Saudi Aramco is scheduled to release its prospectus this Saturday, and shares will officially start trading on the local Tadawul stock exchange in December.
Shares are only listed on the Saudi Tadawul exchange, but the Saudis want global investors. At home, it's one thing: There's no way Aramco will fail to 'attract' local investors because it's basically a do-or-die setup. Big names are expected to invest, and they will risk a lot to do so. That was the message of the Crown Prince's earlier purge and arrest of the country's wealthy. He owns them now. They must invest. At the same time, there are rumors that banks are offering cheap credit to encourage retail investors to get in on this as well.
For global investors, though, there's a lot to consider aside from pleasing the prince. For one thing, they'll have to consider the 18% decline in net profit to $68 billion for the nine months ending in September (compared to the same period the previous year). They will have to weigh this against the fact that despite that decline, Aramco's income for nine months was still more than Apple's last year - all year.
That's tantalizing. But is it, really? There is a ton of domestic political and geopolitical risk here - the latter most dramatically emphasized with the September 14th attacks on Aramco facilities that laid bare the giant's vulnerability.
The even bigger, ongoing risk is the Crown Prince himself, who is tied to Aramco tightly.
It's not…
Saudi Aramco is scheduled to release its prospectus this Saturday, and shares will officially start trading on the local Tadawul stock exchange in December.
Shares are only listed on the Saudi Tadawul exchange, but the Saudis want global investors. At home, it's one thing: There's no way Aramco will fail to 'attract' local investors because it's basically a do-or-die setup. Big names are expected to invest, and they will risk a lot to do so. That was the message of the Crown Prince's earlier purge and arrest of the country's wealthy. He owns them now. They must invest. At the same time, there are rumors that banks are offering cheap credit to encourage retail investors to get in on this as well.
For global investors, though, there's a lot to consider aside from pleasing the prince. For one thing, they'll have to consider the 18% decline in net profit to $68 billion for the nine months ending in September (compared to the same period the previous year). They will have to weigh this against the fact that despite that decline, Aramco's income for nine months was still more than Apple's last year - all year.
That's tantalizing. But is it, really? There is a ton of domestic political and geopolitical risk here - the latter most dramatically emphasized with the September 14th attacks on Aramco facilities that laid bare the giant's vulnerability.
The even bigger, ongoing risk is the Crown Prince himself, who is tied to Aramco tightly.
It's not just that the Saudi government will remain the 95% (at least) owner of Aramco. The removal, a couple of months ago, of Khalid al Falih from the position of chairman of Aramco and from his position as oil minister was meant to create the impression of transparency. Al Falih had been allowed a bit of wiggle room, even to criticize the prince to some extent in the past, but once the IPO was destined to become a reality, he was replaced. There can be no more room for constructive criticism. It became imperative to have 100% yes-men in place at this stage. Yasser al-Rumayyan was set up as head of Aramco, while MBS' elder brother was set up as oil minister. It looks like a separation of powers, but it is tightly controlled by the Crown Prince. But that dividend payout will still look attractive to some: At $75 billion a year.
The trick right now for Aramco is the dividend yield. Investors will want a higher yield, which also means a lower valuation.
But the bar will be lower for the Chinese, who are more interested in a foothold than anything else. Chinese state-run companies are considering a massive investment into Aramco, to the tune of a combined $5 billion to $10 billion. One of China's interested parties is the Silk Road Fund. An investment of this size would allow China to hedge against high oil prices - and as one of the world's largest oil importers, they are particularly susceptible to higher oil prices at present. It would also strengthen ties between China and Saudi Arabia. For Aramco, an investment this size would go a long way to ensuring the IPO's success.
In the meantime, now that the Aramco IPO is real, watch out for middlemen (or middlewomen) on this terrain. If this is going to work, it's going to have to draw in Western investors, not just locals. And that's where we caution against all the deal-makers who will pop up to try to cut these deals in potentially questionable ways.
What Really Keeping Libyan Oil Production From Soaring?
