How Aramco Became the Biggest Company in the World | WSJ

Summary

The video script details the rise of Saudi Aramco, the world's most profitable company, from its founding in the 1930s to its 2019 IPO. It discusses how Aramco capitalized on the 1970s oil crisis, expanded globally, and became a dominant force in oil markets. However, changing dynamics like the US's resurgence as an oil producer, increased efficiency, and the shift to cleaner energy sources are challenging Aramco's growth, prompting its IPO as part of Saudi Arabia's economic diversification.

Takeaways

• 🌐 Saudi Aramco is the world's most profitable company, with major infrastructure supporting its oil and natural gas business.
• 📉 In 2018, Aramco produced a record 13.6 million barrels of oil per day, surpassing any other company globally.
• 💰 Aramco's IPO in 2019 valued the company at $1.7 trillion, marking the largest public offering in history.
• 🔍 Analysts question Aramco's ability to sustain growth necessary to satisfy investors due to changing market dynamics.
• 🏜️ The company was founded in the 1930s in a desert with no natural rivers or significant vegetation.
• 🤝 In 1933, Saudi Arabia's leader IBBEN SAUD struck a deal with SoCal (Standard Oil of California) to search for oil.
• 🚢 By 1939, Aramco's first shipment of oil was exported to global markets from Ras Tanura.
• 📉 The 1970s saw a pivotal shift in the oil market with U.S. oil production decline and increased dependency on foreign oil.
• 🛑 The 1973 oil crisis, exacerbated by the Arab-Israeli War, led to an oil embargo impacting the U.S. and its allies, significantly raising oil prices.
• 🏛️ Saudi Arabia gradually increased its control over Aramco, eventually fully nationalizing it by 1980.
• 🌍 Aramco expanded globally in the 1980s, with significant investments in refineries and storage in Asia, coinciding with rising demand in the region.
• 📈 The early 2000s witnessed a historic rally in oil prices, driven by supply disruptions and demand from emerging markets.
• 📉 The U.S. resurgence as a major oil producer, advancements in fracking technology, and increased energy efficiency have challenged Aramco's dominance.
• 🌿 The shift towards cleaner energy and ESG investments has impacted oil stocks, reflecting a changing global attitude towards fossil fuels.
• 💼 Aramco's IPO in 2019 was part of a broader strategy to diversify Saudi Arabia's economy beyond oil.

Q & A

What is the significance of the dark spots on the map in relation to Saudi Aramco?

The dark spots on the map represent deep reservoirs of oil and natural gas, which are the lifeblood of Aramco's business and the global economy.

How much oil did Saudi Aramco produce in 2018?

In 2018, Saudi Aramco produced 13.6 million barrels of oil a day, more than any other company.

What was the valuation of Saudi Aramco's IPO in 2019?

Saudi Aramco's IPO in 2019 valued the company at 1.7 trillion, making it the world's biggest ever public offering.

What challenges does Aramco face in sustaining its growth according to some analysts?

Some analysts say Aramco may not be able to sustain the kind of growth it needs to keep investors happy due to changing market conditions and forces.

How did the discovery of oil in Saudi Arabia impact the global economy?

The discovery of oil in Saudi Arabia led to the country becoming a major global supplier, which significantly impacted the global economy by providing a crucial energy resource.

What was the role of OPEC in the 1970s oil crisis?

OPEC played a pivotal role in the 1970s oil crisis by negotiating higher oil prices and imposing an embargo on countries supporting Israel, leading to a significant increase in oil prices.

How did Saudi Arabia increase its control over Aramco in the 1970s?

Saudi Arabia increased its control over Aramco in the 1970s by negotiating deals to buy increasing percentages of the company, eventually completing the purchase for all of Aramco in 1980.

What strategies did Aramco employ to expand beyond Saudi Arabia's borders?

Aramco expanded beyond Saudi Arabia's borders by setting up joint ventures and establishing refineries and petrochemical facilities in countries like South Korea, Japan, and China.

