June 19, 2016

Saudi Aramco plans to IPO 5% of the company and plans global expansion

Saudi Arabia's state-owned oil giant Aramco is finalizing proposals for its partial privatization and will present them to its Supreme Council soon, its chief executive said about the centerpiece of the kingdom's efforts to overhaul its economy.

The company has a huge team working on the options for the initial public offering (IPO) of less than 5 percent of its value, which include a single domestic listing and a dual listing with a foreign market, CEO Amin Nasser said on Tuesday.

They will be presented "soon" to Aramco's Supreme Council, headed by Deputy Crown Prince Mohammed bin Salman, who is leading an economic reform drive to address falling oil revenue and sharp fiscal deficits by boosting the private sector, ending government waste and diversifying the economy.

Nasser stressed that even after the listing, the Saudi government would retain sole control over Aramco's oil and gas output levels. "Production is sovereign," he said.

In April, Prince Mohammed said he expected the IPO would value Aramco at at least $2 trillion, but that he thought the figure might end up being higher. Any valuation would account for both oil price expectations and the size of Saudi Arabia's proven oil reserves.

A sale of a 5 percent stake would be the largest I.P.O. ever, with proceeds most likely approaching $100 billion The oil company generated an estimated $180 billion in profit per year to the state, which represented over 40 percent of its economy, at least before the recent slump in oil prices. We don’t know the exact figures because they aren’t published, but we do know that about 90 percent of the Saudi government’s budget comes from oil profits.

The latest indications are there will be a global listing in New York, Hong Kong and London. If Aramco goes to New York, it will be subjecting itself to the full array of United States securities laws applicable to foreign companies. This will require extensive disclosure and will subject the company to the scrutiny of the public market.

A successful IPO would ease an annual national budget deficit of about $98 billion.

Saudi Arabia had discovered a total of 805.6 billion barrels of oil, of which 141.5 billion had already been produced and 260 billion barrels were considered "proven", the industry term for reserves that can definitely be extracted.

Aramco also had 403 billion barrels of reserves it could probably extract, they said, adding that it hoped to add another 100 billion barrels to total reserves by 2025 by increasing the recovery rate by 50-70 percent using new technology.

Aramco expects global crude oil demand to grow by 1.2 million barrels per day this year, he said, and has seen increasing demand in the United States and India.

The global oil market will be almost balanced next year as demand continues to rise faster than production, while the current oversupply is much smaller than previously thought, the International Energy Agency said.

Oil prices in New York have surged about 80 percent from a 12-year low in February to trade near $48 a barrel as production retreats amid investment cuts, wildfires disrupt operations in Canada and militant attacks hit exports from Nigeria. Prices tumbled last year as OPEC refused to concede market share to a crude surplus triggered by years of booming shale oil output from the U.S.

Production outside the Organization of Petroleum Exporting Countries will grow by a “modest” 200,000 barrels a day, with gains limited to Canada and Brazil. While U.S. shale oil production will start to recover by the middle of next year, average output for 2017 will be 190,000 barrels a day lower, after falling 500,000 a day in 2016. Global inventories will decline by 100,000 barrels a day through the year

Saudi Aramco produced an average of 10.2 million bpd of crude in 2015, he said, adding there had been a big drop in oil output among non-conventional and even other conventional producers.

The expansion of the Khurais oilfield will come on stream in 2018, he said, adding that the latest stage of its expansion project at the southeastern Shaybah oil field would be finished "in a couple of weeks".

The increased capacity of 250,000 bpd, taking Shaybah's total production capacity to 1 million bpd, is aimed at rebalancing Saudi Arabia's crude oil quality and at compensating for falling output at other fields as they mature.

The immense Saudi Aramco complex in Dhahran resembles a small city, with its large residential complex, its own hospital, sports stadium and parks.

Saudi Basic Industries Corp (Sabic), the state-run petrochemical and metals conglomerate, to jointly develop an oil-to-chemicals project, an official said in a briefing to reporters.

The project, likely to cost up to $30 billion, would chime with efforts to better integrate the kingdom's energy and industrial sectors. On Saturday a new Energy, Industry and Mineral Resources Ministry was created in place of the old oil ministry.

Another example is its huge ship repair and shipbuilding complex that it is developing at Ras al-Khair on the kingdom's east coast to be fully operational by 2021, Nasser said.

The first part of the shipbuilding complex will be ready by 2018, and it will eventually make oil rigs and tankers, Nasser said.

SOURCES - Reuters, NY times, Bloomberg

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