Sunday, July 29, 2018

Saudi retreat on oil IPO highlights dearth of reliable information on world oil reserves

Since late 2016 the financial media has been abuzz about what would likely be the biggest initial public offering (IPO) ever: The sale of 5 percent of the world's largest oil company, Saudi Aramco, which is wholly owned by the government of Saudi Arabia. The IPO with its required disclosures would shed light on the inner workings of the company for the first time since it was nationalized in 1980 and lead to independent verification of its oil reserves and other assets.

It would be a large first step in unmasking the murky world of national oil companies (NOCs), the reserves of which are thought to represent 90 percent of the world's total reserves of oil and natural gas according to one estimate.

With estimates that Saudi Aramco is worth $2 trillion, the sale of 5 percent to public shareholders potentially represents $100 billion, a valuation that would make such an IPO an all-time record and result in roughly $1 billion in fees for the lucky bankers handling the deal.

All that anticipation, however, has now come crashing down as the Saudi government seeks the funds it might have gotten from an IPO through other avenues. So, what happened?

First, oil prices rose significantly. When the Saudi government officially confirmed that it was seeking an IPO for Aramco in October 2016, Brent crude, the world benchmark, averaged just under $50 per barrel that month. While the IPO was being considered earlier that year, oil had dropped below $30. Last week it closed just below $75.

The government was thought to be desperate to reduce its rising deficits—due in large part to a precipitous drop in oil prices—by selling a part of the company. That seems an unlikely reason for the sale since the Saudis have ample money in a sovereign wealth fund and substantial credit with major banks. The stated reason was a plan to diversify the Saudi economy.

With oil prices 50 percent higher than when the plan was proposed, rising revenues may be sufficient to justify waiting and may be able to provide investment funds for other purposes. (The Saudi government finances itself largely from oil revenues.)

Second, it's possible the Saudis now believe that investors would not be willing to pay as much as the Saudis want for a variety of reasons that include:

  • Concern about the stability of the Saudi regime (with whom investors would become business partners).
  • The high taxes and royalties paid by the company to the government.
  • The lack of diversification because almost all of Aramco's operations are in Saudi Arabia and thus subject to upheavals and conflicts in the Middle East.
  • The role of Saudi Arabia as an OPEC member and as the world's largest swing producer which leads it to adjust its output for geopolitical reasons and not merely to maximize profits for the company.

These are merely a sampling of concerns discussed in the media.

But, I believe that perhaps the most important reason the Saudis are reconsidering the IPO is that the government simply does not want to subject the company to an independent audit that would for the first time since 1980 determine whether the country has been telling the truth about its oil reserves.

Saudi Arabia must have significant remaining reserves in order to pump at rates that make it the number one or number two producer in the world, alternating with Russia for the top position. But that doesn't really tell us the relative size of Saudi reserves since Russia claims less than a third of the reserves that Saudi Arabia does and yet produces nearly the same amount of oil on a daily basis.

Despite the fact that one of the world's largest producers of oil has not been audited in 38 years, official sources of energy information such as the U.S. Energy Information Administration and the International Energy Agency have been taking Saudi Aramco's public claims about its reserves at face value and including them in their official statistics.

In fairness, what choice do these agencies have? They have no standing or power to compel an independent audit.

It might not be so bad if Saudi Arabia were the only case of this. But wherever there exists a government-owned oil company that monopolizes oil development in a nation, there is likely to be secrecy about reserves. The national oil companies of Iran, Iraq, Kuwait, and Venezuela represent some of largest corporations in the world. But because they are not publicly traded, they are not subject to the kind of scrutiny that large international companies such as ExxonMobil and Shell are. Wikipedia provides a lengthy list of NOCs demonstrating just how far the shroud of secrecy extends across the industry.

(Of course, not all these companies escape scrutiny. For example, the Argentine national oil company, known as YFP, in which the government holds a 51 percent stake, is traded on the New York Stock Exchange and thus required to adhere to disclosure and audit standards for listed companies. But most national oil companies are not publicly traded.)

The recent retreat of Saudi Arabia from its planned IPO is not only an important financial event. It's an important informational event in that it highlights the opacity of the world's oil producers. It should remind us that the numbers we accept from major governmental and international organizations regarding oil reserves worldwide are largely based on unverified sources, namely, the word and only the word of most of the world's national oil companies.

That we continue to plan our futures—our cities, our transportation systems, or industrial developments—based on such numbers should be a cause for alarm and not the complacency we are currently exhibiting.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique,, OilVoice, TalkMarkets,, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at


Joe said...

We don't need to know in detail how much oil the NOCs have in reserve. We already know that oil will either be depleted or be too expensive to extract in a matter of decades rather than centuries or millennia. That fact alone is enough to remove any justification for using oil as the energy underpinning of a global civilization. Add in the dangers of carbon emissions and the large rates of global oil use look downright stupid. That's humanity for ya.

lyle said...

Conversly if you had looked at reserves 12 years ago world wide before the fracking boom, the picture looked very different. The amount of reserves depends on the technology deployed. If you include heavy oil Venezula is #1, Saudi is #2 and Canada is #3.
Note that the USGS estimate for unconventional shale reserves is 335 to 345 billion bbl. This does not include possible shale resources in the middle east, as insufficient information exists to evaluate them.
One source now estimates the US to have 265 billion bbl, 256 in Russia and 215 in Saudi, so you pick your estimate and take your choice. The estimate of global reserves is 70 years at current consumption.

Anonymous said...

Plausible conjecture- Much of Saudi production comes in the form of “light sweet” crude from just a couple of giant fields that have been producing for many decades. They are somewhat unique in how easily mobile the oil flows underground. They are as opposite to tight oil as you can get. This blessing of easy production will also be a curse. Gharwar in particular is showing a very high water cut. When the oil float gets to the top of the reservoir dome, production will drop like a rock and not be like the usual bell curve. The Saudi’s may know this and see it coming. A successful IPO would need to complete before that happens to draw in all available suckers. The IPO has now taken too long to set up as that day of oil production disaster may be imminent. I would not be surprised to see it happen just as the lack of Oil Major capital investment starts to bite and China’s growth stimulus policies ramp demand. If it synchronizes that way, hold onto something.

Kurt Cobb said...

Thanks for the thoughtful comments. It is worth noting that Lyle calls the USGS estimate "reserves" when what he should call the estimate is "resources." This is a common mistake of those who don't understand industry terminology. "Reserves" are what the drillbit has demonstrated can be extracted using existing technology, at current prices from known fields. "Resources" are highly speculative estimates based on slim evidence and are a guess about what is in the ground, not what is economical to extract. In any case, only a small fraction of "resources" ever become "reserves." The average recovery from oil wells worldwide has been about 35 percent which means that in known fields that have been heavily exploited, 65 percent of the oil remains in the ground. And, this reflects mostly easy to extract light sweet crude from the past. Estimates for recovery of so-called shale resources (actually tight oil) which are much more difficult to extract are on the order of 5 percent of the resource, much lower than conventional reservoirs.

The industry is hoping the public will not understand such nuances and be fooled into thinking there is far more economical oil to exploit than there actually is. And, we should not take outlandish claims about shale resources at face value. Huge resources in the Monterey Shale were discovered to useless because of the difficulty of extraction. The U.S. EIA downgraded technically recoverable resources by 96 percent after it did its own evaluation following a glowing and much hyped evaluation by a contractor.