What factors contributed to the historic rally in oil prices in the 2000s?

The historic rally in oil prices in the 2000s was driven by supply disruptions in the Middle East and increasing demand from emerging markets like India.

How has the rise of the U.S. as a major oil producer affected Aramco?

The rise of the U.S. as a major oil producer has increased competition for Aramco, as the U.S. has found new ways to extract oil and has become less reliant on foreign oil imports.

What is the impact of increased efficiency in cars and homes on Aramco's business?

Increased efficiency in cars and homes has led to a decrease in demand for oil, which poses a challenge to Aramco's business as it means less oil is needed to fuel transportation and power homes.

Why did Aramco consider an IPO in 2016?

Aramco considered an IPO in 2016 as part of an effort to diversify the company's economy beyond oil and to attract investment in a changing energy market.

Outlines

00:00

🌏 The Rise of Saudi Aramco and its Global Impact

This section of the video script outlines the growth and significance of Saudi Aramco, the world's most profitable company, highlighting its vast oil and natural gas reserves. Aramco's history dates back to the 1930s when the kingdom's leader, IBBEN SAUD, partnered with Standard Oil of California (SoCal) to search for oil. After several unsuccessful attempts, they struck oil, leading to the construction of a pipeline and the first shipment of oil from Saudi Arabia in 1939. The script also discusses the pivotal role Aramco played in the global oil market, especially after the 1970s when U.S. oil production began to decline and the demand for oil surged, leading to OPEC nations, including Saudi Arabia, to exert significant control over oil prices.

05:00

📈 Aramco's Expansion and the Shift in Oil Dynamics

This paragraph details Aramco's transformation into a global conglomerate following its acquisition by the Saudi state in the 1980s. The company expanded rapidly, venturing beyond Saudi Arabia to establish refineries and petrochemical ventures in Asia, particularly in South Korea, Japan, and China, capitalizing on the region's growing demand for oil. The script also touches on the impact of geopolitical events, such as the Arab-Israeli War, on oil prices and how Aramco leveraged these events to its advantage. The narrative shifts to discuss the challenges faced by Aramco in the 2000s, including the resurgence of the U.S. as a major oil producer and the global shift towards cleaner energy sources, which have put pressure on oil companies to adapt to a new market reality.

10:04

🏦 Aramco's IPO and Future Prospects

The final paragraph of the script discusses Aramco's initial public offering (IPO) in 2019, which was part of a broader strategy to diversify Saudi Arabia's economy beyond oil. The IPO was launched on the Tadawul stock exchange in Riyadh, primarily targeting Saudi investors. The script raises questions about Aramco's future plans, including whether it will sell more shares on international markets as initially intended. The paragraph concludes with a look at the broader challenges faced by the oil industry, such as the need to compete in a market that is increasingly focused on clean energy and the growing influence of environmentally conscious investment funds.

Keywords

💡Saudi Aramco

Saudi Aramco is the state-owned oil company of Saudi Arabia and is recognized as the world's most profitable company. It plays a pivotal role in the global economy due to its vast reserves of oil and natural gas. The video script highlights its historical significance and its evolution from a single well to the largest oil producer globally, emphasizing its impact on the world's energy markets.

💡Infrastructure

Infrastructure, in the context of the video, refers to the fundamental physical and organizational structures needed for the operation of Saudi Aramco. This includes facilities for extracting oil and natural gas, pipelines, refineries, and distribution networks. The script mentions the major infrastructure of Aramco, which is crucial for its operations and global energy supply.

💡Oil Reservoirs

Oil reservoirs are subterranean regions with significant accumulations of hydrocarbons, which are the foundation of Aramco's business. The script describes these dark spots to the east as deep reservoirs that are vital for the company and the global economy, illustrating the geographical concentration of Aramco's resources.

