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Saudi Aramco allows sneak peek into its finances

Saudi Aramco allows sneak peek into its finances thumbnail

The company’s mammoth $12bn global bond offering allowed a glimpse into its treasure chest for the first time

The world’s focus, not surprisingly, has been on Saudi Aramco’s $111bn of net income recorded in 2018, making it the most profitable company in the world. But elements of the upstream story were largely ignored.

For example, the prospectus showed the company’s largest oilfield, Ghawar, undershooting what many had thought was its current capacity of around 5mn bl/d, instead coming in at 3.8mn bl/d.

Ghawar has contributed about half of the estimated 150bn barrels of crude that Saudi Arabia has produced to date. Without doubt, Ghawar is an enormous field. Its remaining reserves are put at 48bn bl, so there is still a lot of oil out there, but it will get harder to recover, and require substantive expenditure.

Aramco is developing new fields to plug depletion, with half a dozen expected to come on stream by 2026 — adding an extra 1.25mn bl/d, according to data from consultancy Energy Aspects. Its co-founder Richard Mallinson emphasises that future upstream development is designed to keep things steady “at current capacity levels…Aramco is not talking, as it has done in the past, about possibly raising potential capacity from 12mn bl/d to 15mn bl/d.”

Still, Aramco is not giving up on Ghawar anytime soon. The prospectus says field facilities and infrastructure there remain a central component in the company’s long-term strategic framework.

“The scope of the utilisation and maintenance of the established infrastructure has expanded to be a hub for development of secondary reservoirs and satellite fields,” says the prospectus.

The prospectus also shows how it has boosted production at other fields. At Shaybah in the south of the kingdom, and at the offshore Safaniyah field in the Gulf, Aramco reported production was close to double earlier Western estimates. At the Khurais field, near Ghawar in the east of the country, a “mega-project that started in 2009 with initial capacity of 1.2mn bl/d, has hoisted production to 1.5mn bl.” In 2018, Aramco produced 13.6mn bl/d of oil, including 10.3mn bl/d of crude.

Half a century of reserves

Overall, Aramco’s reserves come in at a similar level to an independent audit published earlier this year: 261.5bn bl of crude and condensate, sufficient for proved reserves life of 54 years, “significantly longer than the 9 to 15 year proved reserves life of any of the five major IOCs based on publicly available information”, claims the prospectus. The document also records 36.1bn bl of NGLs and 233.8tn ft3 of natural gas.

“The postponed Aramco IPO is certainly back on the table” — Modell, Rapidan Energy

Another scarcely mentioned disclosure in the prospectus was Aramco’s shift to lighter-grade oil, in terms of projects that have come on line, and new ones in the pipeline. The question now is the extent to which Aramco can match this type of product to demand in the marketplace. The move to lighter is good in terms of petrochemical demand and positive when gasoline/diesel demand is strong.

The prospectus flags Aramco’s rock-bottom cost of production based on a comparison of data of the five major IOCs and other leading oil and gas companies. The company’s “average upstream lifting cost was $2.80/bl” of oil equivalent produced in 2018. Revenue from upstream operations stood at around $217bn, while downstream revenue was $139bn. It had $86bn in free cash flow at the end of 2018, with minimal debt.

But all that glistens is not gold. Aramco may be the world’s most profitable oil company, producing more than 10pc of global crude, but the prospectus shows the state’s reliance on the company means it generates less per barrel than privately-owned competitors. Riyadh relied on the oil sector for 63pc of its total revenue in 2017, according to the prospectus. In 2018, Aramco paid about $160bn to the government in dividends, taxes and royalties.

Top credit rating

The transfer of funds from Aramco to the kingdom meant the oil company made about $26/bl last year, compared with $38/bl for Shell and $31/bl for Total. That’s why Moody’s and Fitch assigned the company ratings of A1 and A+, respectively, arguing the government’s reliance on the oil producer to fund its budget acted as a cap on its creditworthiness. ExxonMobil is rated AAA by Moody’s.

The linkage between the state and company is an important one in the debate about whether Riyadh really does intend to float a minority stake in Aramco in 2021. Investors worry about the government’s control over the oil giant and whether future decisions will be made for the benefit of the state or shareholders.

261.5bn bl — Saudi Aramco crude and condensate reserves

Andy Critchlow of S&P Global Platts says “investors may be cautious about an IPO because of uncertainty linked to sovereign risk and the kingdom’s future potential financing needs [particularly if prices crash due to a swifter switch to green technologies]”.

In the interim, the company is shoring up its defences in an uncertain world. It plans to double its refining network, mostly outside the country. The idea is to feed about 50pc of its oil into its fully-owned or joint-venture refineries, making it the largest consumer of its own crude. The prospectus states categorically that refinery expansion was a means “to secure crude oil demand by selling to its captive system” of refineries.

Also revealed is the way Aramco ensures it always has enough spare capacity up its sleeve. The aim is to have “the average maximum number of barrels per day of crude oil (MSC) that can be produced for one year during any future planning period”.

Sovereign wealth boost

As of 31 December 2018, MSC stood at 12mn bl/d of crude. Spare capacity afforded by maintaining MSC enables the company “to increase production above planned levels rapidly in response to changes in global crude oil supply and demand”.

Saudi Arabia is drawing on Aramco’s cash to bolster its sovereign wealth fund to develop new industries to break the kingdom’s reliance on oil. It is also trying to extract more profit from the crude it pumps by turning it into gasoline and diesel, as well as plastics and other materials used in consumer goods. The $69bn purchase of Sabic was a case in point and a major factor behind the bond offering.

The aim is to provide more cash for the Public Investment Fund, the kingdom’s sovereign wealth fund, to invest both internally and overseas to wean Saudi off its addiction to fossil fuels. It is a race against time as the bond prospectus indirectly acknowledges via its references to risk factors that span climate change, among others. And that raises, once again, the issue of an IPO down the line in which the Saudis would like to raise a cool $100bn.

