UNVEILING the shroud of secrecy, Aramco — the Saudi state oil company — has for the first time ever issued a bond prospectus, providing a rare glimpse into the finances of the kingdom’s prized asset. The data was contained in a bond-offering document to potential investors as Aramco looked to raise about $10 billion from selling bonds to international investors to help finance its $69.1bn acquisition of Sabic, the Saudi industrial conglomerate.

The revelations made immediate headlines. Aramco is the world’s most profitable company — screeching headlines said all around. It dwarfed all other businesses on the planet. As per Moody’s Investors Service, Aramco profits in 2018 crossed the total, combined profits of Apple, Google and Exxon Mobil. In fact, Apple, with a profit of $59.5bn in 2018, stood a distant second to Aramco.

However, the biggest revelation in the document has been about Ghawar, the Saudi supergiant oil field. The 174-mile long Ghawar has been producing oil for the last almost 60 years, accounting ‘for more than half of the total cumulative crude oil production in the kingdom,’ the bond prospectus detailed.

This was in sharp contrast to the common belief. As reported by Javier Blas of Bloomberg, in 2017, the US Energy Information Administration, statistical arm of the US Department of Energy, listed Ghawar’s production capacity at 5.8 million bpd, while Aramco in a presentation in Washington in 2004 also underlined the field was pumping more than 5m bpd.

But as per newly revealed details, Ghawar is producing considerably less. It can pump only 3.8m bpd. This was unexpected. “As Saudi’s largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report,” Blas quoted Virendra Chauhan of Energy Aspects Ltd. as saying.

Aramco also disclosed reserves of its top-five fields, revealing that some of them have shorter life spans than previously thought. Ghawar, for example, has 48.2bn barrels of oil left which would last another 34 years at the maximum rate of production. Nonetheless, companies are often able to boost their reserves over time by deploying new techniques or technology.

In total, the kingdom has 226bn barrels of reserves, enough for another 52 years of production at the maximum capacity of 12 million barrels a day.

The Saudis also underlined their fields are ageing better than expected, with “low depletion rates of 1 per cent to 2pc per year,” slower than the 5pc decline some analysts suspected, Blas, underlined.

Some analysts feel that by issuing the bonds, the oil kingdom is also testing market appetite for Aramco IPO, possibly the next year. Saudi Arabia has long insisted that Aramco would fetch the lofty valuation of $2 trillion. Markets are not too sure of it. Analysts are insisting given the current financials, the company is not expected to reach the $2tr valuation mark, as the Crown Prince Mohammad bin Salman (MBS) had claimed while launching his ‘Vision 2030.’

Financial details revealed Aramco paid $58.2bn in dividends to the Saudi government last year and working back from that, Aramco valuation should be closer to $1.2tr if investors judge Aramco by the same metrics as other major oil companies, Blas said.

And there is a catch in this too. If investors demand a higher yield to compensate them for the risks involved with the government continuing to control a majority stake in the company, then the valuation may go even lower.

Saudi Arabia is, however, stuck to its original $2tr aspirations, even after some investors made it clear they didn’t share that view. Aramco instead pushed back the timeline for its IPO to 2021, from 2018, and embarked on the acquisition of a majority stake in the Saudi industrial giant Sabic at a cost of $69.1bn.

Saudi Arabia has a few options to boost Aramco valuation before resuming efforts on the IPO. One way would be to cut the amount of tax the company pays. Aramco paid $102bn in income tax last year, almost double the dividend amount. However, a cut would reduce tax revenue at a time when the state is already struggling to cover its budget.

And that means, obtaining a valuation close to $2tr may still be difficult to achieve. In the given circumstances, for MBS to achieve his ‘Vision 2030’ may not be financially viable.

Published in Dawn, April 7th, 2019