Saudi Arabia has more oil than we may ever need
Saudi Arabia has finally silenced its peak-oil critics and simultaneously revived interest in its stalled $2 trillion (£1.6 trillion) plan for a stock market float of state-owned producer Aramco. The kingdom revealed this week it has enough crude to pump at current rates for at least another 70 years. At the end of 2017, Saudi oil reserves stood at an eye-watering 268bn barrels, up from previous estimates of 266bn. By comparison, the UK’S remaining cache of retrievable oil under the seabed of the North Sea will be almost completely drained, probably after another couple of decades.
The updated figures were no surprise for many experts. BP’S highly respected statistical review of world energy lists Saudi oil reserves at just over 266bn barrels and Rystad Energy estimates that 276bn barrels remain under its Arabian deserts. However, not everyone has been convinced by either the longevity, or scale, of Saudi’s remaining oil riches.
In his critically acclaimed 2005 book Twilight
in the Desert, the then-prominent oil economist Matthew R Simmons predicted that Saudi Arabia’s oil wells were about to run dry. His theory was based on the ageing status of several gigantic oilfields, which still provide the bulk of the kingdom’s near-11m-barrel-per-day output.
Simmons triggered a wave of paranoia, which Riyadh had failed to entirely dispel until now. After all, oil production in the kingdom dates far back to 1938 and the drilling of its first commercially viable well in Dammam. Although the original borehole is enshrined at the centre of Aramco’s headquarters in the Eastern Province, the company is still squeezing barrels from the deposit.
Instead of running out of oil, Saudi Arabia’s bigger problem is a deficiency in transparency. Its reserves have rarely been publicly updated, or audited by an independent third party until now. Doors to the data rooms of Aramco – which is responsible for almost its entire national output – have been tightly locked.
The reason for this new spirit of openness could be Aramco’s proposed public listing.
The plan to sell a 5pc stake in Aramco to international investors in order to raise a potential $100bn windfall for the Saudis has been beset by problems.
The initial exuberance of international bankers for the deal, which could create the world’s most valuable listed company, was replaced almost immediately by cynicism. Aramco’s accounts were too opaque and the amount of revenue the government was willing to share with investors unclear.
A decision went unresolved about where the company’s shares outside Saudi would be listed and crucial advisory appointments remained unfilled as the deadline for issuing a prospectus approached. Tepid oil prices were also making the IPO much less appealing.
Technocrats at Aramco’s headquarters may have hoped the entire plan would be shelved indefinitely as more people began to question the $2 trillion valuation desired by the kingdom’s Crown Prince Mohammed bin Salman, inset.
One delay led to another, until the world’s financial community finally gave up believing it would ever happen at all. Some of their faith may have been restored by the update of the kingdom’s oil reserves, which underscores both Aramco’s potential value and strategic importance as a global energy supplier, but also the government’s desire to maximise its most prized asset.
“Every barrel we produce is the most profitable in the world, and why we believe Saudi Aramco is the world’s most valuable company and indeed the world’s most important,” said Saudi oil minister Khalid Al-falih in a statement posted on the state news agency’s website.
According to the latest survey by S&P Global Platts, Aramco pumped more than 10.6m barrels per day of crude last month, making it by far the world’s single largest producer.
It is also one of the most efficient. Al-falih said Aramco’s oil costs just $4 per barrel to produce. It’s a key figure for potential investors, which could make its $2 trillion valuation more believable. Suddenly, the IPO looks plausible again.
The fact is oil markets are more likely to dry up before Aramco’s reserves of crude run out. Demand for oil remains robust despite the growing popularity of electric vehicles and the pressure of climate change forcing consumers to search for cleaner transportation fuels.
Last year, the world consumed 100m barrels per day for the first time in history and consumption is expected to continue rising at least through to 2040. However, beyond this date the outlook is harder to predict.
Unless it wants to flood the market and send oil prices tumbling, Saudi Arabia’s best option if it wants to maximise its vast remaining hydrocarbon reserves could be to sell off increasingly larger shares of Aramco to international investors no later than 2021. Otherwise it runs the risk of having to leave much of its wealth stuck in the ground.
‘Instead of running out of oil, Saudi Arabia’s problem is a deficiency in transparency’