Saudi Arabia’s desert dream is turning into a nightmare


Saudi Arabia’s desert dream is turning into a nightmare

Aramco is a fearsome beast, but there are signs its prowess is diminishing, and with it a nation shockingly dependent on it

Ben Marlow

At a dizzying 469 pages, the prospectus issued by Saudi Aramco ahead of its debut international bond sale is no easy read. Yet for those with even a passing interest in business, finance, or geopolitics, it is a treasure trove of fascinating information that lifts the lid on the world’s biggest company for the first time and reveals just how inextricably linked the fortunes of Saudi Arabia are with a single corporation.
Until recently, the kingdom had been planning a blockbuster stock market float of the state-backed oil goliath. It was dubbed the sale of the century. Bankers, lawyers and accountants flocked to Riyadh in the hope of landing a lucrative role on a project long considered unthinkable. Even UK Prime Minister Theresa May flew out to the Middle East in a desperate effort to try to get in on the action.
The move should have underlined Saudi Arabia’s might on the world stage.
Aramco was tipped to fetch a gargantuan $2-trillion valuation and help bankroll Crown Prince Mohammed bin Salman’s highly ambitious plans to modernise and diversify Saudi Arabia’s oil-dependent economy. Instead, the float plans were shelved and the kingdom has decided to raise $10bn from international investors instead, forcing it to open its books anyway.
It’s an odd move.
Some thought the Saudis backtracked on a share sale because the prince realised Aramco would not fetch the $2-trillion valuation he was hoping for. Others claimed that cagey Saudi officials hated all the advisers poking around under the bonnet of its most precious asset. Yet, the end result is the same, if not worse.
The bond prospectus succeeds in revealing, for the first time, just how fearsome a beast Aramco is. The national oil producer racked up profits of £85bn in 2018, more than any other company on the planet and equivalent to £233m per day. Profits were almost double those of Apple, at £45bn, and nearly five times that of its nearest rivals, Royal Dutch Shell and ExxonMobil. Before tax was paid, Aramco generated an astonishing £171bn in oil earnings.
Meanwhile, the cost of extracting a barrel of oil from the desert comes in at just $7.50 before tax, compared with about $30 for other majors, and production stands at 12 million barrels a day, more than a 10th of the world’s total production.
But dig past the headline numbers and there are clear signs of a company whose prowess is diminishing, and with it a country that has become so reliant on it that you wonder if someone in the economics ministry got their numbers wrong.
Jaw-dropping dependence
At the heart of the mighty Aramco machine is the vast Ghawar oilfield, but it is now pumping less oil than the Permian basin in the US, demonstrating how the kingdom’s power is already waning as the balance of power in the global energy system has shifted.
Yet, the extent of the government’s dependence on a single commodity is truly jaw-dropping.The prospectus reveals that Aramco paid the government $200bn in 2018, in royalties, taxes and dividends. In 2017, Saudi Aramco provided 63% of all state revenues and almost half of real GDP. Add in a total of 51 risk factors stretching across 20 pages, ranging from volatile oil prices, US litigation and even the weather, and the fragility of the country’s finances become even more stark, particularly at a time when the world is shifting to cleaner fuel.The crown prince’s desert dream is in danger of becoming a mirage.– © Telegraph Media Group Limited (2019)

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