Formula 1

Strict requirements for oil services in Saudi

The days of rep-offices in Saudi Arabia are over. As part of the Kingdom’s efforts to diversify the economy away from oil and gas, the government is encouraging companies to […]

The days of rep-offices in Saudi Arabia are over. As part of the Kingdom’s efforts to diversify the economy away from oil and gas, the government is encouraging companies to invest and manage their operations locally and develop young, Saudi talent.

Pioneering these ambitions is Saudi Aramco, the biggest energy company in the world. In December 2015, Aramco officially launched the In-Kingdom Total Value Add (IKTVA) program that is set to completely revolutionize the giant’s procurement process. This may well set the precedent for other local heavyweights, and indeed the entire government, to follow.

The IKTVA stipulates that by 2021 all of Aramco’s supplies and procurement will meet strict localization requirements. Specifically, each of its suppliers will have to undertake an IKTVA test that will assess the value of locally sourced goods and services used, salaries paid to Saudi citizens, training and development efforts for Saudis, and supplier development spending, and divide this figure by the company’s revenue received from Saudi Aramco. This figure will then be multiplied by 100, and if the company’s IKTVA score is over 70, they will be approved.

Speaking exclusively to TBY, Abdulaziz AbdulKarim, Saudi Aramco’s Vice President for Procurement and Supply Chain Management—essentially the department responsible for IKTVA’s launch and implementation—explained: “The program was designed to positively change the way Saudi Aramco engages with its suppliers when procuring goods and services, targeting primary goals that will enable a sustainable economy, supply chain, and energy sector.“

The target of reforming Aramco’s entire supply chain by 2021 is ambitious to say the least. Currently a 30% IKTVA score for any given company is considered strong, and Aramco’s own local procurement figures linger around that figure at present. However, whether these targets are realized within four years or not, the ambition alone creates “enormous potential…for local spending to trickle down to a variety of industries and services,“ argues Dr Abdulrahman Al Zamil, Chairman of Zamil Group and one of the loudest proponents of the IKTVA program.

The USD23 billion spent on oilfield services and equipment (OFSE) annually in the Kingdom suggests that if the 70% target is achieved, up to USD17 billion will be pumped back into the local economy.

Naturally, a possible drawback to the program is that, for now, local procurement could potentially compromise quality and lead to worse prices when compared with services provided by internationally renowned brands. In addition, such structure could prove off-putting for any potential partners aiming to work with Aramco on an ad-hoc basis. The company’s vice president countered these concerns by stressing: “We want an increased presence in Saudi Arabia not only to finalize assembly operations, but also to establish and develop their manufacturing supplier base and regionalize research and development (R&D) alongside their operations in the Kingdom… We are committed to those companies through our long-term agreements.“

However, IKTVA’s biggest test will be its legacy. That is, the ability of such a formula to surpass the boundaries of a single company (albeit one of the biggest in the world), and to extend its reach to the wider economy.
Saudi firms in the industrial and oil and gas sectors have been broadly positive about the concept and feasibility of IKTVA, and many have suggested that the program ought to be used as a model for other local powerhouses, including SABIC, Ma’aden, and the government itself. AbdulKarim confirmed that “such discussion and collaboration is ongoing to ultimately adopt a localization program where we think that IKTVA can be the base of the national localization initiative.“