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Aramco’s True Breakeven Price

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Saudi Aramco, the national oil company of Saudi Arabia, is by far the largest oil company in the world. The company produces around 13 percent of the world’s oil, but its business operations have been notoriously opaque for decades. It has often been stated that the company has plenty of low-cost legacy wells that drop its overall production costs to $10 per barrel, or even lower.

Because there was no way to audit this information, the world was left to guess at the actual breakeven costs for the world’s largest oil company. This week Saudi Aramco lifted the veil on its financial condition in a bond offering for the company. (PDF link here).

There are many important financial details in the filing. The company is indeed the world’s most profitable, earning $111 billion on $356 billion in revenue in 2018. This is nearly double the $59.4 billion made by Apple, the world’s second-most profitable company, in 2018. It’s also over five times the $20.8 billion made by ExxonMobil last year.

Bloomberg points out that Aramco’s “funds flow from operations” was $26 per barrel last year, which they note was worse than Shell or Total which reported $38 and $31, respectively.

However, I found the most significant item in the prospectus to be that Saudi Aramco struggled to break even in 2016 when Brent crude averaged about $45 per barrel. Net income in 2016 was only $13 billion, and free cash flow a mere $2 billion. Contrast that with the $111 billion in income and $86 billion in free cash flow the company made in 2018 (when Brent crude averaged $71.34/bbl), and it looks like Aramco’s breakeven price is just about $40/bbl.

No wonder OPEC threw in the towel in 2016 and decided to abandon its price war with U.S. shale. OPEC’s largest member saw its income dry up and was on the verge of posting a loss if oil prices didn’t turn around. I once characterized OPEC’s decision to declare war on U.S. shale oil producers as a trillion dollar miscalculation, and at least now we can see that it likely cost Saudi Aramco alone several hundred billion dollars.

The implications of this news are that we will likely never again see an extended period of time with world oil prices below $45, because OPEC will have to take action at that point to prop up prices as the cartel did in 2016. Otherwise, they will quickly find themselves in deep financial trouble, unable to balance government budgets.

So, if you do see oil prices dip back down to that level, it’s definitely time to buy. Unless, of course, demand for oil has peaked and is on the decline. But that’s an argument for a different column.

By Robert Rapier

10 Comments on "Aramco’s True Breakeven Price"

  1. Davy on Tue, 9th Apr 2019 7:11 am 

    Somebody is betting on oil

    “Biggest Orderbook In History: Aramco Bond Demand Tops Record $100 Billion” zero hedge

    “Update: just as we expected earlier (see below), the Aramco order book has now crossed $100 billion, making this not only the largest ever orderbook seen in emerging markets, covering 10x the $10 billion Aramco is expected to raise (a number that will almost certainly jump shortly), but the largest orderbook in bond market history, surpassing the prior record when Verizon drew $100BN of orders for a record-breaking $49BN corporate bond sale in 2013.”

  2. anon on Tue, 9th Apr 2019 8:53 am 

    To my mind the only thing that sufficiently explains why aramco is ‘opening up’ right now is as a mechanism to pull future revenue/profit/gain into the present – because there is less and less confidence of its available utility in the future. Now this could be beacause of internal power struggles- the young prince wants more cash right now, damn the future, for without it he will lose his power and his future throne. that’s one possible explanation. An even more cynical version would also include some amount of knowledge on the part of MBS and any others in high power in saudi arabia, that even if they could manage aramco for a few more decades , the surplus is not going to last as long as they claim, so they might as well sell the rumor before getting stuck with the fact and empty pockets (and a political shitstorm).. or even more cynical, that perhaps they also know that without a stable functioning global economy their billions will be useless in 20 years so why bother with long term planning, suck out as much as you absolutely can now…
    in any case if aramco truly had the future its champions are trying to convince everyone of, they wouldnt part with a penny of it, so the official storyline is for sure BS.

  3. shortonoil on Tue, 9th Apr 2019 9:34 am 

    “The implications of this news are that we will likely never again see an extended period of time with world oil prices below $45, because OPEC will have to take action at that point to prop up prices as the cartel did in 2016.”

