Case Study | Overview of Saudi Aramco

Saudi Aramco case study
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Table of Contents
Introduction......................................................................................................................................3
Overview of Saudi Aramco.............................................................................................................3
Micro and Macro environment........................................................................................................3
-SWOT.........................................................................................................................................3
-Porter’s Five Force.....................................................................................................................4
-PESTLE......................................................................................................................................6
-Resource Based Analysis...........................................................................................................7
Past Strategic Decisions...................................................................................................................9
Strategy 1: Acquisition of SABIC...............................................................................................9
Strategy 2: Global Chemicals Strategy........................................................................................9
Strategy 3: Shifting strategy in China........................................................................................10
Strategy 4: Downstream Shifting Strategy................................................................................10
Recommendations..........................................................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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Introduction
Strategy is considered as a coordinated plan of action and inaction that is constructed based on
the values, mission and vision. However, the strategic decisions are undertaken based on the
environmental changes, desire to outperform the competitors and to learn and improve
organisational capabilities (Whittington, 2014). In the context of undertaken strategic decisions,
it is important to stress the strategic management tools and analysis. In this paper, Saudi Aramco,
national petroleum and natural gas company in Saudi Arabia would be analysed based on two
ideas such as defining strategy and serving customers.
Overview of Saudi Aramco
Saudi Aramco is based in the Kingdom of Saudi Arabia and is thought of as a very large
integrated oil and gas companies (Saudi Arabian Oil Co., 2019). Apart from its home country,
the company also operates 20 international locations, and provides employment to around 75000
people (approx). In own words of the company it is a leader in the production of chemicals and
energy that helps to drive the global commerce (Saudi Arabian Oil Co., 2019). Currently the
vision of Saudi Aramco is to focus upon making the best usage of the income along with
enhancing the diversified and sustainable expanding of the Kingdom’s economy along with
making the Saudi energy sector more vibrant and competitive (Armaco Overseas Company,
2019). On the other hand, the overarching mission of the company is to “continue to deliver on
their core mission of reliably supplying energy to the Kingdom and the world, and continue to
progress towards becoming the world’s leading integrated energy and chemicals enterprise, a
top refiner and a creator of energy technologies” (Saudi Arabian Oil Co., 2019).
Micro and Macro environment
-SWOT
Strengths
 Strong financial backbone
 Positive relationship with the
government in its home country
Weaknesses
 Dependence on the sales of only one
commodity, i.e. crude oil
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 Usage of advanced technologies
 Lower cost of production
 Lack of transparency regarding
corporate governance
Opportunities
 High price of crude oil
 Sufficient capital to invest
 Increasing demand of crude oil across
the globe
Threats
 Constant emphasis on the renewable
and non- conventional energy sources
 Prospective slow down of crude oil
because of the recent increased price of
oil
One of the biggest strengths of Saudi Aramco is its strong financial backbone. In the first half of
2019, the company announced its net income which was around $ billion (in the 1st half of 2019)
(Saudi Arabian Oil Co., 2019). Beside this, the free flow of cash for the same period was $38
billion with a reduced capital expenditure at $14 billion. Apart from this, the company enjoys a
low cost production due to the greatest number of oil fields throughout the nation being free
flowing (EIA, 2019). This has lowered the cost of production to as low as $3.5 per barrel. Also,
the company used advanced technologies at each step of production process along with enjoying
operational autonomy. Despite all its strengths, it still has some weaknesses including its core
dependence on crude oil, which in a way can make it vulnerable to threats like facing loss if the
demand of non-conventional energy sources increases. On the other hand, the increasing the
current increasing oil price as well as demand can pose as great opportunities for Saudi Aramco.
Also, due to the current boost in cost of oil, Saudi Aramco has the prospective of getting enough
funds of their capital investment.
-Porter’s Five Force
The application of Porter’s Five Forces could prove to be effective in providing an overview of
the market condition and situation of Saudi Aramco in the O&G industry.
