Saudi Arabia soaking up investors’ cash for oil and gas
Saudi Arabia is trying to take the wind out of the sails of every other oil producer.
Wind, in this case, is a metaphor for capital. Saudi Arabia announced a $17.5 billion bond sale Wednesday, the largest issuance ever from an emerging market.
“The kingdom raised $5.5 billion in each of the five- and 10-year bonds and $6.5 billion in 30-year debt,” Bloomberg News reported. “People with knowledge of the offering earlier said investors submitted $67 billion in bids.”
The Saudi government needs the cash following the collapse of global oil prices from $109 a barrel in June 2014 to $52.54 on Wednesday for Brent, the international benchmark.
Saudi Arabia produces oil for $10 a barrel, but because the nation’s entire economy relies on oil sales, the government needs at least $60 to cover expenses.
The Saudi bond issuance follows the government’s announcement in April that it plans an initial public offering of stock in Aramco, the national oil company. The government hopes to raise $2 trillion in 2018, Aramco CEO Amin Nasser told CNN Money.
The question is how much money do global investors actually have to bet on the oil and gas business? After all, there is only so much wealth available for investment, and every investor knows to maintain a diverse portfolio. So how much money is available to go into oil, a highly volatile industry with a dubious future?
That’s an important question, because just as the Saudis are protecting market share by keeping prices low, they are also soaking up a lot of available capital, keeping competitors off balance.
This allows the Saudis to capture foreign cash to finance energy operations and increase wealth at home, while taking away opportunities for Saudi Arabia’s competitors to access that capital.
Iran is desperately looking for cash right now as it attempts to rebuild its infrastructure to export 5 million barrels a day by 2020. U.S. shale companies, who crashed the market by adding 1 million barrels of excess crude to the market, rely on stocks and bonds to raise funds for drilling because banks just aren’t interested right now.
Investors are embarrassed for choice. They can put their money into one of the largest, and lowestcost, oil fields on the planet operated by a government-owned oil company, or they can invest in more unpredictable nations and cash-strapped companies that will never produce petroleum as cheaply as Saudi Arabia.
The smart money that wants safety will go to Saudi Arabia. The Saudi’s competitors will have to sweeten their offerings to attract investment, which means higher capital costs for them.
Saudi Arabia won the price war on the global market by forcing 1 million barrels of American crude off the market.
Now they are going to battle in the financial markets to keep those competitors from coming back.
The oil and gas business just got more expensive.