The position of Saudi Arabia as the holder of the world’s largest
crude oil reserves has rarely ever been questioned. The country’s figures of
260 trillion barrels in reserves has barely budged since the 1980s, enabling
Saudi Aramco – the state oil firm – to flex its muscle on the world stage, as
it did in the oil shocks. Though its power has waned over the decades, the
perception of that vast wealth of oil under the sands is still enough to
influence the market, as it did recently did by forcing OPEC members to the
table to agree on a supply cut. And now that figure has apparently been
confirmed. An independent audit has reportedly confirmed Saudi Arabia’s proven
oil reserves at 265 trillion barrels, some 15% of world reserves.
In the past, an audit would never have been called or imagined. However, Saudi Arabia is planning to radically transform Saudi Aramco in an IPO that could potentially create the world’s most valuable company. Estimates suggests that a public listing could see Aramco valued at almost US$2 trillion, more than five times the current worth of ExxonMobil. It is part of deputy crown prince Prince Mohammed’s quest to move the country away from oil dependence, using the proceeds from the IPO to diversify the economy and create new jobs in manufacturing, industry and services. It’s an ambitious plan and, more importantly, requires a huge mindshift for a company and its leaders who were used to be answerable only to the royal family.
But more so, it requires also requires state disentanglement. Saudi Aramco is so intertwined with the Saudi Arabian government that an IPO at its current structure is impossible. Apart from pumping and refining oil, and forming the vast bulk of the country’s revenue, Aramco also runs hospitals, schools, universities and charities, as well as state infrastructure projects like stadiums, roads and ports. Disentangling this will be tricky, particularly given the self-imposed deadline of 2018 to finalise the IPO. It also means Aramco has to publish financial statements and audited numbers, something that it never had to worry about until last year.
Hence the need for the audit of its reserves. Aramco has engaged Gaffney, Cline and Associates of service firm Baker Hughes and Dallas-based DeGolyer and MacNaughton to perform separate reviews of its reserves, with Aramco stating that initial numbers and correlation was “reassuring” and even higher than previous estimates.
If confirmed, that would be the ground for a blockbuster IPO. The current plans calls for 5% of the company’s share to be floated on an international exchange – possibly London for the prestige, now that a more hostile environment renders New York a bit less hospitable – and a secondary listing in Riyadh. But don’t expect any huge change in the approach Saudi Aramco will be doing its business. The motive here is money and the Saudi Arabian government has no intention of reducing its role as overseer of Saudi Aramco. But at least one clear thing has come out of the process so far: there is as much oil under the Arabian sands as has always been claimed, and Aramco’s role as controller of the world’s largest petroleum spigot remains intact.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)