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Figure 1: PESTEL Analysis
Source: Self
Bargaining Power of Suppliers: The bargaining power of suppliers within Saudi Aramco is
considered to be low in nature. It is majorly due to the fact that Saudi Aramco does not need to
search out for suppliers to acquire raw materials as they have their own supplier (Saudiaramco,
2019). The business of Saudi Aramco is involved in activities related to drilling and exploring of
oil which in turn makes it easier for the organisation to source its own raw materials required to
supply abundant amount of oil by them.
Bargaining Power of Buyers: As compared to situation of suppliers, the power of bargaining of
customers in Saudi Aramco is also low. The management of Saudi Aramco enjoys a monopoly in
the field of oil and gas backed by government support (Defterios and Cavaliere, 2019). This
makes it easier for Saudi Aramco to control and monitor the prices and market share resulting in
making difficult for buyers to gain control of the market. Moreover, being a member of OPEC,
Saudi Aramco holds the power of production and oil pricing making it difficult for buyers to
have any form of impact on the prices.
Competitive Rivalry: The nature of competitive rivalry faced by Saudi Aramco is medium. It is
primarily due to the fact that the domestic oil market is controlled and monitored by Saudi
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Porter's
Five
Forces
Bargaining
Power of
Buyers -
LOW
Bargaining
Power of
Suppliers -
LOW
Competitive
Rivalry -
MEDIUM
Threat of
New
Entrants -
LOW
Threat of
Substitutes
- VERY LOW

Aramco which in-turn makes it easier for them to gain first-mover advantage in terms of field
expansion and refining (Lawler, Rashad and Azhar, 2019). However, there are numerous oil
companies that somehow impact on the performance level of Saudi Aramco is SABIC in terms
of finished goods (i.e., hydrocarbon products) and overseas giants such as Shell and BP.
Threat of New Entrants: The possibility of new companies entering the oil market is low. It is
largely due to the fact that oil industry is very intensive in nature making it difficult for new
companies to survive for longer period of time. Furthermore, it should also be taken into
consideration that setting up of production facilities, exploring and distribution of oil fields
require high level of investment.
Threat of Substitutes: The rate of alternative products in oil industry is considered to be very
low in nature. Though government authorities have been founding ways to encounter depleting
rate of petroleum through biofuels, nuclear power and solar energy, it had miserably failed to
overshadow the need and importance of petroleum products.
-PESTLE
The external environment for Saudi Aramco can be analysed by conducting a PESTLE analysis.
Political- The Saudi Arabian government has a strong hold over the business policies and
controls the business process for major oil companies. Saudi Aramco is a state owned
organization, and thus it enjoys certain political advantages while being strictly regulated by the
government regulations and policies (AlJazeera, 2019). It has been further noticed that the Saudi
Arabian government holds responsibility of the company even during external attacks (BBC-
News, 2019). However the political unrest and turbulences imposes challenges.
Economic- Saudi Aramco is considered as a leading company of oil across the globe and has
contributed to the Saudi Arabian economy. As an oil exporting country, the Kingdom ranks 18th
in respect of annual gross domestic product and earns a GDP of $683 billion in 2017. Saudi
Aramco has reported a profit of $111 billion in 2018 and oil contributed towards 90% of the
economy (John, 2019). At the same time, the country has extensive oil fields to hold 660,253
gallons of fluid. Moreover by employing more than 33 million people, it can be said that there is
significant opportunity of growth for the company. However the present challenges for the
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demand of natural gas have forced the firm to focus on the exploration of gas fields by the
company and restrain its oil exploration in the nation.
Sociological- The Kingdom of Saudi Arabia is ruled by the strong political and military power
held by the Monarchy which is based on Sunni Islam ideologies (BBC-News, 2019). The oil
boom has reduced the burden on the people. However the rapid westernization and rise of social
media has evolved the social cultural environment and encourages people from abroad to reside
and work in the country (Alhussein, 2017). The cultural changes impose certain challenges for
Saudi Aramco, but the opportunity to employ greater number of workers and foreigners might
prove to be beneficial.
