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Kurt Cobb

Kurt Cobb

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has also appeared in The Christian Science…

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The Oil Mystery Undermining An Aramco IPO


It's what you can't see—the oil beneath the Arabian sands—that potential investors in Saudi Aramco's on-again, off-again initial public offering (IPO) ought to focus on. The truth about the remaining oil resources beneath the Saudi desert continues to be a state secret. I'll elaborate on this after a little background to set the context.

Recently, Saudi Aramco, the state-owned Saudi oil company, delayed its planned IPO again. For those who missed the previous time, plans for the IPO first came to light in 2016 as part of Saudi Arabia's 2030 Vision, essentially a plan to diversify the country's economy away from heavy dependence on oil. The feverish attention the proposed IPO produced abated when the world's largest company unexpectedly withdrew it in 2018. The financial firms advising the government were let go as the government looked for other ways to raise money for its 2030 Vision plans.

And yet, the IPO idea remained a possibility and was later revived. The problem has been that both times the IPO looked like it was about to happen, the Kingdom of Saudi Arabia got cold feet, worried that it might not get the $100 billion it wants for 5 percent of the company.

Initial hopes of listings on prominent international exchanges such as the New York Stock Exchange and the London Stock Exchange have long since been abandoned. But the most recent IPO attempt was to be made wholly on Saudi Arabia's own domestic exchange. Even that apparently looked like it might fail.

So, the big question is why. The answer is probably right beneath the Saudis' feet: The oil under Saudi sands—or rather the uncertainty about the amount of extractable oil that still lies there. Related: The Biggest Oil & Gas Discoveries Of 2019

The vast infrastructure that makes up the Saudi oil industry is visible to anyone with access to satellite photography. Its details are so widely known that the kingdom's enemies in Yemen were able to launch a crippling drone strike on that infrastructure not long ago that temporarily knocked out half the kingdom's production capacity.

None of this is a mystery to investors. And, the amount of oil that is brought out of the ground and sold each day into the international and domestic markets is calculated and crosschecked against information from a vast international oil surveillance system where precious data about oil well production and cargoes goes for millions of dollars to subscribers.

The one piece of data that cannot be known with much clarity is the size of Saudi oil reserves. The Saudis have a publicly stated number. But Saudi Aramco has not submitted to an independent audit of its reserves since 1980. Stated reserves have barely budged since 1998 according to the most recent BP Statistical Review of World Energy despite enormous production. One would think that 20 years of robust production would have had some downward effect on reserve numbers.

But even if reserves have in reality held steady, what's left of the total oil resources under Saudi Arabia has been declining. (Resources are typically defined as original oil in place, a rather vague estimate. Reserves are defined as oil which can be extracted profitably at today's prices using current technology from proven deposits. Reserves are only a tiny fraction of resources though reserves may be expanded through exploration and sufficient drilling.) Related: Oil Rebounds On Rare Market Optimism

Why might investors be skittish about Aramco's oil reserve claims? Back in 2011 diplomatic cables leaked by Wikileaks revealed that the company might not have the reserves it is claiming, though the diplomats misstated how much lower those reserves might be. But perhaps the biggest reason for the skittishness is that the company seems unwilling to make full disclosure about its reserves. That is almost certainly one of the reasons why the IPO will not be appearing on the New York Stock Exchange which has standards of disclosure that would require an independent audit of reserves.

None of us who have been watching the melodrama of the Saudi Aramco IPO will be surprised if the IPO gets rescheduled and then canceled once again. To put it plainly, investors don't seem to trust Saudi Aramco's representations about its reserves and so must be discounting the publicly available numbers. That is what is likely spooking the Saudi government which keeps hoping against hope to get the $100 billion it wants from the IPO.

Therefore, I don't recommend holding your breath waiting for the kingdom to submit to an independent audit of oil reserves that will clear up the matter anytime soon.

By Kurt Cobb

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  • Mamdouh Salameh on October 28 2019 said:
    There is no mystery whatsoever. Since Saudi Aramco Initial Public Offering (IPO) has been published as part of Saudi Vision 2030 in 2016, I was probably among the first if not the first international oil expert to say on the pages of oilprice.com that the IPO will never see the light of day because of persistent question marks about Saudi proven oil reserves and the risk of US litigation in relation to 9/11. I said then and I say now that the IPO is dead and buried.

    Saudi King Salman decided to withdraw it altogether in 2018 justifying his decision by saying that he didn’t want to Saudi Aramco to feel obliged to disclose its finances and oil reserves. His words spoke volumes about Saudi reserves.

    It is possible that a smaller Aramco Petrochemical IPO might go ahead simply because would-be-investors could see refineries and other petrochemical assets but they can’t see oil under the sand without an international and fully independent audit, something the Saudis will never submit to.

    The fact that Saudi Arabia is producing 9-10 million barrels a day (mbd) shouldn’t dupe the world that their reserves amount to 267 billion barrels (bb) since that production level could still be produced from 50 bb of proven reserves, albeit that they will deplete faster.

    I have been analysing Saudi reserves for many years and I have reached the conclusion that current Saudi reserves wouldn’t exceed 55 bb based on Saudi production since oil was discovered in Saudi Arabia in 1938 (for which we have figures) and an average annual depletion rate of 5%-7%.

    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 deliberately increasing both the 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 of 200 bb which are yet to be discovered.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Di Laccii on October 29 2019 said:
    They can say whatever they want, but they have depleting oilfields, just in Berri how much water they have to inject to get some oil. Ghawar is not producing 60% anymore.

    All Aramco is worth below 400 B, and first estimates were correct, all ganes with,"independent auditors" are bull****.

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