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Page added on March 12, 2017
Trillion-dollar question looms as Aramco audits oil reserves
* One auditor working towards completing report by year-end
* Listed reserves haven’t changed in nearly 30 years
* Falih says reserves could be bigger than those already booked
* Disclosures likely to resemble those of BP and Shell
* Market will not get detailed information by field – sources
When Saudi Aramco reveals a Western audit of its oil reserves, investors will be looking for two answers: How much oil and how much detail?
Saudi Energy Minister Khalid al-Falih has hinted at a surprise on the upside on reserve volumes ahead of Aramco’s 2018 share listing, but industry sources say detail on individual deposits – which investors have long sought – will be thin.
Saudi Arabia’s reserves of easily recoverable oil have long been the world’s largest.
But there also have long been questions about the volume and quality of those reserves. For nearly 30 years – despite rising production, wild swings in oil prices and improved technology – Riyadh has annually reported the same number for reserves of 261 billion barrels, according to BP’s statistical review.
Firms listing in New York are required to have a U.S. Securities and Exchange Commission audit. Last year, the SEC launched a probe into why the world’s largest listed oil company, ExxonMobil, reported virtually unchanged reserves for years despite a plunge in prices.
Exxon revised its reserves down last month.
Having an internationally recognised reserves audit has become a key task for Aramco as it seeks to become the world’s most valuable company when it lists shares in an initial public offering (IPO) for 5 percent of the firm’s value.
An industry source told Reuters that Aramco aimed to have one of its two reserves auditors wrap up the review this year, long before the share listing.
Dallas-based DeGolyer and MacNaughton, and Gaffney, Cline and Associates, part of Baker Hughes, are involved in the auditing, sources have said.
When the reserves are confirmed by the auditors, the results are likely to be similar to the levels of disclosure by international peers such as BP and Royal Dutch/Shell , sources familiar with the process said.
“What Aramco will do in the IPO is try to report in a similar way to other companies,” a senior source with knowledge of the plans said.
Listed majors’ reserves reports “vary a bit in detail and some give a greater breakdown. Aramco probably hasn’t decided that yet,” the source said.
Over a decade ago, Shell’s stock price collapsed after the company said it had overstated its reserves by 20 percent. No listed oil major has seen its stated deposits stay unchanged for the past 30 years.
Aramco declined to comment. “Saudi Aramco does not comment on rumour or speculation,” a company spokesman said. Gaffney, Cline and Associates also declined to comment, while DeGolyer did not respond to a request for comment.
A reserves total that is significantly above or below the 261 billion figure is likely to affect Aramco’s potential value. Earlier phases of the audit have supported Aramco’s statements on the total size of deposits.
Aramco is showing all its data to the auditors, the sources said, and is using two firms rather than one in an effort to bolster confidence that the process is not a rubber-stamping of Aramco figures.
“Our reserves have been partially audited and are bigger than we actually booked,” Falih said this week.
“On every metric, Aramco will surprise analysts on the upside – lowest cost, highest cash flow, solid reserves that will be certified by third-party agencies.”
WHAT’S IN THE GROUND?
Historically Aramco has provided little detail publicly on its reserves other than total volume.
Publicly traded oil companies such as BP and Shell with assets distributed globally give more detail than just a headline figure, including reserves by geographic location and whether they are developed or undeveloped.
However, they do not give reserves by individual field – and for Aramco that is precisely what investors want, because its oil is concentrated in one country, Saudi Arabia.
Sadad al-Husseini, a former Aramco senior executive and now energy consultant, said Aramco has extensive details on its reserves in every field but it was not common practice for national oil companies to identify their deposits on that basis.
“What it might do initially is give a corporate summary and break it down by crude grade with more data to follow,” he said.
Aramco’s precise level of disclosure has yet to be decided, the source familiar with the plans said. He noted that Western majors do not list reserves by field.
“There is no way Aramco will be giving field-by-field detailed reserves,” another industry source familiar with the plans said, adding that the firm considers reserves decline rates and field maturity as sensitive, non-public data.
