Saudi Aramco Coming Soon to an Exchange Near You?

Similar documents
IPO + Private Placement, or No?

Sanctions Still Sting

OPEC Agrees to Agree to Cut

Greetings from Paris!

DECEMBER 20, 2017 The Turkish Iranian Gold for Oil Scheme

Orinoco Woes. JUNE 26, 2017 Profiting from the PDVSA Crisis

OIL-EXPORTING COUNTRIES: KEY STRUCTURAL FEATURES, ECONOMIC DEVELOPMENTS AND OIL REVENUE RECYCLING

Global Resources Fund (PSPFX)

Dr. Raja M. Almarzoqi Albqami Institute of Diplomatic Studies

Province of Alberta Investor Meetings

Frequently Asked Questions

Crude oil: What s in store for 2018?

COMPARATIVE ANALYSIS OF MONTHLY REPORTS ON THE OIL MARKET

COMPARATIVE ANALYSIS OF MONTHLY REPORTS ON THE OIL MARKET

Sovereign Wealth Funds

skyrocketing, production and exploration efforts tend to ramp up to capture the potential

Oil price volatility: Focus on the fundamentals to navigate your way to long-term rewards

The impact of plummeting crude oil prices on company finances

Raising Capital in Global Financial Markets

Brent spot Brent 20-day rolling average WTI spot WTI 20 day rolling average. USD per barrel. USD per barrel. WTI - Brent Arb

The OPEC-Middle East Investment Cycle. Bassam Fattouh. Oxford Institute for Energy Studies

Oil price. Laura Lungarini

COMPARATIVE ANALYSIS OF MONTHLY REPORTS ON THE OIL MARKET

John H. Lichtblau Executive Director Petroleum Industry Research Foundation, Inc

The current US sanctions and foreign policy environment: Implications for global energy firms

Canadian Oil Sands. Energy and Economic Security. February 21, Cindy Schild, API Senior Manager Downstream Operations

The Rise of China and the International Monetary System

The Petroleum Economics Monthly

QATAR: ECONOMIC GROWTH CONTINUES IN DIFFICULT TIMES

COMPARATIVE ANALYSIS OF MONTHLY REPORTS ON THE OIL MARKET

Looking ahead to. S&P Global Platts. Celebrating. Disruptors, dealmakers and new developments. December How blockchain could disrupt commodities

THE SPECIALIST IN TRADING AND INVESTMENT

Can Russia Use Its Energy Endowment and the World Oil System To Its Advantage?

3 Factors that Are Changing the Oil Trade

GCC Overview. Equity Focus. Fixed Income Focus. improved liquidity in the system is benefiting both the public and private sector.

Review of trading and delivery data for the DME Window volumes (for Oman OSP)

Oil: A Perfect Storm Hits Prices OCTOBER 23, 2014

The Economic Transformation of the Caspian Region and the Falling Price of Oil

JOINT VENTURE REVIEW

OPEC extends oil output cut through March 2018

Oil at Two-Year Highs as Saudi Arabia Engages in Its Own Game of Thrones

Managing Volatility in Oil and Gas Revenues

October Sanctions Guide. The Impact of Sanctions on Russia. Chris Weafer Senior Partner, Macro-Advisory Ltd

An Oil Price Increase Is Not Enough for Russia

Supply Trends ÖGEW / DGMK

Saudi Arabia Turns to Asia for Investment

MBF1223 Financial Management Prepared by Dr Khairul Anuar

Today s China NPL Market Master Class for Investors HOT issues in seeking yield and managing and pricing risk

Mexico s Energy Reform

Yen and Yuan RIETI, Tokyo

TEHRAN SUMMIT. A) Contractual Regime of Iran Oil and Gas Industry from Past to Present

Capitalised terms used herein have the same meaning as in the Consultation Paper.

Presentation Outline A brief history of Saudi Arabia s oil policy Some recent changes to Saudi policy following the Arab Uprisings Reasons for current

Economic Development. Business Plan to restated. Accountability Statement

Legal update. Iran: new petroleum sector opportunities. March 2016 Energy Oil and gas. Background. Canadian sanctions

Policy Options for Revenue Distribution. Andrew Bauer Senior Economic Analyst, NRGI Yangon, Myanmar June 30, 2015

MART RESOURCES: A Nigeria Marginal Field Case Study Mr. Wade Cherwayko (Chairman & CEO) Asia O&G Assembly, Hong Kong, 25 April 2013

Importance of NAFTA to US and Canadian oil & gas companies

Saudi Arabia and the Future of Global Energy With Gal Luft the Global Forum on Energy Security

The Strategic Partnership between COSMO OIL COMPANY, LIMITED and International Petroleum Investment Company and the Allotment of New Shares

EXXON MOBIL CORPORATION ANNOUNCES ESTIMATED FOURTH QUARTER 2011 RESULTS % %

Alberta s s Energy Industry will the growth continue?

