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Many more questions than answers have been raised by last week’s sale of an additional US$11.2 billion of shares in Saudi Arabia’s flagship company Aramco. Much has been made by Aramco sources that the issuance attracted many more international investors than the original initial public offering (IPO) in December 2019 but as virtually none in the Western investment community took part back then, this appears as a largely redundant comparison. More apposite observations prompted by this latest stock sale are whether this will further damage the company to function competitively in the current oil and gas market, if it will boost its ability to help Saudi Arabia to create more liquidity for its financial system, and whether it will reignite calls for far-reaching anti-trust legislation to brought against the firm and Saudi Arabia, given the inextricable link between the two in the world oil market.
It is vital in all these contexts to recall that one of the key purposes of the original IPO was to plug the huge hole left in Saudi Arabia’s finances after the 2014-2016 Oil Price War that it had instigated to destroy or significantly delay the expansion of the U.S.’s then-nascent shale oil industry, as analysed in full in my new book on the new global oil market order. That War had swung Saudi Arabia from a budget surplus to a then-record-high deficit of US$98 billion at the end of 2015. It had also spent at least US$250 billion of its precious foreign exchange reserves over that period that even senior Saudis said was lost forever. So bad was Saudi Arabia’s economic and political situation back towards the end of that Oil Price War that even the country’s then-Deputy Economic Minister, Mohamed Al Tuwaijri, stated unequivocally (and unprecedentedly for a senior Saudi) in October 2016 that: “If we [Saudi Arabia] don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.” At that point, the ambitious then-Deputy Crown Prince, Mohammed bin Salman, came up with the idea of selling part of Aramco. One advantage of this would be that it could raise a lot of money to plug the budget deficit in the first instance. An additional purpose of the 2019 IPO was to use any extra funds from the then-intended 5 percent stake sale to bolster Saudi’s ‘Vision 2030’ development plan aimed at diversifying the Kingdom’s economy away from its reliance on oil exports. Another positive factor was that if it was successful, the Aramco IPO would boost Saudi Arabia’s reputation in the international capital markets, allowing it to more easily conduct similar IPOs in the future, and to the same end as the Aramco sale.
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For multiple reasons also analysed in full in my latest book, Western investors largely avoided the IPO, resulting in a significant reduction of the size of the offering from 5 percent to just 1.5 percent, and it failing to find a major international listing destination as had been intended. Another consequence of this lack of interest was that the Saudi Arabian government had to offer a guarantee of massive dividend payments alongside the IPO to ensure that it could sell even the 1.5 percent stake. Although the percentage amount of dividend returns (just less than 4 percent) at that time was not huge by the standards of comparable Western firms (some of which offered dividend yields of 6 percent or more), in absolute terms the amount of money to be paid would be a major strain on the company for years, given the much smaller free cashflow it generated. More specifically, the Saudi Arabian government had to guarantee a US$75 billion dividend payment in 2020, split equally into payments of US$18.75 billion every quarter. Staggeringly, this rose in 2023 to US$97.8 billion for the year, boosted by additional performance-linked dividends intended to keep up with the higher dividend payments offered by some major Western oil and gas firms. These added dividends are designed to target 50-70 percent of Aramco’s annual free cash flow, net of the base dividend, and other amounts including external investments, according to Aramco’s chief executive officer, Amin Nasser. In Q1 2024, the base dividend was US$20.3 billion, which will be increased by another performance-linked dividend distribution of US$10.8 billion, bringing the total to US$31 billion. For 2024 as whole, Saudi Aramco expects to pay US$124.3 billion in dividends! What this means in practical terms is the increased likelihood of Aramco having to cut back on other investments in its field operations to be able to continue to service these huge obligations into the future. Indeed, January saw a directive from the Energy Ministry to the company to cancel a vital planned increase in oil production capacity.
