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Abu Dhabi, UAEMonday 18 June 2018

Saudi Aramco, Russia move to shake up gas markets, say analysts

The powerful duo will create a new network and rearrange market

King Salman's state visit to Russia marks the beginning of a powerhouse alliance to ruffle up energy markets, according to analysts. Sergei Karpukhin/ AFP
King Salman's state visit to Russia marks the beginning of a powerhouse alliance to ruffle up energy markets, according to analysts. Sergei Karpukhin/ AFP

Russia and Saudi Arabia are set to announce landmark deals in the wake of a three-day visit by King Salman to Moscow which may reshape gas markets, according to analysts.

The state visit marks the beginning of a powerhouse alliance to catalyse the energy markets, according to analysts.

“There is no doubt that the potential results of collaboration will shake up the gas market with Qatar in mind,” said Theodore Karasik, a senior adviser at the Washington, DC-based geopolitical risk consulting firm Gulf State Analytics. He said the key priority was to expand in natural gas to create new opportunities for pipeline and shipping networks with the Arctic Sea route, which is just as important as the Suez and Strait of Hormuz.

This could weaken Qatar's natural gas network as the world's biggest exporter of liquefied natural gas refuses to adhere to stipulations placed by the Saudi-led Arab quartet, Mr Karasik said. “Gas importers are in for a rearrangement of market fundamentals.”

There is even more to gain, particularly for state-owned Saudi Aramco, the world's biggest oil producing company, which is scouring for gas to feed rising electricity demand. Russia, which sits on the world's second-largest gas reserves after Iran according to BP statistics, also has gas ambitions of its own.

“There are significant opportunities ... for collaboration between Saudi Aramco and leading Russian companies,” said Amin Nasser, the chief executive of Aramco.

He said the company’s priority is in strengthening ties spanning oil and gas services, petrochemicals, renewables and the advanced technologies sectors. Mr Amin said these were “all promising areas for bilateral cooperation”.

Combined, Saudi Arabia and Russia produce about a quarter of the world’s oil. Saudi Arabia, the world's biggest oil exporter, and Russia, the biggest oil producer, partenered last year when they brokered a global oil output deal that helped lift prices.

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During King Salman's trip, a Saudi-Russian Business Investment Forum, headed by Russia’s oil minister Alexander Novak, will take place in Moscow.

Aramco plans to present its plans under the Saudi Vision 2030 that targets economic diversification and its localisation programme, In-Kingdom Total Value Add, which can potentially attract Russian companies to help with skills development and technological know-how, the company said.

Aramco wants to go global, given the ever-changing dynamics in the energy markets from a three-year oil price slump, a growth in renewables and a huge business transformation plan in the kingdom, according to Mohammed Atif, the Middle East and Africa regional manager of the consultancy DNV GL.  

"These industries are being disrupted, and sometimes that can be a blitz - fast and sudden. If these companies do nothing, they can find themselves going from one position to the next,” he said.

Mr Atif believes that the joint approach by the state-owned companies could indicate a larger effort to take on global international oil companies (IOCs), such as Exxon Mobil, BP and Total. “As long as you have other competitors out there, it’s an erosion of your market power,” he said.

The two state-owned energy powerhouses of Aramco and Rosneft together produce 16 per cent of the world’s crude oil, which averages around 97 million barrels per day (bpd), according to figures from the International Energy Agency. Aramco pumps 10.5 million bpd with Russia’s largest producer, Rosneft, adding 4.6 million bpd to the mix.

There is also the upcoming Aramco sale of a 5 per cent stake to the public, which could raise $100 billion and become the world’s largest IPO.

“It may excite investors by saying that it’s the world’s biggest company with the largest reserves, but I would be concerned with these trends indicating a downturn in future demand,” said Mr Atif.

“However, investors may be excited with these new alliances as it opens up options to further reserves in the Caspian and other areas.”