Some of the most secretive, highly-anticipated details about the Saudi oil industry have just been released.
Saudi Aramco is preparing to launch a major bond issuance to purchase the Saudi petrochemical company Sabic, a process that required a detailed prospectus on the company. As part of that review, Aramco released on Monday some closely-guarded state secrets that have been kept under wraps for decades and have been the subject of endless and wild speculation.
With little fanfare, Aramco released some details …and they are somewhat damning. For instance, the Ghawar oil field, which has at times held an almost mythical status both because of its massive size and also because of the complete opaqueness on its inner workings, can’t produce as much as previously thought. Ghawar is the core of Aramco’s oil production, and is of vital national security importance to the Saudi state.
The prospectus says that the Ghawar field can only produce 3.8 million barrels per day (mb/d), not the widely thought 5 mb/d that has floated around for years as a rough estimate. “As Saudi’s largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report,” said Virendra Chauhan, head of upstream at consultant Energy Aspects Ltd., according to Bloomberg.
There was little other detail offered on that figure, why it declined, or whether it would continue to decline. But it is a very significant downward revision.
Nevertheless, the Aramco prospectus confirmed some more impressive figures that have also been the subject of speculation. The document says the company can produce 12 mb/d, a rate of output that has been criticized and questioned. With current production at about 10 mb/d, that implies a current 2 mb/d of spare capacity, which is a comfortable buffer that could plug some hypothetical supply gaps. In addition, there is about 500,000 bpd lying dormant in the Neutral Zone on the border with Kuwait.
The country is also sitting on 226 billion barrels of oil reserves, or about 52 years’ worth of supply at maximum production rates of 12 mb/d.
Aramco is also the world’s most profitable company, earning $111 billion last year, which is several multiples of the oil majors and significantly higher than tech giants such as Google and Apple. And its reserves are incredibly cheap to produce – Aramco can produce oil, including capex, at as lowas $7.50 per barrel before tax. Liam Denning of Bloomberg Opinion points out that the low cost of production and enormous output levels means that return on capital employed vastly exceeds its competitors.
But the profits are sorely needed to prop up the entire Saudi state, which makes Aramco entirely different from the oil majors. “Saudi Aramco’s rating is constrained by that of Saudi Arabia (A+/Stable),” Fitch said when explaining its decision to rate the company’s credit below that of, say, Shell or Exxon, despite much larger profits and lower debt. “This reflects the influence the state exerts on the company through taxation and dividends, as well as regulating the level of production in line with its OPEC commitments.” Also, its valuation could be only half of the $2 trillion that Saudi officials repeatedly trumpeted.
More broadly, some of the largest unanswered questions revolve around Aramco’s future. While the company has some of the largest and cheapest oil reserves in the world, the longevity of the oil market in general is up for debate. Peak oil demand looms. Aramco argues that it will be well-positioned for the peak, with low-cost output that can survive in a dwindling market. High-cost producers will be forced out long before Aramco will be.
Also, Aramco is aggressively pivoting into petrochemicals, refining, natural gas and other avenues that could shield it a bit from a future of peak demand. But the shift is still relatively modest given the size of its crude business. “It’s going to be very difficult for them to ever diversify away from oil,” Olivier Jakob at Petromatrix told the FT.
In that sense, Aramco, while seemingly impenetrable with sky-high profits and vast reserves that are some of the cheapest in the world to produce, is also dangerously vulnerable to the unfolding energy transition.