The fact that all this money will continue to have to be paid out to investors simply to prop up the share price also undermines the key premises for the selling of the shares in the first place – that is, plugging the budget deficit and funding the ‘Vision 2030’ development plan. This is even more necessary now, as far from being awash in oil money as many people think, Saudi Arabia has still not fully recovered financially from the appalling effects of the 2014-2016 Oil Price War, or from the 2020 Oil Price War, and subsequent oil market actions, as also analysed in full in my latest book. Up until the 2022 invasion of Ukraine by Russia, Saudi Arabia’s fiscal breakeven price for oil was higher than the market was paying, which meant in simple terms that it was not making enough to cover its expenses as a country. It is no better again now, with its 2024 fiscal breakeven price at US$96.17 per barrel of the benchmark Brent oil price. In fact, Saudi Arabia has forecast a budget deficit this year of SAR79 billion (US$21.07 billion), which many oil market observers believe to be extremely optimistic. So bad are the real-world ramifications of this that several ‘Vision 2030’ projects have either been suspended or radically reduced in size, including the flagship Neom City development. Initially-costed at US$1.5 trillion the linear city project located has been cut back in size from 106 miles long to just 1.6 miles long.
Given the dire financial situation of Saudi Arabia and Aramco, the 2 June extension by OPEC of 3.66 million barrels per day (bpd) of production cuts to the end of 2025 and another 2.2 million bpd to the end of September 2024 at minimum may again raise ani-trust concerns about the relationship between the two entities. The irrefutable fact remains that OPEC is a de facto cartel, Saudi Arabia is its de facto leader, and Saudi Aramco is Saudi Arabia’s key oil company. The U.S. has long been critical of this relationship and has also kept in reserve its key weapon to break it – the ‘No Oil Producing and Exporting Cartels’ (NOPEC) bill - as also detailed in my new book on the new global oil market order. The enactment of NOPEC would mean that trading in all Saudi Aramco’s products – including oil – would be subject to the antitrust legislation, meaning the prohibition of sales in U.S. dollars. It would also mean the eventual break-up of Aramco into smaller constituent companies that are not capable of influencing the oil price. May 2022 saw the passing of the NOPEC Bill by a U.S. Senate committee following Saudi Arabia’s unwillingness to help with soaring oil prices after Russia’s invasion of Ukraine three months earlier. It signaled to many that Washington was not prepared to put up with ongoing high oil prices, and that the threat of NOPEC could easily become reality for Saudi Arabia. Consequently, the leeway for the Kingdom to repair its burgeoning budget deficit, and to seriously continue with its ‘Vision 2030’ by engineering a sustained and significant rise in oil prices past its fiscal breakeven point appears extremely limited.
By Simon Watkins for Oilprice.com
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Sure about that.
However, it is becoming amply clear that Aramco's share sales on their own won't be enough to provide the huge amounts of funds that the Saudi economy needs for financing the megaprojects of the diversification and also plugging the widening budget deficit because of lower oil prices and also lower production.
Saudi Arabia currently needs a Brent crude price of almost $96.17 a barrel to breakeven at a time when Brent price is currently at almost $82 a barrel or 15% below the breakeven price. Saudi Arabia and the overwhelming majority of OPEC+ members need a Brent crude of $90-$100 a barrel. This is achievable this year despite deliberate market manipulations by the United States in cahoots with the IEA, speculators and oil traders to depress oil prices given the solid oil market fundamentals, the robust global oil demand and China's record-breaking crude oil imports in 2024.
But the real problem facing Saudi Arabia is its declining production. For more than 70 years 90% of Saudi production has been coming from 5 giant , aging and fast-depleting oilfields discovered more than 75 years ago and are being kept in production by the injection of billions of gallons of water. These are Ghawar, Shaybah, Safaniya, Zulud and Khrais oilfields. I nicknamed the Saudi voluntary production cut of 1.0 million barrels a day (mbd) which has been in place since June 2022 as the cut that never was since the Saudis can't produce it anyway. My estimate of current Saudi production is 6.0-6.5 mbd. The balance to make up the 9.0- mbd production the Saudis declare comes from stored oil. By 2030 the Saudis could only have 400,000 barrels a day (b/d) for export and would have ceased by then to remain an oil exporter. I project that the Saudi voluntary cuts will soon become a permanent fixture of the global oil market.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert