A new program, In-Kingdom Total Value Add (IKTVA), unveiled by Saudi Aramco’s CEO Tuesday intends to redirect dollars spent on Western oil service/equipment to Saudi-based operations.
The program is designed to pull $10bn per annum away from foreign accounts and create half a million new oil service jobs for Saudi citizens. Saudi Aramco is one of the oil service industry’s largest customers, spending upwards of $30 billion in capex this year.
IKTVA will make local content a formal requirement for doing business with Saudi Aramco. If successful, the localization program will also create a large Saudi-based oil service industry – one that will compete abroad with Western service firms in time.
The move comes at a time when the Saudi economy, battered by low oil prices, is desperate for stimulus. Taking back dollars spent outside the country is a form of social subsidization and will provide a needed economic boost.
Saudi Aramco is currently heavily reliant on Western oilfield firms for equipment and services. Companies like Halliburton, Schlumberger, National Oilwell Varco, Nabors Industries, and others provide goods and services to the National Oil Company (NOC). Today, Aramco procures 65% of its materials and services from outside the Kingdom. The new goal is to cut this foreign spend in half over the next five years.
In a speech Tuesday in front of Saudi government officials and local business leaders, Saudi Aramco’s recently appointed CEO Amin H. Nasser delivered a message Western service firms should be paying attention to. “Our local content levels remain modest at just 35%. …That is not good enough for our company… Continuing to import materials and services at growing levels cannot be our long-term strategy.” Nasser said.
Amin H. Nasser
This program doesn’t force Western firms out of the Kingdom. But it does mean Western oil service providers that want to keep their Aramco accounts paying will incur additional costs to staff up with Saudi locals, build out manufacturing capacity in the region, and comply with requirements. They may also find themselves increasingly competing against Saudi start-ups.
Under the program, a three-year baseline score will be established for each supplier measured against key local content metrics. After this, Aramco and each supplier will collaboratively form an IKTVA action plan to increase the IKTVA score. Performance will be monitored on an ongoing basis. A new function within Aramco – the Industrial Development & Strategic Development Supply Department – will champion and integrate the IKTVA program and manage the supply chain around it.
Nasser outlined three key goals that underpin Saudi’s oil service localization initiative:
Double the percentage of locally-produced energy-related goods and services to 70% by 2021.
Ramp up the local energy goods and services industry to export 30% of its output over the same timeframe.
Create 500,000 direct and indirect Saudi jobs in the oil service / equipment sector. For context, that is more than double the combined headcounts of the Big 4 Oil Service firms (Schlumberger, Halliburton, Baker Hughes, and Weatherford together only employ about 220,000).
Nasser cited the Norwegian O&G industry as a successful model to emulate. Norway has maximized the multiplier effects so that their local content levels have soared to nearly 80%. And over 1,000 companies support the industry with an annual turnover of $60 billion.
Local content appears poised to become the heart of Saudi Aramco’s procurement process. There will be no shortage of demand, as Saudi Aramco plans to spend more than $300 billion over the next 10 years. As Nasser said Tuesday: “We have the business!”
Indeed, Aramco is one of the few operators running more rigs today than a year ago. Saudi Arabia’s rig count is currently tracking about 21% above the 2014 average, while the rest of the world is down 57%.
Source: Baker Hughes
The question now is can the Saudis replicate the efficiency and technology of Western service and equipment firms in country, and if so, how long will it actually take. Aramco is already working with the Saudi Ministry of Labor to establish 22 national training centers in the Kingdom by 2025, 7 of which are active now. Ideas are easy, but execution is hard.