Technological- The advancements in the technological field has set different challenges as well
as opportunities for major oil companies like Saudi Aramco. While the country faces challenges
in developing the domestic technology market, it has signed digitalization deals with foreign
corporations to innovate firm activities of companies like Saudi Aramco and even Uber (Buller,
2018). Similarly the growth of Information Technology projects has provided greater
opportunities and benefits to maintain and extensive supply chain and streamlines the activities
for the oil companies.
Legal- Saudi Aramco is a state owned corporation and hence enjoys the legal protection as well
as flexibility from the government. While the Kingdom is selling 5% of the Saudi Aramco in the
stock market to reform the economy of the country, the company has gained support from the
Supreme Council for Petroleum and Minerals (SCPM) (Raval and Omran, 2018). Although
Saudi Arabia has a strict legal system, it is evident, that Saudi Aramco has significant legal
backing and can strive further with such aids.
Environmental- Finally, it is essential to maintain sustainability and the environmental balance
for the oil companies. Although Saudi Arabia has a huge natural reserve for oil, environmental
depletion and pollution remains a significant challenge for companies like Saudi Aramco that
must be controlled effectively.
-Resource Based Analysis
The resource-based analysis is considered to be a managerial framework that has been used for
the determination of the strategic resources that a company can exploit in order to achieve
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sustainable competitive advantage. In this regards, the tangible or physical resources (such as
cash, vehicles, plants, equipment and investment) and intangible or non-physical resources (like
pre-paid expenses, patents, and goodwill, receivable) are important for the analysis (Madhani,
2015). Following is a resource-based analysis of Saudi Aramco.
Tangible Resources- Saudi Aramco contains the second biggest proven reserves of crude oil and
maintains the largest hydrocarbon network across the globe, called the Master Gas system (Saudi
Aramco, 2018). Saudi Aramco maintains more than one hundred gas and oil fields, including a
288.4 trillion standard cubic feet of reserve for natural gas in Saudi Arabia. The company also
manages the Ghawar field and Safaniya field as onshore and offshore oil field. In case of
technology, Saudi Aramco functions with Situ Steam Generation, PDC Bit Shear Cap
Technology, hydraulically powered coiled tubing tractors etc (Saudi Aramco , 2017).
Intangible Resources- Saudi Aramco has 230 patents in 2012 which has increased four times in
2013. One of the most recent patents includes the fluids to break rocky oil formations using
micro particles, techniques to remove carbon from fuels and docking station for mobile robots
within the oil fields (Arab News, 2018).
Capabilities- Saudi Aramco has established upstream capabilities with a strategically integrated
network in global downstream operations. The company uses state-of-the art technologies and
effective organisational capabilities to be the leading producer of energy and chemicals (Saudi
Aramco, 2018).
Resource-Based Analysis Saudi Aramco
Tangible Resources Master Gas system
Ghawar field and Safaniya field
Situ Steam Generation, PDC Bit Shear Cap
Technology, hydraulically powered coiled tubing
tractors
Intangible Resources 230 patents
Rocky oil formations using micro particles,
Techniques to remove carbon from fuels and
Mobile robots within the oil fields.
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Capabilities Upstream and downstream capabilities
Cutting edge technologies
Organisational capabilities
Past Strategic Decisions
Strategy 1: Acquisition of SABIC
Saudi Aramco and SABIC are two biggest oil-based companies operating in the Middle East.
They engage in intense competition in terms of manufacture and sales of oil and finished
products. However, in 2019, Saudi Aramco and SABIC entered into an agreement wherein Saudi
Aramco had agreed upon purchasing 70% of stake from Public Investment Fund of Saudi Arabia
(Saudiaramco, 2019). The major purpose behind involvement of Saudi Aramco is to strategically
grow and expand its market share in the global oil market. Furthermore, the success of the
acquisition of SABIC had benefited Saudi Aramco in accelerating their downstream activities
related to petrochemicals and integrated refining. The other success factors that could
significantly arise out of Saudi Aramco and SABIC partnership is that it would allow Saudi
Aramco to enter new markets and also help in balancing the production of oil in both of their
upstream and downstream activities (Sertin, 2019).
