Meeting localization expectations of Saudi Aramco's IKTVA program requires rethinking the oilfield services value chain

October 2016 | Rachid Majiti, Clara Cuvelier


Saudi Arabia is seeking to accelerate the diversification of its economy away from oil and gas and to develop skilled jobs for Saudi talent. This has prompted the creation of the In-Kingdom Total Value Add (IKTVA) program launched in December 2015, which applies to every Saudi Aramco supplier and stipulates how much revenue from Saudi Aramco must be spent on Saudi content.

By increasing local content to serve both the domestic and export markets, it is hoped that the program will enable Saudi Arabia to “capture value that produces long-term tangible benefits—quality jobs for a growing Saudi population, innovation and diversification of industry, and increased global competitiveness,” says Saudi Aramco on its IKTVA website.

The proportion of each supplier's earnings from Saudi Aramco that go back into the Saudi economy is measured by a score. Saudi Aramco is seeking a 70% score by 2021 for each of its suppliers—an ambitious target bearing in mind that 30% is considered a strong score today.


IKTVA score formula:

A. Localized goods and services
B. Salaries paid to Saudis
C. Training and development of Saudis
D. Supplier development spending
E. Company revenue (spend from Saudi Aramco only)
%IKTVA=[(A+B+C+D)/E]*100


The program could deeply affect the operating model of oilfield services and equipment (OFSE) companies serving the Middle East market and presents multiples challenges if they want to remain a Saudi Aramco supplier.

Major challenges to overcome for the oilfield services & equipment players in Saudi Arabia

The oil giant’s ambition is to maximize the proportion of the massive ~USD23 billion/year spent on OFSE that is retained within the Saudi economy. With a 70% score overall, this could be a ~USD16 billion/year opportunity for the country, even excluding indirect effects. (Exhibit 1)


Exhibit 1: Potential value for Saudi economy with a 70% IKTVA score for OFSE suppliers.


SOURCE: Rystad

A change of this scale creates challenges for existing OFSE business models. This level of local content requires a complete structural rearrangement of most contractors’ supply chains and workforce, likely leading to the businesses relocating to Saudi Arabia to serve Saudi Aramco if they have not already done so.

Indeed, to achieve the localization objectives, OFSE suppliers must carry out an in-depth review of their own supply chains and plan a switch to Saudi suppliers wherever possible and cost-competitive. Regarding workforce localization, the changes mean that the OFSE players serving Saudi Aramco need to prioritize the hiring, development, effective deployment and retention of Saudi employees. This requires starting the revision of current recruitment plans and implementing measures such as outreach to Saudi vocational training centers, schools and universities.

Doing this creates at least two significant challenges for the OFSE industry.

First, it requires heavy investment in Saudi Arabia as operations, warehouses, and manufacturing centers would have to be set up in the Kingdom during what remains a difficult time for international players. Local OFSE companies, on the other hand, are in a better financial situation due to the more limited impact of low oil prices on OFSE activity in the region.

Second, training for many OFSE jobs can take years, and the 2021 target for Saudi workforce expansion is just over 4 years away. By attempting to meet the target score too quickly, a supplier might undermine its efficiency and competitiveness as it takes on Saudi staff too rapidly.

Plans submitted have to be realistic, otherwise the supplier is putting itself at risk. Rather than doing everything at once, we believe positive signals should be sent regularly before 2021, with investment gradually building. Such a show of commitment is critical; a good recent example is GE’s female training centers, which have created only a limited number of jobs but provide high-visibility commitment to creating jobs in Saudi Arabia.

Considerable uncertainty remains for OFSE players over how bids will actually be decided under the new rules. There is still an assumption that quality and cost will remain the top priorities, and it is unclear how exactly the IKTVA score will be taken into account. Saudi Aramco itself is unlikely to wish to pay over the odds or award the work to a supplier that is not performing well enough.

Unlocked opportunities for collaboration

As described, there are challenges but clearly also new opportunities.

We feel there need to be efforts beyond the individual company level to achieve the IKTVA aspirations in a sustainable way for Saudi Arabia, while also enabling suppliers to remain competitive. This includes industry-wide coordination to identify areas where Saudi Arabia lacks skills or suppliers, so investment can be targeted more effectively. We can also expect further collaboration between local and international companies through joint ventures or strategic alliances for example, where local OFSE companies with high localization rates would leverage the experience of an international partner to boost their development.

Coordinated action with the government would also help encourage key international suppliers to site supply facilities in the Kingdom, creating a longer-term, more sustainable impact. OFSE companies may need help to convince their own international suppliers to settle in Saudi Arabia.

In the case of workforce training, localization will continue to depend on available places in vocational training programs for Saudis. The Saudi Arabian Drilling Academy (SADA) opening in Q4 2016 in Dhahran to train up to 4,000 Saudis a year is a representative example of the training structures needed by OFSE companies to develop more Saudi talent and of how Saudi Aramco can support them. The demand for these places is likely to increase in the near future if the targets are to be met.

To conclude, the new IKTVA program has the potential to reshape the OFSE landscape in the Middle East and the way OFSE companies operate there. It could be the trigger for a success story in Saudi Arabia, following the Norwegian model. Indeed, since the 1970s, Norway has demonstrated that committing to localization with the right mechanisms in place can lead to the development of top-tier Norway-based OFSE companies (e.g., Aker Solutions, Odfjell). Could Saudi Arabia’s Eastern province emerge as a new hub in the global OFSE landscape?


Exhibit 2: Major oilfield services hubs


SOURCE: Energy Insights
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About the authors

Rachid Majiti is a partner with the Oil and Gas Practice in McKinsey's Dubai office.
Clara Cuvelier is a senior analyst with Energy Insights in McKinsey's Dubai office.