A listing may be better sooner than later if you believe in the relentless switch to cleaner fuel sources. That said, traders are wondering whether Aramco and Riyadh really need the money.

After all, have they not demonstrated how easily they can tap the bond markets for credit?

Scott Modell, head of geopolitical risk at Washington-based consultancy Rapidan Energy, disagrees with this thesis. “An IPO is necessary [otherwise MBS’s] ambitious Vision 2030 programme designed to reduce oil dependence [could end up becoming] Vision 2130,” he says. “And for that reason, the IPO [postponed last year] is certainly back on the table.”

10 Comments on "Saudi Aramco allows sneak peek into its finances"

  1. Sissyfuss on Fri, 21st Jun 2019 9:21 am 

    As Monbiot says, ” there’s enough to cook us all.” And the Saudis will be the head chefs.

  2. print baby print on Sat, 22nd Jun 2019 4:23 pm 

    The war with Iran could be finished in couple of hours. Iranians just have to obliterate KSA oil terminals . 10mil barrel less, and there isn’t anything worth fighting left. Usa can go home

  3. Duncan Idaho on Sat, 22nd Jun 2019 6:05 pm 

    Iranians just have to obliterate KSA oil terminals . 10mil barrel less, and there isn’t anything worth fighting left.

    We have a winner

  4. makati1 on Sat, 22nd Jun 2019 6:40 pm 

    At least some here understand my assertion that Iran holds all the Aces in this game. Only million of barrels of oil have to die, not millions of people. Maybe a few hours and a few hundred missiles?

    The Navy will exit the gulf in a hurry when the missiles start to fly. That is IF they can get thru the Strait. I bet there will be no US Navy in the Gulf when the SHTF.

  5. print baby print on Sun, 23rd Jun 2019 11:25 am 

    Mak but be realistic Iran doesn’t stand a chance against Usa navy or army , but those terminal are sitting ducks , and all the fuss is about oil and Israel right?

  6. makati1 on Sun, 23rd Jun 2019 6:07 pm 

    pbp, the US has shit for a military. None of its weapons systems work and the paid to fight snowflakes are not going to win against any real army, like Iran. In 17+ years, goat herds have been beating them in Afghan. Ditto for all the other wars of choice: Syria, Iraq, etc..

    Iran holds the Aces. Last time I checked, there are zero carriers in the Gulf bathtub. The US Navy knows it will lose anything they have in the Gulf when the SHTF. Iran’s missiles are capable of taking out all American assets in the ME not to mention all of the oil resources as you mentioned. One day would take the world economy to its knees and destroy the US as a powerful nation. One day.

    Only fools would attack Iran. It doesn’t need nukes. In today’s world the Strait is the “Nuke of Nukes”. Even Israel will not attack Iran directly as it would get its ass handed to it in short order. Instead, Israel wants the US to do its dirty work. Maybe Hitler had the right idea?

    I would guess you are an arm-chair-general, pbp and likely have zero experience in the military or even know what Iran is like today. Easy to suck down that USMSM Koolaid when YOUR ass is not on the firing line. Like most Americans, you deserve what is coming.

  7. makati1 on Sun, 23rd Jun 2019 6:29 pm 

    “Provoking Iran Could Start a War and Crash the Entire World Economy”

    “Iran’s ability to target and destroy the high-altitude American drone, which was developed to evade the very surface-to-air missiles used to bring it down, surprised some Defense Department officials, who interpreted it as a show of how difficult Tehran can make things for the United States as it deploys more troops and steps up surveillance in the region.”

    “The threat of causing a conflict in the Persian Gulf, and thereby making the price of oil soar to $300 a barrel, will not save US hegemony but will rather end up accelerating the inevitable end of the US dollar as a global reserve currency.” And the end of the US as a major power. Third world?

    As I said: Iran holds all the Aces in this game. Reality is much more exciting than the piss-poor “Game of Thrones”. Pass the popcorn.

  8. print baby print on Mon, 24th Jun 2019 1:09 am 

    Mak we all deserve what is coming me you , trump , mulah in teheran . We are parasites with brain anomaly .You think you are better than other you hate Jews and Americans. You think Ksa or Iran are better , you are wrong. Yes I am arm chair general just like you , but I have military experience and I know what is coming and we have deserved all what is coming .

  9. makati1 on Mon, 24th Jun 2019 2:04 am 

    Actually, pbp, the US deserves most of it for its greed, immorality, murders. theft and plain insanity for the last 70+ years or so. The voracious termite US consumer/wasters that reside there are well deserving of what is coming. In spades!

    I “hate” those who are causing the unnecessary pain in the world today, and yes, the Jews and Americans are at the top of the list. The sooner both are taken down, the better for the rest of the world. Tomorrow would be fine with me.

    I served for 11 years as an officer in the military. I was on the street in the 60s riots, were you? I see what the US is doing in the name of “democracy” when there is no democracy in the US. Hypocrites. Always pointing the finger of blame at others instead of the real culprit, themselves.

    So, yes, it is time they (Americans) live on their <4% of the world's resources instead of the 25%+ that they have been stealing from 3rd world countries for decades. ? Filipinos live on 1/20th that of an American, so it can be done. If you cannot live on 1/5 what you do now, then die. Simple, yes?

  10. print baby print on Mon, 24th Jun 2019 7:09 am 

    You are completley right. I am saying another thing can you imagine Russia Iran Ksa Serbia Croatia you name it to be super power for the last 70 years the things would be hundred times worst . I am 99% sure , well we can discuss about it but I am sure you know the true deep inside . So the americans are not the ultimate evil human kind is

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