully owned by Aramco. With a capacity of 603,000 b/d, it is even larger than Aramco’s Ras Tanura refinery in Saudi Arabia. In January, Aramco’s president and chief executive officer, Amin Nasser, expressed an appetite for natural gas investment in the United States, which materialized in May as a 20-year liquefied natural gas purchase deal from Sempra Energy as well as the purchase of a 25 percent stake in Phase 1 of a Port Arthur production facility. This signals that Aramco’s investments in U.S. energy companies are continuing despite talk of anti-OPEC legislation in Congress.
Increased integration with global markets in the downstream sector could pay lofty dividends for Aramco and ADNOC. Yet, there are considerable risks to their success. Should premiums for Arab crudes keep rising, some analysts have suggested that a “buyer’s club” may emerge from the Asian bloc of countries unable to import Iranian crude. This would require significant political will on the part of importers, which may coalesce if inventories decrease as a result of OPEC+ quotas. Collective negotiation of crude purchases would harm the advantage Aramco and ADNOC currently enjoy. New U.S. crude products being shipped to Asia may also place further downward pressure on prices. Beyond crude exports, the two companies may also face competition from other Gulf state national oil companies for investment in Asian downstream projects, which is perhaps best exemplified by the 200,000 b/d Nghi Son refinery project in Vietnam. The $9 billion facility is 35.1 percent owned by the Kuwait Petroleum Corporation and was specifically engineered to process Kuwaiti export crude to help ensure that Kuwait can secure long-term contracts to supply the refinery and the growing Vietnamese market well into the future.
Regionally, continued instability constrains Iraq’s recovering oil and gas industry, but its rehabilitation may constitute a threat to the aspirations of the Aramco-ADNOC duo. Baghdad has little interest in adhering to OPEC+ quotas, with which it barely complies. This motivation stems in part from the need to fund reconstruction efforts and also from the renewed interest international oil companies are expressing in Iraq. Aramco has expressed enthusiasm for natural gas exploration in Iraq and construction of a pipeline running through Kuwait into Saudi Arabia. This would be an asset for Aramco’s penetration of the gas industry and could help Riyadh in its efforts to regain geopolitical influence aimed at distancing Baghdad from Tehran.
Saudi Arabia also requires energy consumption discipline at home to help stabilize prices. As the kingdom is one of the few countries that uses oil for power generation, the looming summer heat, during which air conditioning units work overtime, will push power demand. The kingdom does not want to use subsidized oil for power generation that could instead be exported and sold for profit. Riyadh has succeeded in reducing consumption in recent years, but levels remain high enough to cause concern when Aramco already bears most of the burden for OPEC+ quotas.
Closer coordination between Aramco and ADNOC could provide some insulation from these risk factors, and Saudi Arabia and the UAE could stand to benefit enormously from cooperation between their national oil companies.
Joint investment in downstream megaprojects, concerted forays into the gas industry, and exploration of expanded services in regional markets will be necessary for either company to increase its visibility as a global brand. What remains to be seen, however, is if the companies’ drive to operate more like international oil companies will increase their desire to engage in competition rather than strategic cooperation.
Muqtada al-Sadr’s announcement that he will boycott upcoming parliamentary elections has thrown the electoral process into disarray at a time when the future stability of Iraq depends on legitimate and transparent elections.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More