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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently he works as a Senior Researcher at Hill Tower Resource Advisors. Next…

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Did Aramco Just Open Pandora’s Box?


Saudi Aramco, the world’s largest oil company, has for the first time ever issued a bond prospectus to financial markets, shedding some light on its financial structure and management.

By producing a prospectus the oil giant has provided an insight into the overall financial situation of Saudi Arabia, as around 70 percent of government revenues are linked at present to the oil giant. The insights produced are interesting, but the question remains whether Aramco will become an investor’s favorite in the near future.

There is no doubt that financial analysts will be combing through the prospective in order to find information that may have been missed others. Oil and gas analysts will be eager to take advantage of the fresh insight into the taxes Aramco is paying to Saudi Arabia. Until now, there has been little transparency regarding the financial arrangements made between Aramco and the Saudi government. Claims that Aramco is still the most profitable company in the world have been largely unsubstantiated before now. Based on the new prospectus, it has become very clear to all that Aramco is a giant, ruling over a vast reserve of oil and gas and boasting a profitability and income generating capacity that dwarfs its competition, even outperforming stock market favorites such as Apple or Google.

Net Income 2018

Saudi Arabia

(Click to enlarge)

As stated in the prospectus, the Saudi oil giant had a net income of $111 billion last year. According to international rating agency Moody’s, Aramco expects to use the proceeds to help finance the purchase of a 70 percent stake in Saudi petrochemical giant SABIC. The petrochemical giant is currently held by Saudi sovereign wealth fund PIF, and is valued at $69.1 billion. Aramco’s net income is almost twice that of Apple ($59.4 billion, 2018) while almost 6 times ExxonMobil ($20.8 billion) or Shell ($23.4 billion). At the same time, Aramco’s overall revenues hit $355.9 billion, with $48.8 billion of cash at the end of 2018, with a total debt of $27 billion. Related: Big Oil Is Heading Offshore

While Aramco’s financial situation is far from dire, several significant questions are now going to be raised. Based on the current reporting, Aramco’s overall value is not $2 trillion. The goals set by Saudi Crown Prince Mohammed bin Salman, targeting a 5 percent IPO of the oil giant, are based on a company value of around $2 trillion. This would make it the largest IPO ever, and would also make it the largest listed company worldwide. With a 5 percent IPO offering, Saudi Arabia would raise around $100 billion, which would have flown into the coffers of its sovereign wealth fund PIF, and likely be used to finance the several gigaprojects currently being set up by the Kingdom. The much anticipated IP, however, has not happened yet, and some claim it will never happen. With the current financials the company is not expected to reach the $2 trillion valuation mark, putting a slight dent in the shining armor of the company’s future. Based on the current net profits or possible oil price in the coming years, a net value of an Aramco listing would be around $1-1.2 trillion, a strong downgrade in comparison to the $2 trillion claim.

And that is not the only negative surprise in the prospectus. The tax rate the company pays is a notable issue. As indicated in 2017, in preparation of the IPO, the Kingdom changed the income taxes Aramco pays to the government from 85 percent to 50 percent. The latter sounds reasonably positive, but the fact that the royalties on Aramco are progressive, wasn’t common knowledge. Shareholders will have to understand that the company’s effective royalty rate is determined based on a baseline marginal rate of 20 percent applied to Brent prices up to $70 per barrel, which increases to 40 percent applied to Brent prices above $70 per barrel and 50 percent applied to Brent prices above $100 per barrel. This system is not in place for Aramco’s condensates between January 1 2018 and January 1 2023, according to an MEIM exemption. When looking at the fact that the Kingdom unilaterally decides the overall production targets of the company, it looks that even if Aramco is listed, commercial considerations will not prevail over Saudi national strategies. For Aramco, as a listed company, the risks are even higher as it also falls under OPEC agreements and could be facing international litigation issues, such as JASTA or anti-cartel (NOPEC) regulations in the US or elsewhere.

The decades old discussion about Saudi crude oil reserves is far from resolved. The prospect repeats the previous official statements of reserves of 256.9 billion barrels of oil equivalent (sufficient for proved reserves life of 52 years), consisting of 201.4 billion barrels of crude oil and condensate, 25.4 billion barrels of NGLs and 185.7 trillion standard cubic feet of natural gas. At the same time, the prospect indicates that Aramco holds a total production capacity of 12 million bpd, as mentioned by CMS. The company’s total proven reserves life is now officially set at 54 years, based on 204.8 billion barrels of crude oil and condensates, 26 billion barrels of NGLs and 181 TCF of natural gas. Aramco’s position here dwarfs the Top 5 IOCs, such as Shell or ExxonMobil, as their average production life span of reserves is between 9-15 years. How much of Aramco’s proved reserves are able to be produced is still doubted by many, looking at corrosion, fouling and other issues reported. The prospectus also addressed reserves and costs, showing that Aramco still is a low cost producer, with average upstream lifting cost at SAR 10.6 ($2.8) per barrel of oil equivalent produced in 2018, Aramco’s upstream capital expenditures for the year 2018 have averaged SAR 17.7 ($4.7) per barrel of oil equivalent produced.