Dechert and the Law Firm of Hassan Mahassni

LET S TALK ABOUT NORWAY

Market Overview. Daily Market Commentaries. Daily Market Assessment

ALBERTA OIL SANDS: THE FACTS

Province of Alberta Investor Meetings Asia October Stephen J. Thompson, CFA Executive Director, Capital Markets Treasury Board and Finance

Evolution of the Middle East Trading Ecosystem. May 2013

Econ 366. Fall 2012 The International Oil Market: The Cartel Era

The Rise of the Middle East Sovereign Wealth Funds: Causes, Consequences and Policies

GLOBAL ENTERPRISE SURVEY REPORT 2009 PROVIDING A UNIQUE PICTURE OF THE OPPORTUNITIES AND CHALLENGES FACING BUSINESSES ACROSS THE GLOBE

SGX reports 3Q FY2018 net profit of S$100 million

INT N RO R DU D C U T C ION N T O G LOBA B L A I SLAM A IC C F INA N N A C N E

Approaching the Redline. Dr. Mark G. Dotzour College Station, Texas

Putting China s Capital to Work The Value of Financial System Reform

ASA SUBMISSION - UPDATING ASX S ADMISSION REQUIREMENTS FOR LISTED ENTITIES

Offshore Renminbi (CNH) Market: Opportunities Continue to Expand Silicon Valley Bank. January 13, 2012

Invest in the World s Leading Energy Region FMG MENA FUND

Asian Premium and the Role of Oil Stockpiling

BBK3413 Investment Analysis Prepared by Dr Khairul Anuar. L2 The Securities Market

Michel Prada, Chairman of the Trustees, IFRS Foundation Riyadh 11 March Introduction

The next move. Saudi Arabia/Riyadh on the path of economic and social differentiation. Four phases of Saudi oil policy

Introduction to SAUDI ARABIA

The Persian Gulf s predominance endangered? Amrita Sen, 13 November 2013

Government & Policy Banks Bond Index Guide. October 2018

Reclassification of Saudi Arabia to Secondary Emerging Market Status Implementation Plan

THE KINGDOM OF SAUDI ARABIA acting through the Ministry of Finance. Global Medium Term Note Programme

FTSE Country Classification Process What constitutes a country?

Investor Day 2006 Wholesale Banking 22 November Road to sustainable growth

Franklin GCC Bond Fund

MacroVoices Oil Discussion: OPEC Can t Fix The Problem of Low Oil Prices

Market Watch Presentation

John Gerdes Head of Research. The Dynamic and Global Oil & Gas Industry Next Steps for 2016 & 2017

2015 Oil Outlook. january 21, 2015

FTSE4Good TIP Taiwan ESG Index and ESG Ratings

As close as you need, as far as you go

The construction or provision of oil rigs, drilling. equipment, including seismic data collection.

Monthly Bulletin. GCC single currency delayed

EXPLORATION/PRODUCTION AGREEMENT STRUCTURE

Managing Nonrenewable Natural Resources

Transcription:

JULY 18, 2017 An Increasing Saudi Production Problem? Saudi Aramco Coming Soon to an Exchange Near You? Evidence emerged last week that persistent rumors of technical problems coming from a large Saudi offshore oil field could have credence. There are now indications that the problem may be spreading with a possible knock on effect facing other OPEC members in the Persian Gulf. This is hardly the sort of buzz Saudi Aramco wants in advance of its historic IPO. Aramco is the largest oil producer in the world. At some point within the next year 5% of Aramco will be floated in the largest initial placement on record. Between $50 and $100 billion will be obtained for a sovereign investment fund Riyadh will employ to diversify the government s revenue flow. Some of the realized investment will move back into maintaining Saudi fields, ostensibly to address the kind of problems I will address in a moment. However, most will comprise diversification occurring by acquiring assets of energy and non energy companies abroad, rather than by the more traditional practice of enticing industry to move into Saudi Arabia s domestic market. The IPO will effectively value all of Aramco at between $1 and $2 trillion. My current estimate would put that figure at about $1.4 trillion. But remember that, while the IPO and resulting fund will reflect only a twentieth of the company, the collateral value of what the government retains will be positively impacted. Provided, of course, that potential IPO buyers have access to two matters withheld since Aramco was nationalized back in 1979: a multi year profit sheet on the company; and genuine extractable reserve figures. Both are now the subject of competition among major exchanges worldwide jockeying to be the primary location of the IPO. Ultimately, depository receipts (and to a lesser extent depository certificates) will extend the participation to a network of bourses. Last week the Financial Conduct Authority, the regulator of the London Stock Exchange, announced it intended to establish a special category within its premium listing regime for sovereign owned companies. The new approach would allow less than the currently mandated 25% of company shares to float on the LSE. Secondly, it is going to provide for less transparency. And for a government intent on making available as little information as possible, the latter may be a