The question of how much oil is left at the biggest Saudi field, Ghawar, has long intrigued market watchers.
“What they need to offer is a package of assets with value-chain, operating and financial detail comparable to that made available by integrated oil companies,” said Jason Kenney, head of European oil and gas research at Santander.
“I doubt you’re going to get a full breakdown of the 261 billion barrels – but maybe the IPO is not about a full upstream offering either. To attract the investors, you’ve got to offer the same level of transparency as alternative investments.”
15 Comments on "Trillion-dollar question looms as Aramco audits oil reserves"
Lucifer on Sun, 12th Mar 2017 5:53 pm
I can definitely tell you all that the audit will say Aramco reserves are around the 260 billion mark. There is no way in hell they will say there is less than that. Its all just smoke and mirrors.
Sissyfuss on Sun, 12th Mar 2017 7:06 pm
If Lucifer says there’s no way in hell they say there’s less,take it to the bank.
makati1 on Sun, 12th Mar 2017 7:17 pm
ALL oily numbers and talk is bullshit. That is why I don’t waste my time reading them or paying attention to the ups and downs of FF prices. Meaningless, like the Stock Market Casino.
The greedy capitalist/globalist system is breaking down as cheap, plentiful energy to power it shrinks to lower and lower levels. Desperation is setting in everywhere. Prep now and avoid the rush! LOL
Outcast_Searcher on Mon, 13th Mar 2017 12:26 am
The lead Middle Eastern OPEC countries haven’t been honest about the oil reserve figures since at least the great “inflation” of stated figures in the 80’s.
If they’re not going to provide unfettered access to let the auditors get all the detailed data they can, why should anyone trust Aramco now?
Cloggie on Mon, 13th Mar 2017 3:01 am
For nearly 30 years… Riyadh has annually reported the same number for reserves of 261 billion barrels.
The truly exceptionalist thing about the Saudi’s is that they can have their cake and eat it too.
rockdoc123 on Mon, 13th Mar 2017 7:14 am
this article seems out of date given it was reported throughout the press several weeks ago that the D&M audit was already complete and the Gaffney Cline was largely complete. Both firms were quoted as stating the reserves were largely in line with what Aramco had been mentioning as of late. Also the article suggests there might be some hanky panky going on with reserve reporting. If Aramco is listed on the SEC, London or Toronto exchanges the rules are quite strict and future requirements for transparency required.
dkb on Mon, 13th Mar 2017 7:27 am
If the KSA is producing 10,000,000 bpd, 3.65 billion per year, 261/3.65=71.5 years of oil.
500,000,000 dollars per day, 182,500,000,000 dollars in a year, times 71.5, you have a total of 13,048,750,000,000 dollars worth of reserves at 50 USD per barrel.
At a hundred dollars, it’ll be 26 trillion dollars of reserves.
Answers the trillion dollar question.
One billion shares each worth at least 1300 USD per share.
At one million shares, each share is worth 1,300,000 USD.
Berkshire Hathaway BRKa is 262,000 USD per share. Aramco has to be worth more than Berkshire Hathaway.
Midnight Oil on Mon, 13th Mar 2017 7:28 am
. If Aramco is listed on the SEC, London or Toronto exchanges the rules are quite strict and future requirements for transparency required.
LOL…is this fella serious? These hoars will sell their souls their next cheque. The name of the game from here on out is the appearance of normalcy… Business as usual. My God after the Financial crisis and the aftermath along with Cheeto Trumpet dismantling restrictions and regulations..to state “rules are quite strict” must come from some brochures.
rockman on Mon, 13th Mar 2017 8:34 am
dkb – “One billion shares each worth at least 1300 USD per share.” In case you’re not aware no professional stock market analysis uses such a method set the value of any oil stock. Which also means everyone can stop pissing away time arguing about the amount of oil the KSA has in the ground with respect to a theoretical price of Aramco stock: no public oil is valued on the basis.
