- The 53 billion barrels of crude oil reserves that Iran has revealed would comprise about 3% of the current proven reserves in the world.
- More oil in the world means lower prices.
- Saudi Aramco’s profits have has been falling with declining prices.
Saudi Arabia’s oil giant Saudi Aramco may be the world’s most profitable company but on its path to a public listing, its most potent enemy may not be the oil and gas multinationals but a country.
In its 600 – plus page prospectus, the Saudi Arabian firm has noted that one of themajor risk factors related to the operations of the company is the global supply and demand of oil. This is what determines at what price the oil giant can sell its product:
The Company’s results of operations and cash flow are significantly impacted by international crude oil supply and demand and the price at which it is able to sell crude oil.
Black gold no more?
Interestingly, just days after the prospectus was released Saudi Arabia’s arch-enemyIran came out with a statementto the effect that the world has more oil reserves than previously believed.
The president of Iran, Hassan Rouhani, stated:
We have found an oil field with (billion barrels of oil in place, 53 billion barrels. This is in a big oil field that stretches 2, 400 sq km from Bostan to Omidiyeh. The oil layer has a depth of (m) (ft).
This is not an amount that can be ignored. According to BP,53 Billion barrels of oil constitutes about 3% of the world’s proven crude oil reservesas of 2018.
Iran newly ‘discovered’ crude oil reserves are also not trivial when placed in the context of annual global consumption. Per OilPrice,36 .4 billion barrels of oil were consumed last year around the world. Assuming the same level of consumption, Iran new oilfield could easily last the world nearly months.
Lower prices, lower profits for Saudi Aramco
The Iran discovery, if proved true, cannot be good news for future oil prices and by extension, Saudi Aramco as the likely effect is pressuring prices down when production starts. Revenues and profits for the oil giant have in the past been positively correlated with the price of the commodity.
As an example,Saudi Aramco’s results in the first three quarters of 2019showed a decline in both revenues and net income compared to a similar period in 2018. Revenues fell by 7.6% from $ (billion to $) billion during the period. Net income declined even more drastically from $ 83 billion to $ 68 billion, a fall of nearly (%.)
Between January and September of last year theprice of West Texas Intermediate oil ranged between $ 63 and $ 76. This year during the same period WTI prices have ranged between $ 53 and $ 64. The oil prices had shownsigns of recovery following drone attacks on Saudi oilfieldsin September but are now back below the $ Levels
What similarity does Iran share with Saudi Arabia? Low *** cost producers!
Even worse for Saudi Aramco is the fact that Iran produces oil just as cheaply as Saudi Arabia. This means that the new onshore reserves cannot be easily brushed off like would be the case with offshore reserves which are substantially more expensive to exploit and therefore uncompetitive.
Theaverage production cost per barrelin Saudi Arabia was $ 8. in 2016. Iran was just ten cents more expensive!
So did Iran announce the crude oil discovery to try and scare investors away from Saudi Aramco or at least reduce the valuation? Well, the answer can only be speculated upon. But whether it is just coincidence or mischief on Iran part, the announcement of the ‘discovery’ sure does throw a spanner in the works.
This article was edited by Samburaj Das.
Last modified: November 11, 2019 11: (UTC)