OPEC earned about $711 billion in net oil export revenues (unadjusted for inflation) in 2018
Saudi Arabia accounted for the largest share of total OPEC earnings, $237 billion
India only imports between 4.5 and 5 million barrels per day of oil, but it is shaping up to be the biggest competitive space for producers
OPEC is still making money, despite challenges coming from every which way.
Be it falling prices, market volatility, regional insecurity, trade wars, armed conflict, talks of recession, US production, electric vehicles and renewable energy, or US Iranian sanctions, OPEC still finds a way to generate billions in revenues.
Now, mixed with current production leaders are a few new players making a splash.
The 2018 net oil export revenues increased by 32% from the $538 billion earned in 2017, mainly as a result of the increase in average annual crude oil prices during the year and a slight increase in OPEC net oil exports.
Saudi Arabia accounted for the largest share of total OPEC earnings, $237 billion in 2018, representing one-third of total OPEC oil revenues.
EIA expects that OPEC net oil export revenues will decline to about $604 billion (unadjusted for inflation) in 2019, based on forecasts of global oil prices and OPEC production levels in EIA’s August 2019 Short-Term Energy Outlook (STEO), according to Hellenic Shipping News.
EIA’s forecasts that OPEC crude oil production will average 30.1 million barrels per day (BPD) in 2019, 1.8 million BPD lower than in 2018.
For 2020, OPEC revenues are expected to be $580 billion, largely as a result of lower OPEC production.
Important countries to watch for in the oil sector
5. India—Right now India only imports between 4.5 and 5 million barrels per day of oil, but it is shaping up to be the biggest competitive space for producers.
India is the third-largest oil consumer in the world. Previously, the biggest competition ground for oil producers was for sales to China, but with 1.37 billion people, India has the potential to impact the market much like China has.
4. Saudi Arabia—This Arab Gulf nation owns the world’s most profitable (oil) company, houses the second-largest proven oil reserves in the world, and has the most spare capacity of any country. Oil from Saudi Arabia fuels much of east Asia. Aramco is also expanding its exports to India to compensate for lost Iranian oil.
2. China—This country is the second-largest consumer of oil and is the largest oil importer in the world at around 10.64 million barrels per day. China is such an important oil consumer that any indication that economic growth in China is slowing sends oil prices tumbling.
1. United States –The U.S. is currently producing oil at record levels (12.3 million barrels per day according to the EIA). This is being driven by the shale oil industry. The U.S has shown its ability to impact other countries’ oil business, as it did with Iran’s exports in recent months. Presidential tweets also impact prices.
Author Hadi Khatib is a business editor with more than 15 years’ experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.
The state energy giant’s vast oil reserves – it can sustain current production levels for the next 50 years – make it more exposed than any other company to a rising tide of environmental activism and shift away from fossil fuels.
In the three years since Saudi Crown Prince Mohammed Bin Salman first proposed a stock market listing, climate change and new green technologies are putting some investors, particularly in Europe and the United States, off the oil and gas sector.
Sustainable investments account for more than a quarter of all assets under management globally, by some estimates.
Aramco, for its part, argues oil and gas will remain at the heart of the energy mix for decades, saying renewables and nuclear cannot meet rising global demand, and that its crude production has lower greenhouse gas emissions than its rivals.
But with the company talking again to banks about an initial public offering (IPO), some investors and lawyers say the window to execute a sale at a juicy price is shrinking and Aramco will need to explain to prospective shareholders how it plans to profit in a lower-carbon world.
“Saudi Aramco is a really interesting test as to whether the market is getting serious about pricing in energy transition risk,” said Natasha Landell-Mills, in charge of integrating environment, social and governance (ESG) considerations into investing at London-based asset manager Sarasin & Partners.
“The longer that (the IPO) gets delayed, the less willing the market will be to price it favourably because gradually investors are going to need to ask questions about how valuable those reserves are in a world that is trying to get down to net zero emissions by 2050.”
Reuters reported on Aug. 8 that Prince Mohammed was insisting on a $2 trillion valuation even though some bankers and company insiders say the kingdom should trim its target to around $1.5 trillion.
A valuation gap could hinder any share sale. The IPO was previously slated for 2017 or 2018 and, when that deadline slipped, to 2020-2021.
Aramco told Reuters it was ready for a listing and the timing would be decided by the government.
The company also said it was investing in research to make cars more efficient, and working on new technologies to use hydrogen in cars, convert more crude to chemicals and capture CO2 which can be injected in its reservoirs to improve extraction of oil.