The primary basis for setting a stock’s value is expectation of eventually selling it for more. Imagine if 14 months ago you had such an expectation for Chesapeake Oil and had bought $10,000 of that stock. Surprise: it would be worth 200%+ more today. But here’s an important question: after such a run up in price would you buy it today?
The secondary metric used to determine a stock purchase is the dividend yield. For decades many have bought ExxonMobil for that very reason: no great expectation for its value to increase much above the inflation rate over the long term. XOM has a long history of sharing the company’s revenue with its shareholders. And what dividend yield has Aramco promised? Oh, right, they haven’t.
Actually there are many oil pubcos not paying dividends today. Of course Aramco does have a nice revenue stream today it could share…even more in the future as oil prices increase. Or will it? Does the Saudi oil belong to Aramco or to the Saudi govt? In the past that didn’t matter since the Saudi govt owned 100% of Aramco. But what if Aramco has to pay a royalty to the Saudi govt? After all that’s how every foreign oil concession in the world works today: ExxonMobil gives a % of the oil revenue to the Equatorial Guinea govt which owns the oil. So how much revenue has the Saudi govt promised it will let Aramco retain? Right, they haven’t addressed that issue yet.
Bottom line: there are so many unanswered questions about a potential IPO it really is wasting time to speculate now IMHO.
dkb on Mon, 13th Mar 2017 11:17 am
It is not as simple as I make it look, that I realize.
Just trying to place a number for the five percent of the value.
261,000,000,000 barrels has a monetary value.
At 100 dollars, it is 26,100,000,000,000.
Five percent is 1.3 trillion, a billion shares would have a value of 1300 each.
I know that isn’t how it’s done, just trying to figure a number with some arithmetic that might look like it might work.
rockman on Mon, 13th Mar 2017 3:09 pm
dkb – I doubt it will be an easy task for the pros let alone me and you. Again the best example I can offer as to why there’s really no logical way to do the calculus is to look at them recent history of Chesapeake Energy. For years now folks have been talking about it disappearing in a cloud of debt and bankruptcy dust.
In July 2008 it sold for about $67/share. And 8 years earlier it was about $2/share. Look at the volatility of the stock. I won’t take the time but obviously it’s proven reserve base never had such ups and downs. Of course oil prices did. But in the 5 months from July 2008 to Dec 2008 the price of oil did not fall 80% and neither did CHK’s proved reserves. But the price of CHK stock did. What if Aramco stock sells for $67/s when the IPO is released: anyone going to guarantee it won’t drop to $11/s in 5 months? If they do be sure to get it in writing. LOL.
Now look at Feb 2016: $1.60/s. And Dec 2016: $7.70/s: a 480% increase in just 10 months.
https://www.google.com/#q=chesapeake+energy+stock+price+history&*
Now here’s one pro’s view (“Why Chesapeake Is Doing Even Worse Than Oil and Gas Peers”) of the company just 14 months before its stock took off:
“…and the proved reserves rate of growth, including the impacts of sales and acquisitions, was -8%. If a company cannot, for whatever reason, at least add as much new proved reserves in a year as it extracts, that is a warning sign to investors.”
That was from: https://www.google.com/#q=chesapeake+energy+stock+price+history&*
So if a professional like this can be that wrong over such a short period about the value of a company’s stock whose calculation of the Aramco stock price would you bet your money on?
There’s one valuation of any company’s stock price that has never been wrong: what the market will buy a share of stock for at any one moment. If Aramco sell for $1,300/s the day trading starts it is worth $1,300/s. And if its trading for $130/s a year later then that’s what it’s worth…$130/s.
Of course anyone can write a 10,000 word report with lots of colorful charts arguing the stock is worth less then $1,300/s or more then $130/s. But that would have no bearing on what it is actually worth: the market will tell you that every minute the trading floor is open.
rockman on Mon, 13th Mar 2017 4:04 pm
dkb – “261,000,000,000 barrels has a monetary value.” Yes, it does: multiple and quite variable VALUES.