💡IPO (Initial Public Offering)

An IPO refers to the first sale of stock by a company to the public. In the video, Aramco's IPO in 2019 is highlighted as the world's biggest ever public offering, valuing the company at 1.7 trillion. This event signifies a major milestone in Aramco's journey and its strategy to diversify and modernize the Saudi economy.

💡OPEC (Organization of the Petroleum Exporting Countries)

OPEC is an intergovernmental organization of petroleum exporting nations that negotiates oil prices and affects the global oil market. The video discusses how OPEC, with Saudi Arabia as a key member, played a significant role in the 1973 oil crisis and in shaping the future of oil markets.

💡Fracking

Fracking, or hydraulic fracturing, is a method used to extract oil and gas from shale rock. The script mentions the resurgence of the U.S. as a major oil producer due to advancements in fracking technology, which has allowed for increased oil production and has impacted global oil prices and Aramco's market position.

💡Energy Efficiency

Energy efficiency refers to the reduction in the amount of energy required to provide a particular service, such as transportation or heating. The video notes an increase in the average fuel economy of cars in the U.S., which is a measure of energy efficiency, and how it has affected the demand for oil.

💡Clean Energy

Clean energy sources are those that have minimal impact on the environment, such as solar, wind, and hydroelectric power. The script discusses the shift towards cleaner energy sources and the challenges this presents for oil companies like Aramco, which must now compete in a market that values environmental sustainability.

💡ESG Funds

ESG stands for Environmental, Social, and Governance criteria, which are used by investors to screen potential investments for their ethical impact and sustainability practices. The video mentions that investors are increasingly favoring ESG Funds over oil stocks, reflecting a broader trend towards responsible investing.

💡Diversification

Diversification is the strategy of spreading investments across various financial instruments, industries, or countries to optimize returns and reduce risk. The script indicates that Aramco is considering an IPO as part of efforts to diversify the Saudi economy beyond oil, highlighting the company's response to changing market dynamics.

💡Geopolitical Uncertainty

Geopolitical uncertainty refers to the instability or unpredictability in global politics that can affect markets and economies. The video discusses how geopolitical events, such as the Arab-Israeli War, have historically influenced oil prices and Aramco's strategic decisions.

Highlights

Saudi Aramco is the world's most profitable company.

Aramco's oil and natural gas reserves are vital to the global economy.

In 2018, Aramco produced 13.6 million barrels of oil a day.

Aramco's IPO in 2019 valued the company at $1.7 trillion.

Analysts question Aramco's ability to sustain growth for investors.

Aramco was founded in the 1930s in a barren desert.

The kingdom's leader, IBBEN SAUD, struck a deal with SoCal for oil exploration.

SoCal and Texaco discovered oil in 1938, leading to commercial production.

Aramco's oil began reaching global markets in 1939.

U.S. oil production decline in 1970 led to increased demand for Aramco's oil.

OPEC's formation and actions in the 1970s influenced global oil prices.

The 1973 oil embargo by OPEC quadrupled oil prices.

Saudi Arabia began increasing its control of Aramco in the 1970s.

Aramco became fully owned by the Saudi state in 1980.

Aramco expanded globally in the 1980s, entering Asian markets.

Aramco's CEO Ali Al-Naimi diversified the company's operations.

Aramco capitalized on China's economic growth and oil demand.

The 2000s saw Aramco profit from a historic rally in oil prices.

The price of oil hit a record high of $147 in 2008.

The U.S. resurgence as an oil producer has impacted Aramco.

Efficiency improvements and a shift to cleaner energy challenge Aramco.

Aramco's IPO in 2019 was part of an effort to diversify Saudi Arabia's economy.

Transcripts

- [Narrator] This map shows the major infrastructure

of Saudi Aramco, the worlds most profitable company.

The dark spots clustered to the east

are deep reservoirs of oil and natural gas,

the life blood of Aramco's business and the global economy.

For nearly a century, Aramco's oil has powered

cars, planes, and industries,

and electrified homes around the world.

In 2018, the company produced 13.6 million barrels

of oil a day, more than any other company.

