Saudi Aramco in Developing Oil Exportation - Essay Example

Section/# Aramco: A STEEPLE Analysis and Recommendation for Future Action Introduction: History and Problem Statement Saudi Aramco is considered by many financial experts as the most valuable company in the entire world. In total, conservative estimates of company worth are in excess of 10 trillion dollars. The company itself traces its early history back as far as 1933 as a joint venture came to develop between Standard Oil of California and the Kingdom of Saudi Arabia. As the United States began to experience a higher and higher demand for oil, the colonial powers that controlled much of the Middle East sought to close access to these sources; seeking to protect their own interests and continue to provide for European needs. Recognizing that this created a difficult situation, businessmen within the United States began to court the recently established Kingdom of Saudi Arabia as a potential business partner in seeking to develop oil exportation. Over the years, the firm has grown and developed into the giant that it is today. Beyond oil exploration and development of resources, the firm also has a robust and world renowned group of experts that provide subject matter expertise and planning to clients that seek to explore, produce, refine, market, or distribute their own natural resources. Yet even as this firm exhibits control over the world’s largest known proven oil and natural gas fields, operates the largest hydrocarbon fuel network on the planet, and produces in excess of 300 billion dollars of revenue annually, there are core weaknesses and threats that are represented alongside strengths and opportunities. As such, the following analysis will be concentric upon providing a STEEPLE analysis of Saudi Aramco and illustrate a ranking of the issues that are represented in terms of most important to least important. Through such a unit of discussion and analysis, it is the hope of the author that the reader will be able to gain a more insightful level of understanding concerning the future outlook and potential decisions that the firm should engage in as a means of ensuring its future profitable development and relevance within the marketplace. STEEPLE Analysis Socio Cultural: Firstly, socio-cultural elements of potential danger and harm to Aramco are necessarily concentric upon the way in which development within Islamic ideology determines which direction the leadership of the economy will develop. For instance, a noted threat that is evidenced with regard to a socio-cultural dynamics is that the existing House of Saud would shift towards a much more conservative interpretation of Islam; as the means by which it engages with nonbelievers. Effectively, an even more conservative socio-cultural approach could create a situation in which Aramco would be reticent to deal with Western companies and/or any other business interests that was not ascribing to the norms of Islam that could be expected. This has been given an overall importance ranking of 4th within the analysis - as the likelihood of this happening is rather low. However, the ramifications for business if it did occur would be far reaching and necessarily merit the attention of stakeholders and policy makers. Technological Likewise, it must be indicated that even within the realm of oil extraction and refinement, as well as logistics, technology has a profound and lasting importance with regard to how future techniques might be defined and how the future of the industry will unfold. Firstly, it must be considered that the reliance upon fossil fuel is ultimately a construct of the fact that existing technology has not yet found a more efficient and cost-effective means of generating energy. Whereas it is true that a great deal of progress has been made with respect to renewable forms of electrical generation, almost invariably, automobiles and public transit relies upon fossil fuels as a means of moving tens of millions of people from one place to another. With this in mind, it must be understood that a shift in technology could create assistant in which the product that Aramco is responsible for selling might no longer be required; at least to the extent that it is currently. As an example of this, the reader can and should consider a situation in which a breakthrough in hydrogen fuel-cell technology could create a potential for the demand for oil to plummet. Whereas it is not likely that such a breakthrough will occur within the next several months, or indeed within the next several years, over the long run, it is undeniable that different and more efficient means of energy production will of course be witnessed (Al-Fatih, 2010). In the same way that steam power gave rise to the internal combustion engine, it is not beyond the realm of logic to assume that the internal combustion engine will eventually be replaced by more efficient means; therefore making natural gas and oil a secondary means of generating power within smaller markets. Furthermore, it must not be understood that technology elicits only a threat to the market in question. Instead, technology could also pose a distinct benefit for the future of Aramco; as it might be utilized to gain access to more resources within Saudi Arabia, and elsewhere throughout the world, by developing new, more efficient, and less costly means of natural resource extraction/refinement. Accordingly, the issue of