Saudi Aramco: New rules for suppliers to boost local content development

Saudi Aramco
Source: Saudi Aramco press release

Last week Saudi Aramco – Saudi Arabia’s state-owned giant – launched its In-Kingdom Total Value Add (IKTVA) program, designed to increase investment, economic diversification, job creation, and workforce development within the Kingdom.

The IKTVA program launch event was presided over by HRH Prince Saud bin Nayef bin Abdulaziz, Governor of the Eastern Province; HE Tawfiq Al-Rabiah, Saudi Arabia’s Minister of Commerce and Industry, and HE Abdullatif Al-Othman, Governor of the Saudi Arabian General Investment Authority.

“IKTVA is a step change in our commitment to local content development that is now required across our domestic and international supply chain,” said Amin Nasser, president and CEO of Saudi Aramco.

“Sourcing a majority of materials, goods, and services that we require locally will enable Saudi Aramco to not only embed greater competitiveness and efficiency in our operations, but it will also help us fulfill our potential in support of the Kingdom’s growth, job creation, and economic diversification objectives.

“IKTVA will create win-win, mutually beneficial partnerships between Saudi Aramco and our suppliers,” he continued. “The scale of our diversified energy business and associated capital expenditure programs clearly creates significant opportunities for those suppliers ready, willing, and able to invest in Saudi Arabia and partner with Saudi Aramco on a long-term, sustainable basis.”

IKTVA is underpinned by mandatory local content development of suppliers and contractors that prioritizes the purchase of goods and services from a local supplier base.

Three critical objectives guide the program: doubling the percentage of locally manufactured energy-related goods and services to 70% by 2021; helping raise the export of Saudi-made energy goods and services to 30% over the same timeframe; and, creating direct and indirect jobs within the energy-related sector for a growing and talented Saudi population.

“The IKTVA program will help make our supplier relationships more strategic, mutually beneficial and focused on long-term value creation,” said Abdulaziz A. Al Abdulkarim, vice president of Materials Supply. “The initiative will help recognize the full value and potential that all our suppliers can bring to the table. Our goal is to create a win-win, more formal and systematic mechanism that puts everyone on an equal footing and increases competition to drive growth.”

IKTVA will provide a level playing field for domestic and international suppliers though greater consistency and increased transparency in application and process. Uniform evaluations for service and material suppliers will be consistent across the company, providing investment stability and assurance. The program will first establish a three-year baseline score for each supplier measured against key metrics for local content and value creation. After this, Saudi Aramco and each supplier will jointly develop an IKTVA action plan to increase the respective IKTVA scores and impact. Performance will be tracked and measured on an ongoing basis.

As OilPro portal points out, Western firms wanting to do business in Saudi Arabia will now have to 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.

With the shale industry in the U.S. suffering from low prices and European shale explorers twiddling their thumbs waiting for local exploration and production to take off, Saudi Arabia – a country that still manages to buck the downward trend with its rig count currently tracking about 21% above the 2014 average – is a very attractive business proposition. Especially that Saudi Aramco plans to spend more than $300 billion over the next 10 years.

According to Amin Nasser, Saudi’s role model when it comes to oil and gas policy is Norway – a country that has seen its local content levels soaring to nearly 80%, with over 1,000 companies supporting the industry with an annual turnover of $60 billion. Whether they succeed in this quest remains to be seen.

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