“At 100 dollars, it is 26,100,000,000,000.” No, it doesn’t. Even is all 261 billion bbls were sitting in tanks and oil were selling for $100/bbl no one would pay you $26.1 trillion for it. First, because it would take decades to refine and sell the products the time discount probably would let them pay more then $20/bbl. Hundreds of $billions in oil sitting in a tank is making no profit. In fact, unless you spent $billions building your own tanks you would be paying hundreds of $millions every year to store it is someone else’s tanks.
Of course if those bbls are sitting underground and can only be produced at around 12 million bopd it would be even worse. Are you familiar with the NPV computation? That’s the Net Present Value. Think of it as negative interest on your savings account. Most companies use about a 10% DR…Discount Rate.
And easy way to picture it: I borrow $100 from you and agree to pay you back $150. Good deal or bad? Good if I pay you back in 12 months. Not so good if I take 20 years. You can calculate the NPV of the deal if you know the time frame. IOW with a 10% DR a dollar I pay you back in 12 months is worth $0.90 ($1 – 10% of $1). And a dollar paid back in 2 years: $1 – 20% of $1. Keep going and after 7 or 8 years that $1 returned has very little NPV…after 10 years almost nothing.
Now for a public oil company you only receive any revenue from your stock based upon the dividends you’re paid. BTW Chesapeake just announced it was suspending dividends. IOW the shareholders get no profit on their investment…unless they sell their stock for more then they paid.
So back to my original point about trying to evaluate what Aramco stock would be worth. First, we don’t know how much revenue Aramco gets to retain: the oil belongs to the kingdom…not the national oil company. Aramco might give 25% of the production to the kingdom as a royalty payment. As I said earlier not an unusual arrangement. Or it might be a 10% royalty…or a 90% royalty. Or as when the KSA nationalized the industry: 100% royalty.
But whatever the revenue Aramco receives those monies belong 100% to the corporation…just like the revenue Chesapeake is receiving. And just like CHK the Aramco corporation is under no obligation to share any of that income with the shareholders. Dividend payments will be determined by the Aramco board if directors. A board elected by the majority of the shareholders. Shareholders that will be 98% of the Saudi govt. I wonder how that election turns out? LOL.
So how does a public oil company increase its value? Typically by increasing its reserves. Oddly enough the fact that the KSA has held its proven reserves constant for decades IS NOT positive metric. IOW while it “may have replaced” its production y-o-y for decades it hasn’t INCREASED its proved reserves. So if Aramco has X billion bbls of reserves in 2017 and you expect it to have X bbls of reserves in 10 years why would you expect the stock to increase in value IF, as you implied earlier, a company’s stock is a function of its proved reserves.
So IF you had little or no expectation of the KSA reserves to increase in 10 years (which actually implies the expectation that the KSA will find 36 billion bbls of oil over the next 10 years to replace its production) then why would you expect the stock to be worth more then you paid for it? And that assumes Aramco pays a decent dividend like some of Big Oil…around 3% to 4%.
So still not a bad deal if you invest $100,000 in Aramco stock and get $3,500 per year in dividends for the next 10 years. Assuming, of course, Aramaco finds another 35 billion bbls of oil to replace its production and that you can sell your stock for $100,000. Better then most money market accounts these days. Of course if the feds raise rates significantly in the next 5 years MM accounts might be paying 5%+. That would drive down the value of any stock paying 3.5% dividends. Especially the stock of an oil company that HAS NOT been able to replace all the reserves it has been producing.
shortonoil on Mon, 13th Mar 2017 4:40 pm
The Saudi supposedly have 260 Gb of oil, which at $50/ barrel is $13 trillion. They are going to sell off 5% of that for $100 billion. So, to raise $100 billion they are going to sell off 13 Gb at $7.70 /barrel. Does this transaction include Green Stamps, and Vaseline? Old Chinese proverb; “beware Greeks and camel man bearing gifts, and giving away oil”.
onlooker on Mon, 13th Mar 2017 4:55 pm
Sounds like the Saudis themselves are shorting oil in a big way. Explains also their moves to diversify away from oil
Ravenbran on Tue, 14th Mar 2017 1:17 am
Maybe Matthew Simmons was right.