technology with respect to the future of the company has been ranked as the most important issue that the firm should consider within the coming months, years, and decades. Economic Accordingly, an especially salient concern for the economic outlook of Aramco has to do with the stability of the United States dollar and whether or not this particular currency will continue to define the unit of exchange in which oil is traded. As a direct result of the United States going off the gold standard in 1971, President Richard Nixon was motivated to ensure that some type of asset, either tangible or intangible, helps to prop up the value of the United States dollar (Khakwani, 2007). The ultimate fear was that with a rapid devaluation of the currency, its legitimacy and value would create a situation by which it would no longer be the unit of exchange. By negotiating a deal with Saudi Arabia, in exchange for weaponry and protection, Saudi Arabia, followed by other OPEC nations, agreed to trade oil in exchange for dollars only (Alperowicz, 2013). As such, the value of oil sold - and the ultimate value of the United States dollar - is contingent upon a mutually beneficial arrangement and one that ensures their further symbiotic relationship. However, in the event that the value of the dollar begins to erode rather rapidly, Saudi Arabia, in addition to other OPEC nations, will invariably seek to ensure that their investment, and terms of payment for the oil that they sell, is assured within a different unit of value/currency (Otis, 2009). In this way, beyond the threat of an economic slowdown, decreasing the overall demand for global oil, the threat of inflation and/or hyperinflation upon the United States dollar bears a very real and prescient danger to the way in which Aramco continues to exhibit operational effectiveness and profitability (Cullen, 2013). As this eventuality is unlikely to occur within the very near future, this has been ranked as the 6th most likely threat that Aramco faces within the foreseeable future. Environmental: As BP can attest, the threat of earnings losses and a lack of faith within the broader public elicits a dangerous situation in which an environmental catastrophe can severely weaken the overall success and growth/profitability that an oil producer might otherwise be able to experience. As a direct result of the Deepwater Horizon catastrophe of 2011, BP experienced the largest drop in overall revenue and expense that the firm had yet witnessed during its multi-decade growth and expansion (Smith, 2010). Moreover, the side of the environmental harm that was done as a result of the explosion that caused the Deepwater Horizon catastrophe, the damage to public image and consumer confidence was something that BP continues to struggle to regain up until the current time. In essence, analysts and scholars still are not able to put a definitive financial price tag on the Deepwater Horizon disaster; as it was so disastrous to the firm’s public image that understanding and sympathizing this damage in terms of actual dollars is not something that is easily accomplished (Alperowicz, 2014 a). In such a manner, the potential threat that an environmental catastrophe has for the firm is of profound importance and has been ranked by this analyst as the 2nd most important issue that the firm should seek to address; at least in terms of how policies, strategies, and approaches towards protecting the environment and seeking to further hone safety standards should be effected in the future as a means of averting such an issue. Political: The political climate of the Kingdom of Saudi Arabia has been defined by an all powerful monarchy for the better part of 80 years. As such, the economic system that has grown and developed within Saudi Arabia, as well as almost any and all constraints to business and/or legislation involving the way in which transaction should proceed are overseen by the House of Saud (Jumah, 2005). Whereas it is true that this particular political system has been unbelievably stable over the years it has been in existence, it is also necessary to understand that the authoritarian nature of the system in tandem with the strife and political turmoil that surrounds the kingdom of Saudi Arabia creates a dynamic in which regime change is an ever possible specter that businesses located within Saudi Arabia, and indeed the house of Saud itself, must consider. Whereas it is unlikely that a sudden revolution could overthrow the existing political system of the kingdom of Saudi Arabia, this is a consideration that must be weighed with respect to threats and eventualities which present themselves to Aramco (Emerson, 1982). Due to its position as the largest company in the world, it is highly likely that this particular firm could be understood by enemies of the Saudi regime as one in the same with the state. Due to the fact that Aramco operates under the discretion of the house of Saud and remit a sizable portion of overall revenues to government coffers, the potential for new leadership that would be hostile to the undemocratic norms established by the house of Saud would also likely be hostile to the potential for this particular company to continue to gain favor and/or profitability within a new system of governance (Golph, 2013). As a function of this distinct threat, this particular analysis has ranked the political situation within Saudi Arabia as the 3rd most