Energy Prospectus

Comments below are from EnerCom:

It is widely assumed that one of the main motivations for Saudi Aramco’s IPO is to raise money for the kingdom, which has seen revenues decline like all other OPEC countries. The kingdom is seeking to sell 5% of Aramco, for a total price of $100 billion, according to analysts.

An IPO at that scale would not immediately erase the lost revenue due to the downturn which the Saudi leadership self-inflicted.

In 2014 Saudi Arabia received $297 billion in export revenue, which is below the record $352.9 billion in 2012, but still the 5th-best year since 1994.
In 2015 and 2016, by contrast, Saudi Arabia made $157.3 billion and $133 billion, only $290.3 billion combined.

Compared to 2014 revenues, the kingdom has lost $303.7 billion over the past two years. $100 billion in IPO proceeds at the 5% scale wouldn’t make much of a dent in refilling Saudi coffers.

In fact, if the $2 trillion valuation of Saudi Aramco is correct, Saudi Arabia would need to sell about 15% of Aramco to replace its lost revenues.

Saudi Arabia may have other problems as well. Founder of Petrie Partners Tom Petrie told EnerCom “The giant Ghawar Field is probably now in irreversible decline. There are four or five other large fields, but not like Ghawar. The other fields are maybe 15% of the size of Ghawar, and that’s what they have to overcome.” First production from Ghawar was in 1951, so declining production at this point would not be unexpected.

Saudi unconventionals?

Saudi Arabia may attempt its own unconventional development, according to Petrie. “The deputy crown prince, with the charge from the king, has communicated ‘don’t fight [unconventional development]. Find a way to embrace it.’

“Back in 2011 and 2012, the Saudis said ‘if breaking up source rock is the issue, let’s go do it. We’ve got plenty of source rock, many times thicker than what the Americans have,’ and so they thought they would see flowrates that were many times larger as well. What they found though was that you drilled much more expensive wells because of the thickness, but when you break up the source rock, if you don’t have the right brittleness, it’s not going to work.”

“I have to believe, in an oil province as prolific as Saudi Arabia, you can find rocks with the right kind of brittleness, but they haven’t so far. Making unconventionals work will be a priority, though. If they can make it work, shale development in Saudi Arabia could be somewhat successful, although, it’s not clear to me that it will be as successful, proportionately, as it has been in North America, especially the U.S.”

If the Saudis succeed in making unconventionals work, the oil dynamic could shift from U.S. unconventionals vs. OPEC conventional to unconventional vs. unconventional. It remains to be seen who would win in such a contest, but American shale producers have already shown a resiliency and innovative spirit that will serve them well in the future.