AN INCREASING SAUDI PRODUCTION PROBLEM? 2 more important revision. Other exchanges in the competition Singapore, Hong Kong, Tokyo and even Toronto (but not New York) already have similar provisions. As with any publicly traded oil company, the essential value of the secondary trading is based upon book reserves, not on present sales. It is the known extractable volume of oil that can be brought to bear on a market in response to changing dynamics that determines the attractiveness of shares. That makes the Aramco reserve figures decisive and brings to the fore the rising scuttlebutt about Saudi field problems. Performance Problems A corrosion problem is expanding at the major offshore Manifa field. The situation has been known for some time. But it has reached a point that Aramco officials can no longer dismiss. Manifa is the largest Saudi offshore field, having a targeted level of 900,000 barrels daily once the two phased development kicks in. The situation has been acknowledged by Sadad Al Husseini, a former Aramco VP. He claims the problem is a minor technical situation. On the other hand, my sources currently in the Aramco administration consider it a more challenging problem, one that could end up closing the entire expected 900,000 barrel total. Corrosion is a growing concern for production levels and the geological integrity of underlying reservoirs at other major fields, including Ghawar (by far the world s largest), and is morphing into a major impediment. As the problems of corrosion and related scaling intensify, primary production wells could be blocked if no solutions are found. And to date, nothing has worked except for traditional migration in place, i.e., moving crude to centralized reservoir locations for more concentrated extraction. While this may retain bottom line estimates of reserves, it also discounts their effective support of share value. At the same time, Saudi Arabia s export volumes have been hit by high local summer demand for crude oil and products. Riyadh has already announced that it will cut August overall crude oil shipments by around 600,000 barrels a day to counter the rise in domestic demand. Saudi exports next month could decline to 6.6 million barrels a day, with most of that cut made in

AN INCREASING SAUDI PRODUCTION PROBLEM? 3 exports to the US and Asia. Saudi sources estimate that volumes coming to the US will be below 800,000 barrels, with Asian exports cut at least 200,000 bpd to 3.5 million a day. Europe s imports will be only down by 70,000 bpd, reaching a level of 520,000 bpd. New Saudi investment in technology and working capital is essential. Aramco s announced $300 billion in investments over the next decade will largely focus upon keeping existing projects operating. The push initially expected to open satellite fields will be delayed into the future. There is also a renewed drive to increase natural gas production. There are three pressures at work here. First, the government needs to meet rising local demand for electricity. Second, the increasing reliance on gas frees more crude oil for export (and revenue generation). Third, the gas would be injected as secondary recovery at oil fields. This third factor is the most important for the Aramco IPO valuation, since it allows a higher overall level of arguable reserves subject to extraction. But that also comes at a price. Sour Prospects Aramco has for some time relied on early secondary and enhanced oil recovery (SOR/EOR). I was shown a new minor production field awhile back with 22 wells. Upon closer examination, 18 were water injection and only four were production, and this at a field only opened for a few months. This is certain to adversely impact geological integrity, a matter already evident at much larger fields. Unfortunately, the corrosion problem is not helped by replacing high saline content water with injected gas. That s because the gas, as with crude oil, is very sour. And that sulfur becomes an even greater threat for both corrosion and the resulting scaling. Corrosion is a broader problem in the region. Take Qatar, now in an intense and bitter diplomatic controversy with the Saudis. Qatar Petroleum has only been able to maintain crude oil production on its main offshore oilfield Al Shaheen through heavy investments from its former joint venture partner Maersk Oil. After the Danish concession, the operations are set to be led by French oil major Total. Al Shaheen produces some 300,000 barrels a day from 33 platforms and almost 400 wells. The challenges for this field are increasing. Doha for the past four years has requested foreign operators to come up with plans to address recovery rates. Word is that over $1.5 billion has been spent by

AN INCREASING SAUDI PRODUCTION PROBLEM? 4 Maersk, but not even this has been able to maintain current production levels. The amount and sour nature of associated gas is preventing any increase in output. French Total has better experience with these problems. While there has been no official statement from the company, sources there acknowledge that corrosion and scaling will likely reduce overall extraction levels. Other Qatari fields are experiencing similar problems. This dynamic may have a more pronounced impact on aggregate OPEC production and exports moving forward. The situation will at least require significant additional investment. With the collapse occurring at PDVSA in Venezuela and the uncertainty of additional sustainable exports from Libya or Nigeria (neither at the moment subject to the OPEC production cap/cut regimen), the overall picture for lowering OPEC exports is improving. That may provide some support for rising prices. For the Saudis, and the valuation of the Aramco IPO, that could only be welcome news..

AN INCREASING SAUDI PRODUCTION PROBLEM? 5 About the Author Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio and television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network. A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.