Saudi Aramco allows sneak peek into its finances

Saudi Aramco allows sneak peek into its finances

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.”

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5 hours ago, ceo_energemsier said:

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.

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.

Pay attention to this bit, which underscores the nonsense about Aramco's dirt cheap lifting costs.  The government and many thousands of Saudi princes and royalty leech off of Aramco, driving up Aramco's actual cost of doing business, making Aramco far less competitive than other oil companies.

"In 2018, Aramco paid about $160bn to the government in dividends, taxes and royalties.

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."

 

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On 6/22/2019 at 3:04 AM, Tom Kirkman said:

Pay attention to this bit, which underscores the nonsense about Aramco's dirt cheap lifting costs.  The government and many thousands of Saudi princes and royalty leech off of Aramco, driving up Aramco's actual cost of doing business, making Aramco far less competitive than other oil companies.

"In 2018, Aramco paid about $160bn to the government in dividends, taxes and royalties.

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."

 

Again, "Enron-esque" accounting methodologies and practices. If they add the costs of all the social programmes, payments to their 5000+ family members and all the expenses, then you have the costs more or less transparent.

 

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1 hour ago, ceo_energemsier said:

Again, "Enron-esque" accounting methodologies and practices. If they add the costs of all the social programmes, payments to their 5000+ family members and all the expenses, then you have the costs more or less transparent.

 

You really can't compare Enron a public to Aramco. While both seem to look the same on paper, the accounting of Aramco is mostly fabricated to look good to future investors. Not one outside audit is allowed, and not one Seismic to see real numbers of how much oil they really have. I am just a bit suspicious. 

Soon enough as the world goes more "Electric" and more countries are producing oil, their oil will be less important. Peak energy is getting here faster than most people realize. The 2 most emerging oil consumers realize this. China and India have over half the worlds population and their respective governments know oil isn't the answer to solve energy issues. 

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(edited)

3 hours ago, Old-Ruffneck said:

You really can't compare Enron a public to Aramco. While both seem to look the same on paper, the accounting of Aramco is mostly fabricated to look good to future investors. Not one outside audit is allowed, and not one Seismic to see real numbers of how much oil they really have. I am just a bit suspicious. 

Soon enough as the world goes more "Electric" and more countries are producing oil, their oil will be less important. Peak energy is getting here faster than most people realize. The 2 most emerging oil consumers realize this. China and India have over half the worlds population and their respective governments know oil isn't the answer to solve energy issues. 

It is not a comparison of Enron, a former public company and Aramco, it was a sarcastic and some not so sarcastic comparative analysis of their smoke screen, cloak and dagger .... method of some accounting practices.

Yes @ Aramco there isnt a third party review, analysis and audit of their reserves and resources that is open to public review, analysis and critique.

They are aware of the electrification threat of vehicles and lowering of the demand of oil for liquid fuels, that is why they are also pushing for switch over from fuels to chemicals in a very very big way.  China and India are not going to and are not fully at the stage where they can "dump" oil for other options. India will keep on using lot of coal for power gen., and oil will still be their long term source of transport fuel and other requirements. They are and will continue to seek alternatives into the general mix, but it is not going to be a major factor in changing their demands and habits.

Edited by ceo_energemsier
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