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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Shady Truth Behind The Aramco IPO

Saudi Arabia

One thing that professional bank and fund traders know that others may not is to absolutely never trust the credit rating agencies in making trading decisions. The reason for this is simple: the credit rating agencies are paid to give a rating on the creditworthiness of the very company that is paying them for that rating. This cozy arrangement – and the agencies give ratings to countries, companies, and asset issues – was a principal reason why the U.S.’s own Financial Crisis Inquiry Commission (FCIC) set up by Congress and the President in the aftermath of the great financial crisis that began in 2007/8 concluded that the “failures” of the ‘Big Three’ credit ratings agencies (Moody’s, Standard & Poor’s, Fitch) were “essential cogs in the wheel of financial destruction [and] key enablers of the financial meltdown.” Although the 2006 ‘Credit Rating Agency Reform Act’ was intended to break this situation in which the main credit rating agencies were skewed towards toeing the line of whatever the entity paying for the rating wanted, the former U.S. Federal Reserve chairman – and lead behind the ‘Volcker Rule’ that prohibited questionable dealings by banks – Paul Volcker, has since stated that: “No meaningful reform of the credit-rating agencies has been undertaken.”

Given this, and given that both the government of Saudi Arabia and a veritable ‘Who’s Who’ of the top international investment and retail banks in the world are lined up to try to palm the global investment community off with the upcoming omni-toxic initial public offering (IPO) of Saudi Aramco, it is instructive to see the way in which the credit rating agencies handled the recent attacks on two of Saudi Arabia’s key oil operations: remember, Saudi Arabia – all of its self-serving nonsense aside - is still a petro-state. Unsurprisingly, given that the Big Three were still rating a number of entities as Triple-A credits even on the very morning when the institutions went bankrupt, the broad consensus in the aftermath of the Houthi/Iran attack on Abqaiq and Khurais was – to paraphrase: “Everything’s fine, really.” Back on Planet Earth, though, as OilPrice.com related at the time, the consensus amongst independent oil professionals who do not stand to gain anything out of either Saudi Arabia or the smoke-and-mirrors Aramco IPO was very different. In broad terms, the view was that, as one usually extremely diplomatic oil analyst told OilPrice.com: “The Saudi statements may not contain any direct falsehoods as such but nor are they entirely being fulsome with the truth.”

Standard & Poor’s (S&P) and Moody’s, though, apparently chose to believe the official line (coming from those who have already or will be paying them for ratings in the future, and from those underwriting banks who have already paid them fortunes for ratings in the past and will continue to do so in the future) and did not change anything to do with their ratings at all. Not only did they not change their core long-term foreign currency ratings – S&P at A-, Moody’s at A1 – but they did not even change the outlook, with both ratings being assigned as ‘stable’ in outlook. The ratings being used for this analysis, incidentally, are ‘long-term foreign currency ratings’ – the ones that are used by professional international investors – because the local currency ratings are even more meaningless, as the central bank of any country can simply print more money to cover any debt held in the local currency. Fitch, though – and this sort of ‘nod to reality’ has been a feature of Fitch since it apparently decided to go after the market share of S&P and Moody’s by using the novel strategy of telling the truth (or at least more of the truth than the other two, which is not saying much, obviously) – downgraded Saudi Arabia and Aramco. Related: IEA: An Oil Glut Is Looming

Having said this, the Fitch Aramco downgrade was from the somewhat extraordinarily high A+ level (to A), but at least the agency did note that there would be an effect from the 14 September attacks that had slashed Saudi Arabia’s production by 5.7 million bpd. It had also downgraded Saudi Arabia the month before (to A) due to the “vulnerability of Saudi Arabia’s economic infrastructure and continued deterioration in Saudi Arabia’s fiscal and external balance sheets.” Fitch additionally noted that the Aramco downgrade “also took into account rising geopolitical tensions in the region, ...[and] also the country's continued fiscal deficit.” Galloping gaily into the ranks of the morally dispossessed, though, Moody’s – although acknowledging that the attacks were “a credit negative and the production disruption is significant” – added that it “did not expect this to leave a long-lasting impact on Saudi Aramco’s financial profile, given its robust balance sheet and strong liquidity buffers.” S&P took a similar line, although more effusive: “[Saudi Arabia’s] government’s ability to quickly re-install and maintain its high oil production and installed capacity despite the increased geopolitical tensions in the region is an important factor in S&P’s rating analysis.”

Leaving aside for a moment the enormously troublesome state of Aramco – as analyzed in depth here by OilPrice.com – making a couple of phone calls and not just taking someone’s word for it would have revealed a litany of problems in the ‘Saudi to recover quickly’ angle. For a start, both Moody’s and S&P’s statements at the time – but especially S&P’s – seem to echo the very line of Saudi Arabia’s new oil minister, Prince Abdulaziz bin Salman, just after the attacks. He stated that the Kingdom planned to restore its production capacity to 11 million bpd by the end of September and recover its full capacity of 12 million bpd two months later. As a number of analysts told OilPrice.com at the time, it was extremely telling that he spoke of ‘capacity’ and later of ‘supply to the market’, as these are terms that Saudi tends to use in order to avoid talking about actual production, as capacity and supply are not the same thing at all as actual production at the wellheads. Moreover, veteran oil sector engineers stated clearly at the time – and continue to state - that following an incident like the 14 September attacks, it would take several weeks just to assess the damage, never mind to begin doing anything about it, rather than the few days that the Saudis took. 

