“The role of energy in global economic development is undeniable, but so is the environmental sustainability of the planet. For Saudi Aramco, addressing climate change is a critical objective,” Amin Nasser, President and CEO of Saudi Aramco – October 2016[i]
One could argue that no single company in the world has more to lose from climate change than Saudi Aramco (Aramco). Besides being the world’s largest company, with an estimated value exceeding 2 Trillion dollars, it presides over 266 Billion barrels of proven crude oil reserves (18% of global capacity) and produced an average of 10.2 million barrels/day in 2015[ii] (14% of global production). This is significant because the burning of oil derivatives (gasoline, diesel, kerosene) generates, among other things, CO2 the now infamous greenhouse gas that has been identified as a leading cause of climate change. The war on climate change has placed Aramco in a challenging position that will likely get worse in the near future when more stringent emissions policies come into effect.
Saudi Aramco brands itself as a “fully integrated energy and chemicals company”[iii] and it certainly lives up to that description. It is one of the largest refiners in the world, and has significant interests in power generation and bulk chemicals production that are integrated within its global network of operations. But just as our bodies rely on the flow of blood, Aramco relies on the flow of oil. Oil production remains the core of the company’s operations, and with costs of production around $5 per barrel, by far its most profitable. Aramco thus realizes that it cannot ignore the threat of climate change, and the impact it can have on its most critical product.
What are the key threats?
The threats climate change poses to Aramco are inter-related but follow a specific sequence.
- Regulations are imposed
First, emissions regulations are agreed on and imposed. This is not a new phenomenon but support for more stringent regulations has increased dramatically due to the findings from climate change research. These regulations can vary from caps on sulfur content in diesel products to caps on emissions by nation. These regulations present several operational challenges in terms of meeting an ever changing bar of standards imposed on Aramco’s products. Meeting those standards are both a technical challenge and a financial burden which require significant capital investments. Collectively, these regulations increase the cost of products to the consumer, incentivizing investments into alternatives.
- Alternatives emerge
Investments in alternative energy and research to develop more cost effective, and environmentally friendly, methods to harness renewables are fueled by the increases in price of traditional sources of energy, namely hydrocarbons. The increase in availability of cost-effective alternatives ultimately eats away at demand.
- Demand decays
Ultimately, the real existential threat to oil producers is that demand for their commodity will erode. This not only results in fertile ground for price wars, but will lower the value of their reserves. In the long run, this could lead to a scenario where it would simply be too costly to extract oil from the ground given the pricing environment.
What is Aramco doing about it?
In a keynote speech at the Energy Dialogue Conference in Riyadh (October 2016), Saudi Aramco President and CEO Amin H. Nasser outlined the key strategies Saudi Aramco is pursuing to minimize the carbon footprint of energy.
- Play an active role in the conversation
Nasser cited the Global Methane Initiative, Mission Innovation and the Carbon Sequestration Leadership Forum, or CSLF, as examples where Aramco is part of the global mission to address climate change and reduce greenhouse gas.
- Adopt a comprehensive carbon management strategy
“..helping to support the Kingdom’s efforts in energy efficiency that is focused on all end-user sectors; expanding gas supplies; focusing on developing renewables; and boosting research and development of win-win technologies that could dispose of carbon while turning it into beneficial products.”
- Invest in renewables
“In renewables, we plan to play a role in helping the Kingdom achieve its ambition to become a solar powerhouse,”
- Forge strategic partnerships
Nasser said that, “as part of a leading industry response to climate change, Saudi Aramco has partnered with nine international oil companies to form the Oil and Gas Climate Initiative, or OGCI, whose members represent 20% of the world’s oil and gas production.”
What else can be done?
While I find the plans detailed above to be quite thorough, I do believe the following points would also help in achieving the stated objectives:
- Capability building
By investing heavily in R&D and building the capabilities required to succeed in a clean fuel regulatory environment, Aramco can position itself to take advantage of new opportunities that will emerge with stricter regulations.
- Integrate more fully and further downstream
Integrating down the value chain into refining and distribution will allow Aramco to protect its market share in downward cycles and more volatile markets.
- Self-impose stringent emissions standards
By imposing on itself the highest environmental standards, Aramco will be able to access different markets that may have more stringent regulations at any given time.
[i] Saudi Aramco Press Release, 11/1/2016 (www.aramco.com)
[ii] OPEC Statistical Bulleting, 2015 (www.opec.org)
[iii] Saudi Aramco 2016 Annual Report (www.aramco.com)