SELLING THE STORY
Some would argue this is not enough.
A growing number of investors across the world are factoring ESG risk into their decision-making, although the degree to which that would stop them investing in Aramco varies wildly.
Some would exclude the company on principle because of its carbon output, while others would be prepared to buy if the price was cheap enough to outweigh the perceived ESG risk – especially given oil companies often pay healthy dividends.
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At a $1.5 trillion valuation, Aramco would be the world’s largest public company. If it were included in major equity indices it would automatically be bought by passive investment funds that track them, regardless of their ESG credentials.
And as the world’s most profitable company, Aramco shares would be snapped up by many active investors.
Talks about a share sale were revived this year after Aramco attracted huge investor demand for its first international bond issue. In its bond prospectus, it said climate change could potentially have a “material adverse effect” on its business.
When it comes to an IPO, equity investors require more information about potential risks and how companies plan to deal with them, as they are more exposed than bondholders if a business runs into trouble.
“Companies need to lead with the answers in the prospectus, rather than have two or three paragraphs describing potential risks from environmental issues,” said Nick O’Donnell, partner in the corporate department at law firm Baker McKenzie.
“An oil and gas company needs to be thinking about how to explain the story over the next 20 years and bring it out into a separate section rather than hiding it away in the prospectus, it needs to use it as a selling tool. And also, once the IPO is done, every annual report should have a standalone ESG section.”
Unlike other major oil companies, Aramco doesn’t have a separate report laying out how it addresses ESG issues such as labour practices and resource scarcity, while it does not publish the carbon emissions from products it sells. Until this year’s bond issue, it also kept its finances under wraps.
The company does however have an Environmental Protection Department, sponsors sustainability initiatives and is a founding member of the Oil and Gas Climate Initiative, which is led by 13 top energy companies and aims to cut emissions of methane, a potent greenhouse gas.
On Aug. 12 Aramco published information on the intensity of its hydrocarbon mix for the first time. It disclosed the amount of greenhouse gases from each barrel it produces.
Aramco’s senior vice president of finance Khalid al-Dabbagh said during an earnings call this month that its carbon emissions from “upstream” exploration and production were the lowest among its peers.
A study published by Science magazine last year found carbon emissions from Saudi Arabia’s crude production were the world’s second lowest after Denmark, as a result of having a small number of highly productive oilfields.
THE OIL PRICE
Aramco says that, with the global economy forecast to double in size by 2050, oil and gas will remain essential.
“Saudi Aramco is determined to not only meet the world’s growing demand for ample, reliable and affordable energy but to meet the world’s growing demand for much cleaner fuel,” it told Reuters.
“Alternatives are still facing significant technological, economic and infrastructure hurdles, and the history of past energy transitions shows that these developments take time.”
The company has also moved to diversify into gas and chemicals and is using renewable energy in its facilities.
But Aramco still, ultimately, represents a bet on the price of oil.
It generated net income of $111 billion in 2018, over a third more than the combined total of the five “super-majors” ExxonMobil (XOM.N), Royal Dutch Shell (RDSa.AS), BP (BP.L), Chevron (CVX.N) and Total (TOTF.PA).
In 2016, when the oil price hit 13-year lows, Aramco’s net income was only $13 billion, according to its bond prospectus where it unveiled its finances for the first time, based on current exchange rates. Its earnings fell 12% in the first half of 2019, mainly on lower oil prices.
Concerns about future demand for fossil fuels have weighed on the sector. Since 2016, when Prince Mohammed first flagged an IPO, the 12-months forward price to earnings ratio of five of the world’s top listed oil companies has fallen to 12 from 21 on average, according to Reuters calculations, lagging the FTSE 100 and the STOXX Europe 600 Oil & Gas index averages.
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AN INFLUX OF CAPITAL
Using a broad measure, there was global sustainable investment of $30.1 trillion across the world’s five major markets at the end of 2018, according to the Global Sustainable Investment Review here, more than a quarter of all assets under management globally. That compares with $22.8 trillion in 2016.
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“Given the influx of capital into the ESG space, Aramco’s IPO would have been better off going public 5-10 years ago,” said Joseph di Virgilio, global equities portfolio manager at New York-based Romulus Asset Management, which has $900 million in assets under management.
“An IPO today would still be the largest of its kind, but many asset managers focusing solely on ESG may not participate.”
The world’s top listed oil and gas companies have come under heavy pressure from investors and climate groups in recent years to outline strategies to reduce their carbon footprint.
