A gas flame is seen in the desert near the Khurais oilfield, about 160 km from Riyadh.ALI JAREKJI/Reuters
For decades, Saudi Arabia's gigantic oil company has been glorified for massive reserves and cheap operating costs, which give it a strong grip over global oil prices. Now, in the midst of a deep downturn for energy prices, the Saudi royal family is considering opening it up to outside investors.
The eyebrow-raising news was revealed in an interview with The Economist, during which Muhammad bin Salman, the kingdom's deputy crown prince, said he was "enthusiastic" about an initial public offering of Saudi Aramco. He went so far as to say this is "most certainly" the start of a "Thatcher revolution" for the country.
For now, the Saudis are only considering an IPO. And even if they pull the trigger, it's unclear what assets would be put up for public grabs. But the potential IPO is being billed as a deal that could create what is "probably the world's most valuable company," according to The Economist.
Except outsiders have little insight into what Aramco does, or how it operates. Clearly there's a lot of oil. The Saudi royal family lives lavishly and the country has virtually no taxes, because its budget is funded mostly through oil money. But no one seems to know exactly how pretty Aramco is sitting – especially now that Saudi Arabia faces fiscal deficits amid oil's plunge. There is speculation, possibly unfounded, that the reserves are vastly overstated.
To help make sense of a potential IPO, one that could radically alter energy markets and affect Canada, here is of a rundown of what we do and do not know about the Saudi oil giant.
Who runs Aramco?
The Saudis first bought a 25-per-cent stake in the Arabian American Oil Co. in 1973, and continued to buy more as energy nationalization swept across the Middle East. For decades, Saudi Aramco, as it is now known, was closely tied with the kingdom's oil ministry, but last May King Salman hived it off and gave control to his son, Prince Muhammad, who is only 30 years old.
How lucrative are its reserves?
Saudi Arabia is awash in oil. It has the third-largest reserve base in the world – we believe – and currently produces more than the entire United States. Because it pumps 9.5 million barrels a day, it has heavy control over global prices, which is why energy watchers have followed the Saudis' supply inaction over the past year so closely.
Should Aramco become public, its 261.1 billion estimated barrels of reserves are more than 10 times bigger than Exxon Mobil's – currently the world's largest energy company, worth $322-billion (U.S.).
To make a Canadian comparison, we've got proven oil reserves estimated at 173 billion barrels. The vast majority of these are in Alberta's oil sands, with roughly five billion barrels found in conventional, offshore and tight oil formations, according to Natural Resources Canada.
How valuable is Saudi oil?
While Canada has scores of oil reserves, our domestic producers do not come close to Saudi Arabia's on cost comparisons. Saudi Arabia has the second-lowest oil costs in the world, right after Kuwait, which means it either loses far less money per barrel when oil prices are low or makes much more per barrel when oil prices are high.
Norwegian consultancy Rystad Energy pegs Canada's average break-even cost per barrel just shy of $70; Saudi Arabia's is about $14.
Why go public now?
Companies typically want to go public when they can get top dollar for the assets they sell. That will be tough to do in an energy rout.
Yet these are unusual times. The Saudis racked up a $98-billion budget deficit last year, or 15 per cent of gross domestic product, and is looking for many ways to fill the hole, such as a value added tax. Any money raised from a partial Aramco privatization could go a long way.
And remember that the oil market is incredibly tough to time. The expectation is that oil prices will eventually rise, but what if they don't? The Saudis have proved that they won't budge when it comes to production levels, and Western companies aren't either. Crescent Point Energy Corp. released its 2016 expectations on Thursday, and it actually hopes that production will rise this year. In this environment, the Saudis may think that there is even more risk in waiting.
There is something else. In his interview with The Economist, Saudi Arabia's deputy crown prince suggested that private ownership might shine some light in dark corners. "I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco," he said.
Is this really all that shocking?
Oh yeah. "This is a big surprise. We've never discussed this," the Financial Times reported, anonymously quoting someone the outlet referred to as "close to Saudi Aramco's board."
Tim Kiladze