The oil minister’s comments – and those of Moody’s and S&P - also alluded to the completely fictional production capacity and corollary spare capacity figures that Saudi Arabia has been seeking to establish as truth for years to anyone too stupid and/or lazy to delve into the details. The country has stated for decades that it has a spare capacity of between 2.0-2.5 million bpd, implying – given actual production during virtually all of this time averaging less than 10 million bpd - total production capacity of 12.0-12.5 million bpd. This level, though, or anywhere near it, has never been even remotely tested, with the highest production ever recorded being just over 11 million bpd in November last year. This is despite the all-out oil price war that Saudi started in 2014 against U.S. shale producers to try to destroy the industry through low prices caused by flooding the markets with oil. Clearly, if the Saudis had anything near 12 million barrels per day capacity, then that would have been the time to pump it but all it managed was just under 10 million bpd with 10.5 million bpd managed for just one month over that two-year period (2014-2016) before Saudi reversed it strategy). Related: The Biggest Oil & Gas Discoveries Of 2019

Additionally, the EIA defines spare capacity specifically as production that can be brought online within 30 days and sustained for at least 90 days, whilst even Saudi Arabia has said that it would need at least 90 days to move rigs to drill new wells and raise production to the mythical 12 million bpd or 12.5 million bpd level. All of this also overlooked the very high likelihood – as analyzed here by OilPrice.com – of the Houthis and/or Iran launching more attacks against Saudi oil sites because of the lack of negative ramifications for the previous attacks.

With many professional investors only interested in the Aramco IPO in so far as they can short it in the secondary market, it is unlikely that the effects on unsuspecting investors in the upcoming Aramco IPO will be as bad as was the case for so many investors in the run-up to the financial crisis beginning in 2007/2008. However, for any considering such an investment – and basing that decision on credit ratings - a couple of testimonies from credit agencies’ own staff during the various post-financial crisis hearings should be borne in mind as to the agencies’ ‘independence’. In the ‘Financial Crisis Inquiry Report’ issued by the National Commission on the Causes of the Financial and Economic Crisis in the United States, Moody’s former vice president and senior credit officer, Richard Michalek, testified to the FCIC that: “The threat of losing business to a competitor ... absolutely tilted the balance away from an independent arbiter of risk...” At S&P, meanwhile, a subpoenaed email sent by an investment banker who was annoyed over a possible downward revision of one of his residential mortgage-backed securities told a senior S&P analyst: “Heard your ratings could be 5 notches back [under] of moddys [sic] equivalent, Gonna kill you resi [residual] biz. May force us to do moddyfitch [S&P competitors Moody's and Fitch Rating] only ...”

By Simon Watkins for Oilprice.com


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  • Mamdouh Salameh on October 30 2019 said:
    Ratings given by credit rating agencies to banks, companies and countries are mostly motivated by the money they earn and also by geopolitics. Saudi Arabia is no exception. The largess credit rating agencies receive for giving a favourable rating significantly influences their rating. Still, their ratings could in some cases become self-fulfilling prophecy damaging economies, currencies and finances of countries, banks and companies.

    However, whatever rating the credit rating agencies give Saudi Arabia and its Saudi Aramco wouldn’t enhance the prospects of the Aramco IPO. 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. It is dead and buried.

    Moreover, the claims that Saudi Arabia has a production capacity of 12.0-12.5 million barrels a day (mbd) and a spare capacity of 2.0-2.5 mbd have neither been substantiated nor tested. Saudi Arabia's oil production peaked in 2005 at 9.65 mbd and has been in decline since then. Even when the Saudis say the are producing 10.0-10.5 mbd, at least 1 mbd of which comes not from real production but from stored oil.

    Still, 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 tell how much oil is under the sand without an international and fully independent audit, something the Saudis will never submit to.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Carlos Evie on November 20 2019 said:
    I enjoyed reading your article and will watch the IPO but my gut tells me this is a loser to start with. There will always be someone interested in the IPO.

    Your comments that Engineers indicated it would take months to re-instate production capacity. After working for 35 years in the industry and all of those years either in a pipeline group or on the Commercial side, Engineers are like Lawyers, their best interests are served by extending the work process.

    If the project becomes shutting production in or maintaining your job, it is amazing to watch engineers scramble and tell you, since we own the land, we can install that extra pump you had in storage and we can be back up and running in 72 hours. I have witnessed this before, when it came to shutting a 100,000 b/d refinery or shutting production in. It was amazing to see how fast the pipe was connected to that new pump and flow in the line began immediately.

    The Saudi's personnel are educated at American schools, so they know how to get things done, so the next time you are talking to the engineer , you may want to ask them if they also have a law degree in slowing things down.

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