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The Rise of Saudi Aramco: From Desert Sands to Global Oil Giant

The Rise of Saudi Aramco

There’s a king of oil; it has to be Saudi Aramco. It’s the biggest oil company in the world. Saudi Arabia’s state-owned oil giant Aramco has announced a record profit of $161.1 billion for 2022.

The Birth of Saudi Aramco

In 1933, the Arabian Peninsula was an unexplored map, its vast secrets hidden beneath scorching sands. Camels and Bedouins traversed the silent dunes, oblivious to the slumbering wealth beneath their feet. Then, a gusher erupted, not of water but of black gold, forever altering the landscape and birthing a desert legend: Saudi Aramco. From that first strike to a nearly $2 trillion IPO, Aramco’s story is a captivating chronicle of ambition, power, and the relentless pursuit of oil.

So in today, we’ll explore the story of the trillion-dollar company Aramco. In history, we discover that oil has always been super important in our lives, especially during the time between the two World Wars. This was when the demand for oil worldwide shot up, largely due to the invention of the internal combustion engine. Many experts even argue that a big reason for some of the wars in the 20th century was fighting over control of oil resources. Amidst all this, one particular company stood out.

But before we talk about Saudi Aramco, let’s take a quick look at Saudi Arabia’s history. Ibn Saud brought together four regions—Hijaz, Najd, Eastern Arabia, and Southern Arabia—into one nation. This happened after years of conquest spanning three decades. Ibn Saud was the driving force behind Saudi Arabia’s search for oil. Less than a year after he became king, Saudi Arabia signed its first agreement allowing the Standard Oil Company of California, later known as Chevron, to explore oil.

Early Explorations and Discoveries

In November 1933, a company called the California Arabian Standard Oil Company or CASOC was established to manage the oil concession. CASOC marked the beginning of what we now know as Saudi Aramco. At that time, no oil had been found, and serious exploration hadn’t started.

Actually, no one was even sure if there was oil in the country. However, things changed the next year when geologists began surveying an area near the city of Dammam on Saudi Arabia’s East Coast, which became known as the Dammam Dome.

After initial surveys, CASOC leaders in California instructed their teams to start drilling by early June 1934. The geologists completed detailed work on the Dammam Dome and wrapped up their first season in Saudi Arabia. In their report to the San Francisco office, they recommended starting drilling. As a result, American engineers had to drill wells in seven different areas before making a significant oil discovery.

Nearly 5 years after drilling began, this breakthrough was largely due to Ma Stei, an American geologist who became the chief geologist for the US oil explorers. From 1936 onwards, Stei spent years surveying the Arabian Peninsula to identify potential oil reserves. Exploring Saudi Aramco’s website, we came across an intriguing statement: the Saudi Arabian oil venture hinged on Well Number Seven.

After 5 years of unsuccessful drilling, Well Number Seven appeared to be a dead end. This marked a triumphant moment for a nation transitioning from a nomadic society to a significant player on the global stage. Soon, a pivotal event unfolded, altering Saudi Arabia’s fortunes. Then, on March 4th, 1938, a substantial oil reservoir was struck. This breakthrough propelled Saudi Arabia into the international oil market, setting the stage for its emergence as a crucial energy hub.

The magnitude of Saudi Arabia’s oil industry success became apparent immediately following the tapping of Dammam Well Number 7. CASOC’s headquarters in San Francisco cautiously sent a cable containing a single word: “Congratulations.” Just over a year later, Saudi Arabia dispatched its inaugural shipment of oil overseas.

The vessel, named the DG Scoffield after one of the SoCal oil company’s founders, carried approximately 100,000 barrels of oil, representing about 5% of modern tanker capacity.

However, one success led to another. The next significant oil discovery occurred in 1941, this time in Abqaiq. It came about 5 years after Max Stei, along with two other American engineers, JW Hoover and Jerry Harris, had utilized the area for their earlier explorations.

The Formation of Saudi Aramco

This marked a pivotal moment that paved the way for Saudi Aramco’s future. The name Aramco was established in 1944 when the California Arabian Standard Oil Company was rebranded as the Arabian American Oil Company, or Aramco for short. Throughout the 1940s, Aramco steadily increased its production, hitting the milestone of 500,000 barrels per day in 1949. To put this figure into perspective, current oil production in Saudi Arabia exceeds 10 million barrels per day.

In 1951, Saudi Arabia’s capacity to export oil saw a rapid rise with the opening of the Trans-Arabian Pipeline, stretching over 1,200 km across the Gulf region. This pipeline facilitated the movement of oil to the Mediterranean Sea, significantly reducing the time and resources required to load oil onto tankers. The pipeline remained operational for 32 years until its closure in 1983.