Then in 2019, Aramco's IPO valued the company

at 1.7 trillion,

in the worlds biggest ever public offering.

But the forces that propelled Aramco's growth

from a single well to the biggest producer in the world

are changing underfoot.

And some analysts say the company won't be able

to sustain the kind of growth it will need

to keep investors happy.

To understand these changes, you have to understand

how Aramco got so big in the first place.

The company was founded in the 1930s

on a barren tract of desert, with no natural river

or body of water and little vegetation.

- It was completely pre-modern.

I mean it really looked basically like it had

since the 1700s, the 1800s.

- [Narrator] The kingdom's leader IBBEN SAUD,

was low on cash to fund development,

so in 1933 he struck a deal with an American oil company.

Standard Oil of California, or SoCal,

won the right to search for oil

near the eastern coast, in Al Hasa.

Five years and several dry wells later,

SoCal and it's partner, Texaco, hit oil, a lot of it.

Quickly, well number seven was producing

commercial quantities,

around 4,000 barrels of crude oil a day.

Workers began construction on a pipeline to the sea.

By spring of 1939, the SoCal tanker, D.G. Scofield

docked at Ras Tanura and filled its first shipment

of oil to leave Saudi Arabia for the global markets.

The country with nothing to sell had found

what everyone wanted to buy.

Over the following decades, the American Group

found more and more mineral wealth beneath the Saudi sand.

By 1970, that oil would play a crucial role in a market

halfway around the world.

A market so big it would lift Aramco's profits

and push Saudi Arabia to alter the future

of oil markets everywhere.

What happened is that in 1970, Texas tapped out.

After more than a century of growth,

U.S. oil production began to fall.

At the time, Americans were driving to work

in gas guzzlers like these.

The average fuel consumption for this type pf vehicle

was 13 and a half miles per gallon.

To fuel these cars, the U.S. turned overseas.

You can see it on this chart, which shows the countries

imports of crude oil.

Aramco, still an American company,

had plenty of oil to sell.

Wald said that between 1972 and 1973,

production grew from five point four million to

eight point four million barrels a day.

According to Aramco, in 1971, shipments of crude oil

and petroleum products from Ras Tanura

had surpassed one billion barrels a year.

Saudi Arabia and other oil producing nations

took notice of all this demand.

- OPEC, this organization of petroleum exporting companies,

which had been created in the 60s but didn't do anything

for years, they would essentially negotiate

with the big international oil companies,

like Exxon and BP and Shell,

and they would negotiate a price for oil.

And they were basically selling all of their oil

to these international companies that had

distribution outlets around the world.

And 1973 comes along and the countries say,

you know what, we know what's happening with demand.

We know that we're supplying most of your market.

We need a higher price for oil.

- [Narrator] When OPEC tried to raise prices,

the international companies said No.

So, Saudi Arabia's' oil minister Ahmed Zaki Yamani,

took a different approach.

- So right at that exact same time,

was the Arab-Israeli War and a lot of the countries in OPEC

wanted to basically help out their fellow Arab countries

by raising the price of oil and both embargoing it

to the countries that were helping Israel,

namely the United States and its allies.

And the Saudis were actually the least interested

in doing this, but once it became clear that they

couldn't negotiate an increase in the price of oil,

Yamani looked at this situation and he said,

we can use this political situation to our advantage.

- [Narrator] Here's Yamani in December of 1973.

- When the Israelis accept to withdraw

from the occupied territories,

and the U.S. government guarantees

that decision,

then immediately we can lift the embargo.

This could happen anytime.

- [Narrator] The plan worked.

This chart shows the U.S. price for oil

before and after the embargo.

- [Newscaster] President Nixon said the gas crisis

has dissolved into a problem.

But it's a problem millions of motorists

are still trying to cope with in long lines

at their local gas stations.

- [Narrator] While America was reeling from the price shock,

Saudi Arabia was making plans to increase

its control of Aramco.