important factor that has thus far been discussed. Legal: The overall legal threats that exis for Aramco are of course multiple; however, in an age of increased cyber threats, the risk of sensitive information being breached and unintentionally shared with parties that are not privy to it serves as the most relevant legal threat that Aramco currently faces (Thorn, 2010). As the potential for this is relatively low, this has been ranked as the 7th, and least important, threat that has been included within this STEEPLE analysis (Bronk & Tikk-Ringas, 2013). Ethical In terms of ethical considerations, it should be noted that Aramco faces the distinct difficulty of engaging with a consumer market that is increasingly cognizant of the harmful impacts that human produced CO2 is having on the health of the planet (Maple, 2010). With this in mind, the potential for the ethical backlash based upon the increasing profits and exploitation of hydrocarbon that Aramco is primarily engaged in can have far reaching effects for the way in which profitability is determined in the coming years. As such, this threat has been ranked as the 5th most relevant issue that Aramco faces in terms of the STEEPLE analysis that has thus far been conducted. Recommendations: As a function of long-term survival, the firm must be uniquely interested in engaging with recommendations to the potential threats that have been elaborated upon within this brief analysis. Ultimately, the recommendations that will be put forward will be concentric upon addressing the most salient concerns that the company faces within the coming years; namely those associated with technology, environment, and politics. Firstly, in terms of technology, it is absolutely integral that the firm places a primary focus upon diversification as well as research and development. The ultimate need for diversification is contingent upon the fact that it is very likely that fossil fuels/hydrocarbons will no longer be a primary method of providing energy to the consumers that Aramco currently relies upon. Within such an understanding, it will be necessary for the firm to seek to diversify its holdings and products/services as a means of staying relevant when and if a technological shift of monumental proportion comes about (Inkler, 2007). Regardless of the current profitability and overall success that the firm has been able to engender over the past several decades, any astute observer would indicate the fact that the continued and further success of the firm, based upon the business model at hand, and cognizant of the ex-essential threats relating to it, is not guaranteed for the perceivable future (Ali, 2013). Additionally, technological changes should also be encouraged with respect to research and development and the means by which new means of oil and gas extraction are utilized. Whereas it is of course tempting to continue to post high levels of profitability each and every quarter, it is also essential to develop new technologies that can increase efficiency and ultimately increase the yield/reduce the waste that is evident with respect to the oil processing and refinement that the firm has gained such a strong reputation in providing (Khaber, 2013). Further, a secondary focus must be placed on developing robust contingency plans and ensuring that policies and procedures are sufficient towards dealing with potential spills or environmental catastrophes of other derivatives. As was indicated within the analysis above, the potential for an environmental incident to cripple the firm and ultimately reduce its potential for profitability is both profound and relevant (Zhu, 2014). Whereas it is true that Aramco has been a pioneer of seeking to improve safety and contingency plans related to its extraction and refinement process, it cannot allow this best practice to encourage it towards a level of complacency (Lorensby, 2011). Lastly, it should be understood that even though the house of Saud has been able to exhibit a great degree of stability within the kingdom of Saudi Arabia over the 80 years, not to be expected the mixture of the way in which the firm operates into the foreseeable future. Whereas it is true that this particular company is state owned by on the resources of Saudi Arabia as a function of incurring profitability, n efforts should be made to establish the company, at least within the eyes of the Saudi Arabian population, as a resource and fundamental cornerstone of the Saudi way of life (Hartley, 2013). In so doing, the potential for a change in governance equaling a situation in which Aramco is dismantled and repurposed as a new entity; apart from the confines of the state of Saudi Arabia will be inherently diminished. Conclusion: From the information that has thus far been conducted, it is clear and apparent that Aramco ,although a highly profitable fixture of the Saudi economy, is not guaranteed eternal success within the realm of business; especially considering the issues that have been discussed and ranked by level of importance within the STEEPLE analysis. However, with this being said, it should also be understood that following recommendations and seeking to identify and respond to potential threats prior to them ultimately be exhibited is essential in seeking to ensure the long-term profitability and success that the company might seek to engender within the future. 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