Energy & Mining

Formula 1

Strict requirements for oil services

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Formula 1

In an attempt to boost local content in the oil services industry, ambitious goals have been set for the state’s flagship firm.

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.

In Saudi Aramco, billions of dollars of new contracts are being awarded based on technical competency, cost and the value-add they provide. IKTVA is a component of the value-add evaluation process. Supplier IKTVA proposals go through an evaluation, much like a technical evaluation, and is pass or fail.

IKTVA is a supplier driven program that drives localization through a) spend on localized goods and services b) salaries paid to Saudis c) training and development of Saudis d) supplier development r) research & development. It is a metric that is designed to assess the value generated for the local economy of a specific supplier, or a specific industry. In essence, the metric is calculated by aggregating the localization components divided by the revenues generated from Saudi Aramco and then multiplied by 100.

Speaking exclusively to The Business Year, Abdulaziz AbdulKarim, Saudi Aramco’s Vice President for Procurement and Supply Chain Management—essentially the organization 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 Saudi Aramco’s entire supply chain by 2021 is ambitious to say the least. In 2016, Saudi Aramco engaged with its top 100 suppliers to develop industry segment IKTVA baselines and then established individual and industry specific IKTVA targets. The data was independently validated by third-party auditors and will continue to be updated yearly. Saudi Aramco then engaged with their major suppliers to mutually develop realistic action plans to achieve the IKTVA targets.

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.

Specifically, Saudi Aramco spends between $17 and $20 billion annually on drilling and oilfield services and equipment, which suggests that if 70% is achieved by 2021, up to $14 billion will be pumped back into the local economy in that year alone.

The feedback from Saudi Aramco’s supply base has been mostly positive. Many of the suppliers have shown their commitment to the program through detailed action and investment plans. Additionally, the company has committed to help facilitate the process by bringing together governmental entities and suppliers to ease the process related to registration, land allocation, and inspection.

The company’s vice president stressed: “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 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.”