Shell, BP and others have agreed, together with shareholders, on carbon reduction targets for some of operations and to increase spending on renewable energies. U.S. major ExxonMobil, the world’s top publicly traded oil and gas company, has resisted adopting targets.
Britain’s biggest asset manager LGIM removed Exxon from its 5 billion pounds ($6.3 billion) Future World funds for what it said was a failure to confront threats posed by climate change. LGIM did not respond to a request for comment on whether it would buy shares in Aramco’s potential IPO.
Sarasin & Partners said in July it had sold nearly 20% of its holdings in Shell, saying its spending plans were out of sync with international targets to battle climate change. The rest of the stake is under review.
The asset manager, which has nearly 14 billion pounds in assets under management, didn’t participate in Aramco’s bond offering and Landell-Mills said they would be unlikely to invest in any IPO.
Additional reporting by Ron Bousso in London and Victoria Klesty in Oslo; Editing by Carmel Crimmins and Pravin Char
The global energy economy is undergoing a rapid transition from ‘hydrocarbon molecules to electrons’: in other words, from fossil fuels to renewables and low-carbon electricity. Leading energy industry players and analysts – the energy-forecasting ‘establishment’ – are seriously underestimating the speed and depth of this transition. This in part reflects the vested interests that dominate that establishment. By contrast, the financial sector – which has little or no vested interest in fossil fuels – understands what is going on and is taking the transition on board.
The history of past energy transitions – including the US’s shift from wood to coal in the late 19th and early 20th centuries, and the French adoption of nuclear power on a wide scale in the 1980s – provides useful context for analysis of this trend. Such transitions have been triggered by factors ranging from market upheaval to technological change, with the technological element typically reinforcing the transition.
A similar dynamic, involving triggers and reinforcing factors, is in evidence today. The current transition in the global energy system has been triggered, in the first instance, by concerns over climate change and recognition of the imperative of shifting to a lower-carbon economy. In some places, growing concerns over urban air quality have overtaken climate change as a driver of government policy in support of the transition. The reinforcing factors include the falling costs of renewables and the rapid market penetration of electric vehicles (EVs). To these factors can be added ongoing uncertainty over the possibility of another oil price shock; and rises in oil product prices that are independent of movements in crude oil prices – a phenomenon sometimes known as ‘OECD disease’.
If the transition to renewables and low-carbon electricity happens faster than the energy establishment anticipates, the implications for exporters of oil and for the geopolitics of oil will be very serious. For example, the failure of many oil-exporting countries to reduce their dependence on hydrocarbon revenues and diversify their economies will leave them extremely vulnerable to reduced oil and gas demand in their main markets. The countries of the Middle East and North Africa (MENA) region will be particularly exposed, with the possible consequences including an increase in the incidence of state failure in a region already suffering the fallout from having signally failed to address the causes of the Arab uprisings since 2011. Increased political and economic turbulence in the MENA region would also have the potential to create serious migration problems for Europe.
The geopolitics of oil over the past 120 years have played a central role in international relations. Indeed some would argue that geopolitical rivalry over access to, and control of, oil supplies has been the source of much of the conflict witnessed in the 20th century (Yergin, 1991). The rise of renewables implicit in the current energy transition could well change this status quo. Renewables are widely used and widely produced. Currently, their availability is constrained neither by the agendas of dominant fuel suppliers nor by the threat of physical disruption to the strategic transit routes along which traded resources are typically shipped. There are certainly supply constraints associated with some minerals required for renewable energy technologies, but these hardly compare with the conflicts around oil supply, and most such constraints, in any case, are easily managed. Thus, as this energy transition proceeds, oil geopolitics will begin to fade away as an issue of concern.
While the rise of methane in the Earth’s atmosphere over the past decade has been “globally significant,” quick action to end fracking would have a rapid, positive impact on the environment by Julia Conley, Staff writer.
New research by a scientist at Cornell University warns that the fracking boom in the U.S. and Canada over the past decade is largely to blame for a large rise in methane in the Earth’s atmosphere—and that reducing emissions of the extremely potent greenhouse gas is crucial to help stem the international climate crisis.
Professor Robert Howarth examined hydraulic fracturing, or fracking, over the past several decades, noting the fracking boom that has taken place since the first years of the 21st century. Between 2005 and 2015, fracking went from producing 31 billion cubic meters of shale gas per year to producing 435 billion cubic meters.
Nearly 90 per cent of that fracking took place in the U.S., while about 10 per cent was done in Canada.
