Analysis: Making Aramco more attractive to investors

Author: Arab NewsMon, 2017-04-10 01:12ID: 1491765623529137000The first step has been taken in making Saudi Aramco more attractive to investors ahead of its planned initial public offering (IPO).On March 27, the Saudi government approved a new tax regime for hydrocarbon producers in the Kingdom, under which Aramco’s income tax will fall to 50 percent from 85 percent.So the next question should be: What else can be done to make Aramco more attractive to cash-hungry investors?There are three areas where Aramco can work its magic to sweeten the IPO for investors: Booking more reserves, finding more markets for its crude, and becoming greener and an exporter of technology. Since the company’s production expansion is constrained by the government’s oil policy, the company should be able to show that it can book more oil reserves.Production decisions of Saudi Aramco will still be made in Riyadh and not at its headquarters in Dhahran even if the company goes public, according to comments made by Energy Minister Khalid Al-Falih in June 2016. Investors must accept that the government will direct the production policy, he said. That is a requisite if they want to have a slice of the world’s largest oil producer with the lowest production cost in the industry.In the oil industry, most listed companies maximize their production in order to maximize revenues for shareholders. That will not necessarily be the case for Saudi Aramco as it will still be a key tool to stabilize the oil market.Saudi Aramco has the capacity for a maximum sustained capacity of 12 million barrels per day (bpd) of oil but it never exceeded 10.7 million bpd. The reason for that is the government, as a policy, always maintains a certain limit in order to respond to any supply disruption in the market. That is why Saudi Arabia is the lender of last resort in the oil market. With a strict production policy, Saudi Aramco’s production will always be subject to ensuring market stability and not to maximizing its profits. This is a responsibility the government took since its early days and no change to that is expected in the foreseeable future.So what can be a better deal for the investors under such conditions? The answer is to assure them that there will always be oil for decades to come. This means the company must add to its books more reserves year-on-year — something other big global listed energy companies are looking to do. Some of them are debooking some of their reserves, however, whereas Aramco is in a better position to add more.Aramco has very low production costs compared to the entire oil industry, and huge oil reserves. What it needs to do now is to focus its upstream investments to unlock more of these probable and possible reserves and book them in the company’s records as proven reserves.There are three categories of oil reserves that can appear in any oil company’s records. First, there are proven reserves, which are oil resources underground with 90 percent certainty of commercial extraction. Probable reserves are those with 50 percent certainty of commercial extraction, while possible reserves have a 10 percent certainty of commercial extraction. Most oil companies only report the proven reserves, known as P1. They neglect P2, the proven plus probable, and seldom report P3, which is the sum of the three categories.Aramco has around 261 billion barrels of P1 it reports annually, plus billions more in the P2 category. So while big companies like Exxon Mobil have difficulties to book more reserves every year, Aramco can still amaze everyone. This, of course, does not come free of charge, and more investments are required to develop new technology to extract more barrels every year, and this is what future investors need to know.
Main category: Business & Economy

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