It's not just conflict that's keep Libyan oil production from reaching its potential, which by some accounts could be 5 million bpd. It's money. Yes, the ongoing conflict between General Haftar's Libyan National Army (LNA) and the Government of National Accord (GNA) for control of Tripoli is a critical element, but it's money that's holding things back as well. The Libyan National OIl Company (NOC) said recently that production is now at 1.3 million bpd, down from 1.6 million bpd before the 2011 revolution that took out Gaddafi. But it's not just conflict that's kept it back over the years: mismanagement and lack of investment have been just as brutal. There are new fields to be brought online and old fields to be enhanced with advanced technology - not to mention fields that need to be repaired extensively after ISIS damage. The NOC's plan is to increase production to 2 million bpd by 2022, and to 2.2 million bpd by 2024. That will take an estimated $15 billion in investment over five years, it says. It won't get anywhere without foreign investors, and that's where conflict rears its ugly head to put paid to any progress on that end. Where will the NOC get $15 billion? Not likely from the GNA-controlled Central Bank, which last month promised $1 billion to the NOC, but it hasn't surfaced yet, and may, or may not. Unconfirmed rumors are now that the NOC, deeply indebted, is hoping to find help from private sector banks.
The Syrian Oil About-Face
As we have said before, the United States is not going to usurp Syrian oil, despite Trump's note that "we could take some of it". No one among U.S. oil players is going to develop this oil, and what's already producing isn't worth the time for anyone but Assad, ISIS or the Kurds. The important thing to understand is that this entire maneuver is nothing more than a campaign stunt designed to take the pressure off Trump from multiple corners and to lend a positive PR spin to an ill-thought-out withdrawal from Syria that went very badly. It's a dangerous campaign stunt, too, that will bring a small U.S. force into direct conflict with the Syrian Army and Russian forces. This is another "winging-it" foreign policy play.
Keep an Eye on Brazil's Massive Oil Auction Today
Brazil's massive oil auction will go down today at 13:00GMT and the government is hoping to raise $26.5 billion in hefty signing bonuses. There have been a few upsets, though, and there could be more, with the country's workers unions threatening to block the auction, but as of yet there is no sign that will happen. The auction has created a lot of buzz, with state-run Petrobras already having explored a significant part of the blocks to be auctioned off, in what has been described as the closest thing to a sure thing in the world of oil. The workers union argues that while Brazil's citizens are suffering the effects of a massive mysterious oil spill off one of its coasts, the government is looking to hand over to foreign oil companies its most lucrative natural resource. The bidding field has gotten smaller, though, recently, with 14 oil majors now down to 12, ostensibly due to huge signing bonuses that total $26.5 billion. BP and Total SA have now dropped out even though the offerings potentially hold 15 billion barrels of untapped crude. Up on the block first will be the largest area, Buzios, followed by the smallest area, Itapu. Petrobras has already exercised preferential rights as operator at a minimum 30% stake on both of those fields.
Global Oil & Gas Playbook
- Against all odds, there are now indications that Turkey's campaign to disrupt drilling offshore Cyprus may be working. A consortium of Italian Eni and French Total SA, which has the rights to develop seven of Cyprus' 13 blocks, has decided not to start their drilling campaign in Block 7. The speculation is that the decision was made because of Turkish opposition to drilling in the contested area. Greek Cypriot authorities, however, claim that Eni-Total had not intended to drill in Block 7 first, and were choosing where to drill based on geological data rather than Turkish opposition. Earlier in October, Eni had said it would not drill off Cyprus should a conflict with Turkey result in both sides sending warships to the area. The Eni-Total consortium was awarded the block last year, and the contracts were signed in mid-September 2019. Meanwhile, the Turkish Energy Ministry said that its drillship Fatih will begin a new drilling operation off Cyprus within the next few weeks. The vessel, which left its location West of Cyprus last week, carried out drilling in two areas after Turkey sent it inside Cyprus's EEZ in May.