The fracking method was first used by oil and gas companies in 1949, but Howarth concluded that fracking done in the past decade has particularly contributed to the amount of methane in the atmosphere. As Kashmira Gander wrote at Newsweek:
While methane released in the late 20th century was enriched with the carbon isotope 13C, Howarth highlights methane released in recent years features lower levels. That’s because the methane in shale gas has depleted levels of the isotope when compared with conventional natural gas or fossil fuels such as coal, he explained.
“The methane in shale gas is somewhat depleted in 13C relative to conventional natural gas,” Howarth wrote in the study, published Wednesday in the journal Biogeosciences. “Correcting earlier analyses for this difference, we conclude that shale-gas production in North America over the past decade may have contributed more than half of all of the increased emissions from fossil fuels globally and approximately one-third of the total increased emissions from all sources globally over the past decade.”
“The commercialization of shale gas and oil in the 21st century has dramatically increased global methane emissions,” he added.
Other scientists praised Howarth’s study on social media.
In addition to being the second-biggest contributor to the climate crisis after carbon dioxide, methane has been known to cause and exacerbate health issues for people who live in areas where large amounts of the gas is present in the environment.
Chest pains, bronchitis, emphysema, and asthma can all be caused or worsened by high levels of methane. The process of fracking has also been linked to pollution in drinking water.
The Trump administration has no plans to reduce the amount of fracking that is taking place in the U.S.—rather, President Donald Trump has moved to open up public lands to gas and oil companies looking to purchase leases for fracking.
Howarth urged fossil fuel companies—and the government agencies charged with regulating them—to reverse course, shift to a renewable energy economy, and “move as quickly as possible away from natural gas, reducing both carbon dioxide and methane emissions.”
Cutting emissions of methane promptly would have a positive impact on the atmosphere and could help to slow the climate crisis because the atmosphere reacts quickly to the addition and subtraction of the gas.
“This recent increase in methane is massive. It’s globally significant. It’s contributed to some of the increase in global warming we’ve seen and shale gas is a major player,” Howarth said in a statement.
“If we can stop pouring methane into the atmosphere, it will dissipate,” he added. “It goes away pretty quickly, compared to carbon dioxide. It’s the low-hanging fruit to slow global warming.”
DUBAI (Reuters) – When Saudi Aramco was on the verge of a deal last year to buy a stake in an Indian oil refinery, its boss quickly boarded a company jet in Paris and flew to New Delhi.
Chief executive Amin Nasser arrived unannounced early on April 11, 2018, finalised the agreement and signed it later that day. Negotiators had just finished hammering out the details.
His last-minute flight, after a business trip to France with Crown Prince Mohammed bin Salman, underlined the importance of the deal both to Saudi Arabia and its huge state oil firm.
The planned investment in the $44-billion (£35 billion) refinery and petrochemical project on India’s west coast is a prime example of how Aramco is trying to squeeze value out of each barrel of oil it produces by snapping up refining capacity, mainly in fast-growing Asia.
But it also underlines the challenge Saudi Arabia faces in reducing its heavy economic reliance on oil. The results of its programme to diversify have been mixed, some projects are moving slowly and others are too ambitious, economic and energy analysts say.
Prince Mohammed’s stated goal of being able to “live without oil” by as early as 2020 looks set to be missed.
“Saudi Arabia’s oil addiction is as strong as ever…economically, of course, the Saudi economy runs on oil. Oil still dominates GDP, exports and government revenues,” said Jim Krane, energy fellow at Rice University’s Baker Institute.
“That said, Saudi Arabia is changing its relationship with oil. The dependence remains. But the kingdom is squeezing more value out of its oil,” he said.
The slow progress means the Saudi economy is likely to remain hostage to oil prices for longer than planned. Any delay in implementing change also risks denting Prince Mohammed’s image as a reformer.
SECURING THE FUTURE
Announcing his plan three years ago, the Crown Prince said Saudi Arabia must end its “oil addiction” to ensure the world’s biggest oil exporter and second largest producer cannot be “at the mercy of commodity price volatility or external markets.”
He spoke after a fall in crude oil prices boosted the Saudi fiscal deficit to about 15% of gross domestic product in 2015, slowing government spending and economic growth.
This year the deficit could hit 7% of GDP, according to the International Monetary Fund, as oil-related growth slows following production cuts led by the Organization of the Petroleum Exporting Countries.
Aramco is central to the Crown Prince’s reform plan in several ways, not least because its planned partial privatisation will generate income for the reforms.
The company has also been involved in most of the kingdom’s high-profile deals in the last two years as it increased investment in refining and petrochemicals.
