Saudi Ara­bia has more oil than we may ever need

The Sunday Telegraph - Money & Business - - Business - Andy Critchlow

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’

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