- Africa's newest fledgling petroleum market, Senegal, will hold an oil and gas licensing round for three offshore blocks. Senegal is hoping to challenge Mozambique in the LNG race, with some comparatively low-cost LNG clusters, and with offshore projects slated to come online in 2022 and 2026. This initial licensing round was delayed last month while Senegal sorted out some legal issues surrounding investments. We expect this to attract a fair amount of attention given the low-cost development prospects. Last year, BP made its FDI on the Mauritania-Senegal FLNG plant, which is slated to come online in 2022, producing around 2.5 million tonnes per year, and solidly putting Senegal on the LNG map.
- Uganda is inviting oil companies to bid on five more blocks and also fishing for final investment decisions on two major projects--but it will wait longer. The investment regime is a bit of a mess in this venue. Tullow just said it wasn't ready to make an FDI on the country's first oilfields and is instead trying to sell down its stake in a 230,000 bpd project to French Total and Chinese CNOOC. Earlier efforts to shave that stake have been stymied by a tax dispute with the Ugandan authorities. We're not expecting any real movement on this terrain for a while.
- South Sudan's government will offer up 14 oil blocks for exploration in a licensing round by the first quarter next year. The country is currently producing 180,000 barrels per day, which represents all of its revenue. Several international exploration and production companies have already demonstrated their interest, despite allegations of corruption and fueling civil war through foreign oil entities. The licensing offer announcement marks a shift in strategy from the previous method of direct negotiations with explorers. Investors shouldn't be jumping the gun on this one, though. The country is still not close enough to a peace deal that would make oil exploration even remotely feasible. The deadline to form a unity government is next week and it is meant to be based on a power-sharing deal signed over a year ago to end the civil war. The opposition is now pushing for a six-month delay in the formation of a unity government, without which foreign companies are not likely to bite. If a coalition government is not formed by November 12th, the deadline, fighting is likely to erupt again, putting oil auction plans in limbo.
- Kosmos Energy has more oil offshore Equatorial Guinea after drilling the S-5 well to a depth of 4,400 meters, encountering 39 meters of net oil play in the Santonian reservoir, offshore Rio Muni Basin. Evaluation work is now ongoing to determine the extent of the discovery. This is an "infrastructure-led" well that could tie back to the Ceiba FPSO.
- PDVSA has managed to reduce its debt to Rosneft to under $1 billion. The debt was reduced through crude oil shipments. PDVSA has until the end of 2019 to finish paying Russia's largest oil producer. This development may dispel the earlier rumors that Venezuela was looking to pay off its debt to Russia by handing over control of PDVSA. PDVSA is Venezuela's only hope of pulling out of its economic crisis.
- OPEC's latest World Oil Outlook 2019 has said that the United States will out produce OPEC within the next five years. OPEC's projection is that the cartel will produce 32.8 million bpd by 2024, compared to 35 million bpd this year. Meanwhile, US production will continue to increase, overtaking the group within five years.
- Middle East tensions continue to escalate, as Iran on Wednesday arrested an IAEA inspector. Iran announced on Wednesday that it has renewed its uranium enrichment activities, in violation of the 2015 nuclear deal. Iran has since released the inspector. The IAEA Board of Governors will hold an unscheduled meeting on Thursday to discuss "two safeguard matters" which have not been otherwise described.
- Protesters blocked the entrance of two oil refineries in southern Iraq as nationwide demonstrations rage on. Demonstrators blocked the entrance of the Al-Shanfiyah and Nassiriya oil refineries, obstructing tankers that transport fuel to petrol stations from entering the facilities. More than 250 protesters have been killed and thousands more wounded since the demonstrations began in early October, demanding jobs and better public services. Despite living in the heart of the oil industry, which accounts for 95 percent of the country's exports, residents of Basra and Iraq's south are some of the country's poorest. The Iraqi central government has imposed a full internet shutdown across the southern provinces of Iraq, including Baghdad and oil-rich Basra, in an attempt to prevent a further escalation of protests and to make it more difficult for protest organizers to communicate. They've also blocked social media networks in the northern territory controlled by the Kurdistan Regional Government (KRG).