In that time, Aramco has announced at least $50 billion worth of investments in Saudi Arabia, Asia and the United States. It aims to almost triple its chemicals production to 34 million metric tons per year by 2030 and raise its global refining capacity to 8-10 million barrels per day (bpd) from more than 5 million bpd.
In March last year, Aramco finalised a deal to buy a $7 billion stake in a refinery and petrochemicals project with Malaysia’s Petronas. A month later, Nasser and a consortium of Indian companies signed the initial deal that would give Aramco a stake in the planned 1.2 million bpd refinery in India’s western Maharashtra state.
In February of this year, Aramco signed a $10 billion deal for a refining and petrochemical complex in China. Last month it signed 12 deals with South Korea worth billions of dollars, ranging from ship building to an expansion of a refinery owned by Aramco.
“This is what I call the back to basics approach to economic diversification in the Gulf,” said Robin Mills, chief executive of energy consultancy Qamar Energy in Dubai. “The energy industry has the assets, capital and skills, so it’s the engine of new projects – refining, petrochemicals, gas and so on.”
MR UPSTREAM LOOKS DOWNSTREAM
In March, Aramco said it was acquiring a 70 percent stake in petrochemicals firm Saudi Basic Industries (SABIC) (2010.SE) for $69.1 billion from the national wealth fund, known as the Public Investment Fund (PIF).
Aramco is gaining new markets for its crude and building a global downstream presence – the refining, processing and purifying end of the production line. Its aim is to become a global leader in chemicals.
“We are not investing left and right, we are investing in the right markets, we are investing in the right refining assets, we are investing where we create value from fuels to chemicals,” Abdulaziz al-Judaimi, Aramco’s Senior Vice President for Downstream, told Reuters in May.
Nasser, previously known by Aramco employees as Mr Upstream, is leading the downstream expansion. He wants to bring Aramco’s refining capacity closer to its oil production potential, which is now at 12 million bpd.
Aramco wants gradually to match the downstream presence of its big competitors and, like Saudi Arabia as a whole, to reduce its vulnerability to any downturn in demand for crude oil or oil price volatility.
“You want to secure your demand in key markets,” said an industry source familiar with Saudi Arabia’s oil plans. “You have to become more dynamic, to become more adaptable, you have to make sure that you secure your future. Malaysia was one example, India was another.”
For years, Aramco has been a regular crude supplier to Indian refiners via long-term crude contracts.
Yet while it has stakes in refineries or storage assets in other important Asia markets such as China, Japan and South Korea – and owns the largest refinery in the United States – it has not secured that same access in India, a fast-growing market for fuel and petrochemicals.Slideshow (2 Images)
“India is a market that you just can’t ignore anymore,” an industry source said.
Aramco has also shifted its marketing strategy in China. It is now more oriented towards independent refiners to boost Saudi crude sales after years of dealing almost exclusively with state-owned Chinese firms.
But overall, plans to wean Saudi Arabia of oil have advanced slowly.
Few details have emerged of a $200-billion solar power-generation project announced by the PIF and Japan’s SoftBank in March 2018. It is unclear how or when the project will be executed, and Saudi’s Arabia’s energy ministry is moving ahead with its own solar projects.
In a blow to potential investment, the image of Saudi Arabia and the reputation of the Crown Prince have been damaged by the murder of journalist Jamal Khashoggi in the Saudi consulate in Istanbul last year.
Leading businessmen and politicians boycotted an investment forum meant to showcase the kingdom’s new future away from oil, and it was only big deals with Aramco that saved it.
Also, the partial privatisation of Aramco has been delayed since it set out its plans to acquire the stake in SABIC, though senior Saudi officials including Energy Minister Khalid al-Falih have said it could now happen in 2020-2021.
The PIF, chaired by Prince Mohammed, was meant to receive around $100 billion from the flotation. Instead it will get around $70 billion from the sale of its SABIC stake.
The PIF made its mark on the global stage three years ago by taking a $3.5- billion stake in Uber Technologies. But since 2016, the PIF’s direct investments overseas stand at just $10.5 billion, according to Refinitiv data, and many of the fund’s announced commitments have yet to materialise.
The funds’ main investments over the past two years were inequity shares in companies such as electric car makers Tesla (TSLA.O) and Lucid Motors and Gulf e-commerce platform Noon.com.
Such deals would not necessarily attract inward foreign investment, help develop industries or create jobs.
Additional reporting by Marwa Rashad and Hadeel Al Sayegh; writing by Rania El Gamal; editing by Ghaida Ghantous and Timothy Heritage