Strategy 2: Global Chemicals Strategy
One of the significant strategic decisions that have been undertaken by Saudi Aramco is the
growth of its global chemicals strategy. This decision could be considered as an oil expansion
project in South Korea to meet the needs of the customers and serving them better. In this
context, the Company had installed the S-Oil’s new Residue Upgrading Complex in 2019. The
event had also been marked with the signing of a dozen of agreements that had been designed to
reinforce the relationships between South Korea and Saudi Aramco with the objective to support
energy security of the region (Saudi Aramco, 2019). It could be considered that customer serving
had been a crucial component of the company’s strategic decision especially related to
downstream strategy which had presented substantial long-term commitment to the South
Korean market. The success of this strategy could be warranted by the fact that it had
strengthened the cultural ties between South Korea and Saudi Arabia, improved the Industrial
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Training Center talents and skills, accelerated the nonmetallic solutions on a global basis and
unlocked local opportunities in the form of partnership with Baker Hughes, a GE company
(BHGE), powered Saudi Aramco’s gas operations in Fadhilietc (NS Energy, 2019).
Strategy 3: Shifting strategy in China
After working for a long time with the major players in China, the major state-owned Chinese
energy firms, Saudi Aramco has shifted its focus towards independent running refiners and
newcomers, known as ‘teapots’ (Gamal, Aizhu and Zhang, 2019). However, it is being
speculated that this change in focus may not yield same return to the company as the new comers
and independent refiners lack the scale as well as the market reach of experienced companies
like Sinopec Corp and PetroChina (MarketWatch, Inc. , 2019). Nonetheless, this new strategy
has helped Saudi Aramco to increase its oil exports to China to around 1.6 million bpd, in the
initial segment of 2018, and competing with Russia (Paraskova, 2019). Although the company
has been able to catch up the export level with that of Russia’s, industry experts have speculated
that Saudi Aramco’s aim of expanding its refineries and accessing the retail and marketing rights
with other firms in China may face a setback, as its new partners may not prove to be much
helpful due to the lack of market reach.
Strategy 4: Downstream Shifting Strategy
One of the recent strategic directions undertaken by Saudi Aramco is emphasizing upon the
downstream activities and providing it with similar importance as the upstream business. As the
company is expanding its business in China and India, the aim is to undertake a $100 billion
investment and convert two million crude oil barrels into petrochemicals every day (Saudi
Aramco, 2018). As the Saudi National Transformation Program aims to increase the refining
capability from 2.9m b/d to 3.3m b/d by the year 2020, the investment in upgrading the
downstream will prove beneficial in meeting these targets. On the other hand, it is observed that
combining upstream and downstream activities will benefit the organization to manage the
volatile oil market across the world (Petroleum Economist, 2017). On the contrary, issues like
constant price changes, policy changes, varying demands, cyber security and safety imposes
several challenges upon the downstream activities (Chapman and Kalinenko, 2018). However, it
can be said, that the recent development in technology and this strategy as well as the market
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expansion undertaken by Saudi Aramco will help the company in diversifying and maintaining
sustainable business.
Recommendations
Based on micro and macro environmental analysis, some recommendations could be made to
Saudi Aramco:
 The company should focus on partnering with companies that deal with non-
conventional/ renewable sources of energy to reduce its sole dependence on crude oil.
 It is advised to the management of Saudi Aramco to focus on collaborating with foreign
oil companies operating such as British Petroleum and Shell. This could result in
adopting latest technologies and could benefit inappropriately sourcing and identifying
oil from field to be used for longer period of time in the future.
 Saudi Aramco should increase its footprint in the Asian countries just like in the case of
South Korea to increase market share and gain competitive advantage. It is recommended
that the company must redesign and implement energy strategies in Japan to fortify the
political and economic relationships between Saudi Arabia and Japan.
Conclusion
In conclusion, it can be said that Saudi Aramco had been one of the significant players in the
O&G sector. Within the challenging environment of oil price fluctuations and other strategic
problems, the company had engaged in collaboration, partnership, expansion projects and
acquisition ventures to enhance their competitiveness and further underpin strategic integration
of the global business.
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