Just 5 years after reaching the 500,000 barrels per day milestone, Aramco achieved a daily output of 1 million barrels, marking a significant milestone in Saudi Aramco’s journey toward dominance in the global oil markets. Another crucial development came in 1960 with the formation of OPEC. This organization united the world’s major oil producers, excluding the US, USSR, and Russia, to coordinate oil production policies. Today, OPEC wields immense influence over oil prices and is recognized as a crucial entity in the oil market.

It’s worth noting that during its early years, Aramco wasn’t under the control of the Saudi state. However, this changed in 1973 following the Arab-Israeli War, also known as the Yom Kippur War, and the USA’s support for Israel, including Operation Nickel Grass, a strategic airlift providing weapons and supplies to Israel. In solidarity with the nations involved in the conflict, OPEC members drastically increased oil export prices to Western nations, eventually announcing an embargo and reducing production.

In response, the Saudi government decided to nationalize part of Aramco. By 1974, the government’s stake had increased to 60%, ultimately completing the nationalization process in 1980.

Expansion and Nationalization

By 1974, the government’s stake had increased to 60%, ultimately completing the nationalization process in 1980. At this time, all of Saudi Aramco’s oil assets, production infrastructure, and facilities came under government control. In 1988, Aramco underwent another transformation, becoming Saudi Aramco following approval from the Saudi Council of Ministers, effectively the country’s cabinet.

In the following decades, Saudi Aramco expanded vigorously through a blend of acquisitions and the establishment of numerous new oil production facilities.

Saudi Aramco in the 21st Century

By 2009, the company had the capacity to produce up to 12 million barrels of crude oil per day. The rapid growth of Saudi Aramco meant that by the early 21st century, Saudi Arabia’s economy relied heavily on oil revenues for its development and prosperity. This period coincided with a significant surge in global oil prices during the early 2000s. Between 2011 and 2014, there were several instances where a single barrel of oil was valued at over $100. However, in 2014, oil prices began to plummet, losing more than 50% of their value in a short period.

Since the mid to late 2014 decline in oil prices, the vulnerabilities in Saudi Arabia’s economy that had expanded over the past decade had started to surface. Government revenues now only cover slightly more than half of the expenditures, and the country is facing significant deficits in both its budget and current account.

In response, under the guidance of the ambitious young leader, Mohammed bin Salman, Saudi Arabia initiated its Vision 2030 plan. This plan aims to modernize and diversify the Saudi economy by tapping into untapped mineral reserves, enhancing its role in global trade, and boosting revenues from religious tourism.

Part of Vision 2030 involved listing Saudi Aramco in international financial markets, a milestone successfully achieved under Mohammed bin Salman’s leadership. However, Aramco is now facing a challenge that might put a question mark on its existence.

Challenges and Controversies

United Nations experts have contacted Saudi Aramco and its financial supporters regarding allegations linking their activities to human rights violations through climate change impacts. These allegations accuse Saudi Aramco of maintaining crude oil production, expanding fossil fuel operations, and providing misleading information.

It’s suggested that Saudi Arabia’s Public Investment Fund and several major international banks are involved, with their home countries also receiving letters. However, some argue that Aramco’s decision to persist in oil and gas production, along with ongoing exploration efforts, increases the chances of exceeding the 1.5°C carbon budget. This, in turn, could lead to more severe climate change. Many see this as just the beginning.

The Future of Saudi Aramco

As the world shifts towards renewable energy, Aramco’s relevance may diminish over time. While an immediate end seems unlikely, the future appears uncertain. Consequently, Saudi Arabia is turning to tourism and other avenues to bolster its economy.

Then, there’s the concern about potential changes in Saudi Arabian laws, which could impact Aramco’s operations. With over 90% of its income-generating assets situated in Saudi Arabia, any alterations in laws, such as the arrest of oil billionaires, tax adjustments, or shifts in loyalty shares, along with incidents like the Jamal Khashoggi murder, pose a significant risk to Aramco shareholders.

The decision by the Saudi government to offer Aramco shares sparked widespread debate regarding their value. Saudi Crown Prince MBS estimated the IPO’s worth at $2 trillion. However, a Wall Street Journal investigation suggested that the actual value might be $500 billion less than this estimation. It’s crucial to consider that pricing remains uncertain due to fluctuating oil prices in the future.

Conclusion: Aramco’s Legacy and Vision 2030

To wrap it up, the journey of Aramco from its humble beginnings to becoming a global oil giant reflects the transformation of Saudi Arabia’s economy and its pivotal role in the energy sector. With aggressive expansion and strategic initiatives like Vision 2030, Aramco continues to shape the future of the Saudi economy while adapting to fluctuating oil markets.

In further reflection on the climate change aspect of Aramco, it’s evident that the company’s continued emphasis on oil and gas production poses significant challenges in combating climate change. The UN’s engagement with Aramco and its backers underscores the growing concern over the environmental impacts of fossil fuel extraction and consumption.

As the world strives to limit global warming to 1.5°C, Aramco’s reluctance to reduce production and exploration efforts threatens to exacerbate climate-related human rights issues.

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