Related: A “Perfect Coup’’ Is Unfolding In Algeria

When looking at these figures from a long-term financing standpoint, no clouds can be found on the horizon. The appetite for Aramco bonds will be high, as some analysts have already stated in the press. In the short term the company is a strong financial partner for all. However, looking at the future threats and risks not really addressed in the prospectus, but for sure being asked during an IPO listing procedure, more questions are popping up than are being answered.

The clear view represented in the prospectus that Aramco is led and ruled by the Saudi government and the King should be reassessed and addressed by all. Without any additional transparency and guarantees about the operations of a listed company, Aramco could be headed for a market clash. Mainstream investors will not be willing to base their assessment or appetite on figures currently being given or projected by the so-called Independent Industry Advisor. Several of the future expectations on demand and growth of crude oil and petrochemicals can be criticized or at least discussed. The figures given for global economic growth or Asian growth are slightly optimistic. Production costs and possible revenues are also very dependent on global market developments. A strong price increase is needed to counter higher royalties, while production growth is limited or outright constrained.


Political strategies, royal decrees and OPEC constraints, are not going to help to promote a strong valuation of the company in the next couple of years. The fact that it is openly stated that the Saudi government pulls all the strings, is something that will likely hurt investor interest. Overall, the feeling about Aramco’s prospect is positive, but underlying issues are a growing concern. By opening up its financials Aramco could have opened Pandora’s box, as the real issues and possible constraints have become more clear than ever before. Aramco is the Kingdom, with or without shareholders.

By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on April 02 2019 said:
    In order to secure a massive bond sale to use the proceeds to help finance its acquisition of 70% stake in Saudi petrochemical giant Basic Industries Corporation (SABIC) for $ 69 billion, Saudi Aramco has for the first time since becoming a fully-owned Saudi company shed some light on its finances.

    The prospectus Saudi Aramco issued focuses on the bright side of the company. It emerges from the prospectus that Saudi Aramco is the world’s most profitable company with net income almost twice that of Apple ($59.4 billion, 2018) and almost 6 times that of ExxonMobil ($20.8 billion) or Shell ($23.4 billion). At the same time, Aramco’s had $48.8 billion of cash at the end of 2018 against a total debt of $27 billion.

    However, by divulging some information about its finances, Saudi Aramco will be under intense pressure by investors to let a truly independent audit of its claimed proven reserves.

    With supposedly 266 billion barrels (bb) of proven reserves and exports of some 7 million barrels a day (mbd) providing an annualized revenue of $171.19 bn at current oil prices, Saudi Aramco could to all appearances be confirmed as the world’s most profitable company. However, appearances could be deceptive.

    There are persistent question marks about the actual size of Saudi proven reserves. There has recently been claims that an independent audit has put Aramco’s Oil Reserves at $270 billion Barrels”. It transpired that the audit was neither independent nor unbiased since some of the companies that conducted the audit (DeGolyer, MacNaughton, and Baker Hughes’ Gaffney, Cline, and Associates) have or have had service contracts with Saudi Aramco, so it can’t truly be classified as an independent audit.

    Far from having proven reserves of 270 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. My figures are more or less in line with those of other experts.

    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.

    Still, with question marks about the size of Saudi reserves, the market value of Saudi Aramco could be far lower than $1 trillion.

    Despite Saudi Oil Minister Khalid Al-Falih saying that Aramco’s long-delayed IPO will occur in 2021, it will never see the light of day. It is dead and buried. Any new IPO Saudi Aramco offers will be only a petrochemical IPO since investors can see petrochemical assets but they can’t see or verify Saudi claimed oil reserves.

    One must remember that Saudi Aramco was forced to withdraw its IPO because of two major reasons. The first is the risk of American litigation related to the 9/11 destruction of the World Trade Centre in New York. The second reason is persistent question marks about the true size of Saudi proven oil reserves. When Saudi King Salman called off the IPO, he justified his decision by saying that he didn’t want to expose Saudi Aramco’s finances or reserves to be scrutiny. His words speak volumes about Saudi reserves.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bart King on April 02 2019 said:
    Funny, no mention of Ghawars max production rate of 3.8 million bpd vs. the claimed and assumed 5 million bpd.

    This is a game changer!

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