That year, the Kingdom set a deal to buy 25% of the company.

- And that was really when the tables turned

and it was very clear that it was no longer these

big international oil companies.

It was no longer the Americans.

It was the Saudis that controlled their oil

and controlled their commodity.

And shortly after that, in 1974, they negotiated to buy

another percentage of the company.

In 1976, they had more negotiations that led to them

eventually completing the purchase

for all of Aramco in 1980.

- [Narrator] Aramco was now fully owned by the Saudi state.

From this point forward, Saudi Arabia along with OPEC

would exert enormous control

over the price of oil everywhere.

In the early 80s, the company set forth on a

period of rapid expansion that would take Aramco

beyond the Kingdom's oil fields and borders

to new markets around the world.

- Ali Al-Naimi became the first Saudi CEO of the company,

so it was his vision that diversified

and really integrated the company

and turned it into something that could make money

in all parts of the value chain,

not just the pumping the oil out of the ground.

So they first went to Korea and they negotiated

with the South Koreans and they started

a joint oil refinery called S-OIL in South Korea.

They also negotiated in Japan and they also have a big

oil storage facility in Japan.

Then finally they got the China, and they have several

joint ventures in China for refineries and petrochemicals.

- [Narrator] The timing was right to capitalize

on a surge in demand for oil.

Here's a look at China's GDP over those decades.

- They set up in Asia at exactly the moment

when Asia took off as a consumer

and they were really well positioned.

And in fact, Saudi Arabia is currently

the largest oil supplier to China right now.

- [Narrator] By the 2000s, it was a global conglomerate

positioned to profit from a historic rally in oil prices.

Supply disruptions in the Middle East and demand

in emerging markets, like India,

drove the price to new heights.

- Price spikes are becoming a way of life

in the United States.

- Geopolitical certainty in a number of countries

in the Middle East and Africa will continue

to keep markets on edge.

- [Male Newscaster] Gas prices are hitting new highs.

- We gotta live with it.

They're gonna keep going up.

- [Narrator] In 2008, the price of oil

hit a record high of $147.

In the decade since that peak,

many of the factors that lead to Aramco's rise,

have shifted.

For one, the U.S. came back online

as a major oil producer.

By 2008, U.S. producers had found new ways

to extract oil from places they had thought were tapped out,

as well as some new areas.

Production surged.

This is Nansen G. Saleri, a former Aramco executive.

- What the

U.S. producers have done though is extraordinary.

And with the benefit of new engineering capabilities,

especially the fracking capabilities,

they're able to produce significant amounts of oil

and today you look at the U.S. production,

it's approaching 13 million barrels per day.

- [Narrator] Meanwhile, cars and homes had become

more efficient, curbing growth in demand.

The average fuel economy for new cars in the United States

is now closer to 25 miles per gallon.

That's almost twice what it was in 1970.

And at the same time, buyers have slowly

started shifting toward cleaner energy sources.

- In the new world, it's all about clean BTUs,

clean energies, so Aramco now has to compete

in the clean BTU era.

Nobody in the industry, including the most successful

IOCs, including the unconventionals,

they cannot say, oh we are totally blind

to what's going on as far as global warming,

as far as CO2 emissions, or greenhouse emissions.

That's somebody else's problem.

That is not an answer anymore.

- [Narrator] Investors are pumping cash into assets deemed

more environmentally friendly, such as so-called ESG Funds,

which focus on environmental, social and governance factors.

Investors say all of these factors

have threatened oil stocks.

Here's the performance of oil stocks

compared to the broader market.

This was the stage being set in 2016

when Aramco said it was considering an IPO

as part of an effort to diversify

the company's economy beyond oil.

After setbacks, Aramco launched its IPO in 2019,

selling 1.5% of itself on the Tadawul in Riyadh,

mostly to Saudi Investors.

It's unclear if the company will sell more

on international markets

and reach the five percent like it had planned.

(upbeat music)