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BOOK REVIEW: What SA can learn from Saudi Arabia's oil barons

Jun 28 2018 06:02
Ian Mann

Saudi, Inc.: The Arabian Kingdom's Pursuit of Profit and Power, by Ellen R. Wald

Quick. What is the world’s most valuable company? Apple? Amazon? ExxonMobil?

Not even close. Saudi Aramco is the most valuable company in the world by a long shot, with estimates beginning on the other side of $2 trillion. That is more than double the value of Apple, more than double that of Amazon, and six times that of ExxonMobil. It's more than all three combined!

This book is about the history of Saudi Arabia and Saudi Aramco together, because the history of neither the country nor the company can be written separately.

The book does not address the reign of King Salman, which began in 2015; the power of the Crown Prince; the social liberalisation; Vision 2030; or the intended Saudi Aramco initial public offering.

Rather, it paints a picture of the fortunes of a remarkable company from which important lessons can be learned. It chronicles the growth and operations of this parastatal, extractive enterprise and industrial behemoth.

Chest of coins

The state of Arabia, in the first decades of the 20th century, was so poor and underdeveloped that the King of Saudi Arabia's wealth, and that of the realm, was kept in gold coins, cash, and other precious metals.

It all fitted into chests that Finance Minister Abdullah Sulaiman reportedly stored in his family home. These funds needed to be distributed among the king's subjects in politically expedient ways, so as to ensure continued loyalty from nomadic and settled tribesmen.

What is today Saudi Aramco started as a Saudi Arabian concession to drill for oil, granted to an American company under the name 'Arabian American Company' – Aramco.

It began as a huge gamble. Previous geological surveys for signs of petroleum deposits in the Arabian Peninsula were disappointing, but not conclusively negative. Oil had already been discovered in Iran in the early 1900s by the later-named BP, and subsequently in small quantities in Bahrain.

The Saudi king at the time was so sceptical that oil would be found, that he asked the engineers and geologists who would be surveying the concession area to let him know if they found any underground water cisterns that could be useful to his people.

From zero to 200 000

Several years and $10 million later revealed nothing of commercial value.

In 1938, the team in Arabia decided to deepen one of the 'dry' wells by another two hundred feet, and found oil. By 1940, about 20 000 barrels of oil per day were being produced, and the company had begun building housing and offices in Dhahran on the eastern coast of Saudi Arabia.

With the end of World War II, the demand for petrol remained as high as during the war. Not only was Western Europe rebuilding its devastated cities, but the American military presence around the world necessitated consistently available petroleum products. Aramco increased oil production to over 200 000 barrels per day in 1947.

The economics of oil had to be managed. If oil prices spiralled upward quickly, it could damage the economies into which the oil needed to be sold.

At the same time, the luxuries of modernity were needed and wanted by Saudi royalty for themselves, and for the country. The oil finds were superbly managed so they produced vast amounts of money for the company, and the Saudi treasury.

Catapulted to modernity

Over time, the kingdom was able to leverage its assets to obtain the best from around the world, in a wide variety of domestic developments and enterprises. This wealth enabled Saudi Arabia to spend lavishly and quickly on its building programme - the development of modern cities, airports, hotels, universities and other amenities that catapulted large parts of the country into modernity.

What Saudi Arabia realised it did have, was an immense quantity of a very desirable resource: petroleum. What it lacked was the many resources needed to get the most out of this oil wealth.

Perhaps the most obvious lesson to any country was this realisation: they needed to buy what they did not have from the outside, and then to make it their own. And this theme runs through their modern economic history.

For the royal family, it meant sending princes abroad for education at the finest Western institutions like Princeton and Oxford. For Aramco, it initially meant encouraging Saudi workers to accept training as welders, carpenters, machine repairmen, and general workers.

Later, it entailed sending promising young Saudis abroad to university to learn geology, petroleum engineering, logistics, and law.

Nationalisation debates

There was considerable pressure on the King to nationalise Saudi Arabia’s oil assets and Aramco. Mexico had nationalised their subsoil resources in 1917. Iran’s oil industry was nationalised in 1954, and Egyptian President Gamal Abdel Nasser nationalised the Suez Canal Company in 1956. Iraq, Iran and Libya had nationalised the foreign oil company assets within their borders. All have fared poorly.

But the Royal House of Saud blocked this nationalistic fervour, in favour of engaging their American partners for their business acumen and technical prowess. Eventually Aramco was purchased from the American company – purchased, not taken – in what was described as an "amicable deal", and the company was renamed Saudi Aramco. The board of directors named Ali al-Naimi as the company’s first Saudi CEO.

Al-Naimi is an example of the Aramco development process. Born into a desert Bedouin family, he benefited from an Aramco-sponsored university education. He returned to the company as an entry-level geologist, learned the oil business and corporate management, and rose to the very top.

Managers at Aramco administered the company like an international, not local oil company, with the highest of international standards in every part of the business. This distinction has been the key to Aramco's success.

Aramco has been Saudi Arabia's greatest source of revenue as well as innovation, and has taken its place among the great multinational energy companies of the world. It is a leader in exploration and production; the initial processing and movement of crude oil, natural and liquid gases.

It operates refineries, petrochemical plants, as well as marketing outlets, and product distributors. Its portfolio now includes fracking and solar energy.

Aramco's strategy has always been to enter into joint ventures with other companies who have greater expertise, so Aramco could gain knowledge and proficiency. For this purpose, it has invested in partners in the Philippines, Japan and China, and French partners in Saudi Arabia.

Additionally, the actions and decisions of the kings of Saudi Arabia regarding their oil assets have, without exception, taken a very long-term view of the kingdom’s economic wellbeing.

South Africans have much to learn from them.

Readability       Light --+-- Serious

Insights                      High ---+- Low

Practical           High ----+ Low

  • Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Executive UpdateViews expressed are his own.

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ian mann  |  oil  |  saudi arabia


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