An international independent audit of the oil reserves of Saudi Aramco has more than confirmed the official figures released by Riyadh for three decades, putting the number at 270 billion barrels, two unnamed sources close to the company told Reuters.
The audit was conducted by companies including DeGolyer and MacNaughton, and Baker Hughes’ Gaffney, Cline, and Associates. It is being watched closely because the reserve base of the company will have a direct bearing on its valuation ahead of the much-hyped initial public offering.
The figure may come as something of a surprise because for thirty years, Aramco has been reporting unchanged reserves of about 261 billion barrels despite active production. Yet barrels are not the only factor considered in an oil company’s valuation as Bloomberg Gadfly’s Liam Denning noted in an analysis earlier this year, even though they are an important indicator of the company’s long-term viability and profitability.
Also Bloomberg this month took a look at Aramco’s accounts, reporting that the company booked a net profit of US$34 billion for the first half of 2017. The significance of the figures was naturally questioned by skeptic analysts aware that balance sheets can be adjusted to present the information about a company’s performance in the most favorable way. Related: Can India Break Its Oil Addiction?
Bloomberg itself made a note of pointing out that despite Aramco’s negligible debt levels and super-low production costs, the company is Saudi Arabia’s cash cow: cash flow is not great because such a large part of the Saudi economy and society literally depend on Aramco. Interestingly enough, Aramco said the numbers were inaccurate, adding that they were mere speculation.
The company is also understandably sensitive to oil prices, which is why Saudi officials have been pushing so vehemently for higher oil prices ahead of the IPO. Now they seem to be aiming for US$100 a barrel as the IPO, according to Crown Prince Mohammed, should take place in late 2018 or 2019.
By Irina Slav for Oilprice.com
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Case-in-point: All fundamentals ignored: The U.S. dollar is stronger than it has been since 2016, Friday's Baker Hughes oil rig count data showing yet another increase in oil rigs, following an EIA report this past week which was certainly bearish...and as I type, prices are soaring on today being the last day of the month.
I just read one headline: "Oil prices rise as Israel lines up Iran announcement". Am I to assume that every single trading day leading up to May 12 will only have WTI trading higher? And then what? Markets rise again when those factors have already been priced in weeks leading up to that moment?
I ask again: Why is there a futures market? I mean, if prices are forbidden from sinking based on the laws of supply vs. demand, then what is to stop everyone from selling everything they have and going all-in on long positions for oil? For any oil bull who cannot wait for $80 - $100 oil why should the entire world pay more for the same stuff?
Just wait until margin requirements for futures contracts rise (again, as they recently have). All of those hedge fund managers will have their algorithmic trading reverse those record long positions, faster than you may be prepared for (such as last year's late-night "flash-crash" under very similar circumstances).
Moreover, some of the companies involved in the audit have or have had service contracts with Saudi Aramco, so they can’t truly be classified as an independent audit. .
A simpler way of estimating Saudi proven reserves is to add Saudi production since the discovery of oil in 1938 till now (for which we have figures) and have it deducted from Saudi claimed proven reserves along with an annual depletion rate of Saudi aging fields averaging 5%-7% for the same period. When I did exactly that, my calculations came to around 58-93 billion barrels (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) to offset the annual production. The Saudis have been declaring an R/F of 52% or even higher when the global average is 34%-35%.
Still, the size of Saudi proven reserves is now academic as far as the IPO of Saudi Aramco is concerned. I am on record having been saying for the last five months that Saudi Arabia will eventually withdraw the IPO altogether since it no longer needs it financially.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London