    This is probably not correct. When OPEC has cut production to raise prices they have historically lost revenue. The price increase that results from the production cut does not compensate for their lost sales volume. The best example of this was during the early 1980’s when Saudi Arabia cut its production by 50%; which doubled the price, but they discovered that they were lossing revenue. OPEC abandoned the attempt in 1984. What has saved OPEC this time has been the collapse of Venezuelan production. OPEC’s ability to raise prices is constrained by market forces. There is a maxium price that the economy can support. Beyond that point the marginal buyer begins to reduce consumption at a rate that negates the increased revenue generated from the price increase. We are past the point of maximum affordability, and production constraints will only result in lower total revenue generation for the producers. Depending on the state of the economy, the price could decline to zero, and eventually will.

  4. Robert Inget on Tue, 9th Apr 2019 11:29 am 

    I think it’s imposable to determine a warlike, state owned, single revenue, operation cost structure.

    ARAMCO is the sole source of KSA income.

    When Saudi Arabia entered the forth year of a losing oil grab in Yemen costing untold billions,
    in foreign reserves, plus millions of barrels wasted in the war effort.
    The same can be said for the Syrian adventure.

    The RCMP and FBI supply top security for North American (energy) companies at taxpayer expense. Because Canada and US aren’t entirely revenue dependent on a single industry.

    If KSA’s oil structure is threatened just who are they going to call?

    OPEC countries are for the most part national corps. When Iraq attacked Iran’s oil fields
    did the prices of oil go higher?

    When Iraq attacked Kuwait did Kuwait call the CIA? (well they did, but never mind)
    The same when is still happening when KSA
    invaded Yemen. One day the US will get sick of
    killing barefoot kids and give the entire job back to the Saudis.

    Venezuela, today’s OPEC poster child is not alone.
    Libya and fellow African OPEC members Nigeria,
    Algeria are also headed lower.

  5. Shortend on Tue, 9th Apr 2019 12:05 pm 

    What’s the break even price of supporting 33 million mouths that expect a free handout!?
    Oh, need to add the military hardware that Uncle Sam provides to the House of Said too.
    Protection is a necessity in this cruel world

  6. Robert Inget on Tue, 9th Apr 2019 12:47 pm 

    Yeah, ‘protection’.
    For a young black man to own ‘protection’ (a gun)
    in America is nothing more than a death sentence.
    Just waiting. In fact, his cell-phone, wallet, car keys, better be in bright pink covers, for real ‘protection.

    Does Norway need to invade Sweden to ‘protect North sea oil?

    Does Costa Rica need an army to protect itself from NA Surfers… well, maybe.

  7. Robert Inget on Tue, 9th Apr 2019 1:06 pm

    New NG pipeline for the Permian?

    If this goes through it could (further) destabilize
    ICE motor industry by LOWERING electricity costs. (highbred power, Solar/Natty)
    Here’s your chance to support a do good pipeline.

  8. Robert Inget on Tue, 9th Apr 2019 1:17 pm 

    What’s going down in OPEC member Algeria?

    Algerian police have used water cannon to disperse protesters demonstrating against Abdelkader Bensalah’s appointment as interim president.

    When cops turn to actual cannons, time to
    fill-up the old Jeep.

  9. Harquebus on Tue, 9th Apr 2019 5:25 pm 

    Let me see if I’ve got this straight:

    Saudi Arabia needs the rest of the world to continue increasing debts in order to purchase their crude at now to be consistantly high prices in order to balance their books.

    I don’t think that this is going to end well.

  10. Theedrich on Wed, 10th Apr 2019 1:48 am 

    If Yemenis Houthis ever hit Abqaiq’s oil spigot, it will be all over for the KSA.  As everyone knows, the Mohammedan snakepit exists only because of U.S. protection.  The sandlot’s camel drivers have no other real source of military support beside Uncle Sap and no other source of economic support beside oil.  The Allah-psychos there are living on borrowed time, despite White-killer FDR’s secret February 1945 pact to protect them in perpetuity in return for their petroleum.  Trump made it clear that the ONLY reason Yankeedom supports the murderers there is the money we get from selling weapons to them, which enriches American merchants of death.  Allah bless America.

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