Some of the most secretive, highly-anticipated details about the Saudi oil industry have just been released.
Saudi Aramco is preparing to launch a major bond issuance to purchase the Saudi petrochemical company Sabic, a process that required a detailed prospectus on the company. As part of that review, Aramco released on Monday some closely-guarded state secrets that have been kept under wraps for decades and have been the subject of endless and wild speculation.
With little fanfare, Aramco released some details …and they are somewhat damning. For instance, the Ghawar oil field, which has at times held an almost mythical status both because of its massive size and also because of the complete opaqueness on its inner workings, can’t produce as much as previously thought. Ghawar is the core of Aramco’s oil production, and is of vital national security importance to the Saudi state.
The prospectus says that the Ghawar field can only produce 3.8 million barrels per day (mb/d), not the widely thought 5 mb/d that has floated around for years as a rough estimate. “As Saudi’s largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report,” said Virendra Chauhan, head of upstream at consultant Energy Aspects Ltd., according to Bloomberg.
There was little other detail offered on that figure, why it declined, or whether it would continue to decline. But it is a very significant downward revision.
Nevertheless, the Aramco prospectus confirmed some more impressive figures that have also been the subject of speculation. The document says the company can produce 12 mb/d, a rate of output that has been criticized and questioned. With current production at about 10 mb/d, that implies a current 2 mb/d of spare capacity, which is a comfortable buffer that could plug some hypothetical supply gaps. In addition, there is about 500,000 bpd lying dormant in the Neutral Zone on the border with Kuwait. Related: Alberta Oil Inventories Rise Despite Production Cuts
The country is also sitting on 226 billion barrels of oil reserves, or about 52 years’ worth of supply at maximum production rates of 12 mb/d.
Aramco is also the world’s most profitable company, earning $111 billion last year, which is several multiples of the oil majors and significantly higher than tech giants such as Google and Apple. And its reserves are incredibly cheap to produce – Aramco can produce oil, including capex, at as low as $7.50 per barrel before tax. Liam Denning of Bloomberg Opinion points out that the low cost of production and enormous output levels means that return on capital employed vastly exceeds its competitors.
But the profits are sorely needed to prop up the entire Saudi state, which makes Aramco entirely different from the oil majors. “Saudi Aramco’s rating is constrained by that of Saudi Arabia (A+/Stable),” Fitch said when explaining its decision to rate the company’s credit below that of, say, Shell or Exxon, despite much larger profits and lower debt. “This reflects the influence the state exerts on the company through taxation and dividends, as well as regulating the level of production in line with its OPEC commitments.” Also, its valuation could be only half of the $2 trillion that Saudi officials repeatedly trumpeted.
More broadly, some of the largest unanswered questions revolve around Aramco’s future. While the company has some of the largest and cheapest oil reserves in the world, the longevity of the oil market in general is up for debate. Peak oil demand looms. Aramco argues that it will be well-positioned for the peak, with low-cost output that can survive in a dwindling market. High-cost producers will be forced out long before Aramco will be.
Also, Aramco is aggressively pivoting into petrochemicals, refining, natural gas and other avenues that could shield it a bit from a future of peak demand. But the shift is still relatively modest given the size of its crude business. “It’s going to be very difficult for them to ever diversify away from oil,” Olivier Jakob at Petromatrix told the FT.
In that sense, Aramco, while seemingly impenetrable with sky-high profits and vast reserves that are some of the cheapest in the world to produce, is also dangerously vulnerable to the unfolding energy transition.
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By Nick Cunningham of Oilprice.com
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With supposedly 266 billion barrels (bb) of proven reserves, exports of some 7 million barrels a day (mbd) providing an annualized revenue of $171.19 bn at current oil prices and production costs of $7.5 per barrel before tax, Saudi Aramco could to all appearances be confirmed as the world’s most profitable company. However, appearances could be deceptive.
To help a successful bond issuance, Saudi Aramco has for the first time since it has become a fully-owned Saudi company issued a prospectus in which it shed some light on its finances on what is being touted by investment banks like the discovery of the secret of long life.
However, the prospectus left many crucial questions unanswered. Prominent among them is the real size of Saudi proven reserves and the production levels of its very aging oilfields which underpin its current production.
Four giant oilfields Ghawar, Safaniya, Hanifa and Khafji (shared with Kuwait) all of which are more than 70 years old and which are being kept producing by a huge injection of water, have over the years accounted for more than 90% of Saudi oil production with Ghawar accounting for 50% of the total.
Now the Saudis are saying that Ghawar which is the core of Aramco’s oil production and which has been for years contributing 5 mbd to Saudi total production, can only produce 3.8 mbd. If this is the case, then the persistent reports about depletion of reserves which have been circulating for years about Ghawar must be true. It is fair to suggest that the same depletion would have also affected the other aging oilfields. This is supported by the fact that Saudi oil production peaked in 2005 at 9.6 mbd and has been declining since. In a nut shell, Ghawar could be the Achillies heel of Saudi oil production.
This also gives the lie to Saudi claims that they have a production capacity of 12 mbd meaning a spare capacity of 2 mbd.
Meanwhile, the persistent question marks about the actual size of Saudi proven reserves will continue unabated until a truly independent audit is undertaken.. Far from having proven reserves of 266 bb, I estimated the remaining Saudi proven reserves at no more than 70-74 bb. By adding Saudi production since the discovery of oil in 1938 till now (for which we have figures) and then deducting them from Saudi claimed proven reserves along with an annual depletion rate of Saudi aging fields averaging 5%-7% for the same period, my calculations came to around 70-74 bb of remaining reserves.
The fact that Saudi Arabia’s proven reserves remained virtually constant year after year despite sizeable annual production and a lack of major new discoveries since 1965 is due to the Saudis increasing the oil recovery factor (R/F) and the oil initially in place (OIIP) to offset annual production. The Saudis have been declaring an R/F of 52% or even higher when the global average is 34%-35%. They have also increased the OIIP from 700 bb to 900 bb on the basis of Saudi Aramco projecting new discoveries which are yet to be discovered.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London