This month Saudi Arabian state oil company Saudi Aramco surpassed Apple as the world's most valuable company. The world's biggest oil producer is now the world's biggest company, too.
As western stock markets have been pummelled by the impact of higher inflation, rising interest rates and a series of disappointing earnings results from companies, including Netflix, Walmart and Snap, Aramco shares have soared in line with higher crude oil prices.
Saudi Aramco is now worth US$2.4 trillion (with a "t"). When the Saudi Arabian government listed the company on the Riyadh stock exchange in December 2019, Aramco was valued at less than US$1.9 trillion. Only 2.5 per cent of the stock is held by foreign investors, and the government holds the majority.
This wasn't supposed to have happened. If the oil and gas business is dying in the face of environmental restrictions and the move to battery-powered electric vehicles, this is a pretty spectacular death scene. Saudi Aramco is awash with cash from the high oil prices since the Russian invasion of Ukraine.
Its first quarter net income rose 82 per cent to US$39.5 billion from a year earlier, Aramco reported here. Aramco's cash flow from operations increased 44 per cent to US$38.2 billion in the first ninety days of the year, based on an average crude price of US$97.70 per barrel of oil sold. This compared to free cash flow of US$26.5 billion in the comparable period in 2021. Saudi Aramco's capital expenditure in the first three months of the year was US$7.6 billion, putting the company on track to be the biggest investor in the upstream oil and gas industry in the world this year. ExxonMobil's capital budget for 2022 is expected to be between US$21 billion and US$24 billion, as per its investor day presentation here.
When Russia and Saudi Arabia struggled at the outbreak of the Covid-19 pandemic in early 2020 to constrain oil supply as demand slumped in lockdowns, the oil price crashed to less than US$30 per barrel. Saudi Aramco sent out termination and suspension letters to rig and vessel owners, and demanded steep rebates and discounts for those units kept on hire. It is easy to forget that in April 2020, some American shale shipments were sold for a negative price – the producers literally paid buyers to take it away. On Friday, May 27, however, Brent crude was trading at US$118 per barrel. But this disguises a big difference between the prices obtained by the Russians, and by the Saudis and their Emirati allies.
Since Russia is a pariah state in the west after the invasion of Ukraine, Russian crude sells at a steep discount to Brent crude pricing – typically, Russian Urals blend sells at around 20 to 25 per cent less than non-Russian crude, with India and China as the main buyers. Even as oil prices soared, the Chinese have used sanctions as an opportunity to demand steep discounts from the Russians.
Whatever the outcome of the invasion, the conflict and the western sanctions on Russia will mean that in future, Russia is more dependent on China.
Saudi Arabia, on the other hand, has tried to increase its oil production to meet the gap left by Russia and encourage western countries to buy more Aramco crude. In 2020 and 2021, the kingdom (and by definition, Saudi Aramco, the only oil producer in the country) was producing around 9.2 million barrels of crude per day. Last month, as per the April 2022 OPEC market report (here), Aramco was producing over 10.3 million barrels a day. OPEC economists, meanwhile, revised down their estimates of Russian production for this year by 355,000 barrels per day.
So, there is a double win for Aramco – its production rises and the price per barrel rises, whilst Russia's production falls and the Kremlin's price per barrel is steeply discounted, as western buyers shun Urals crude and stevedores refuse to discharge Russian tankers.
The latest Westwood Insight rig report (here) makes clear how Saudi Aramco is not only increasing its production of oil today, but is also investing in a massive new drilling campaign to also increase its production in the coming decade – all the while promising investors that it will be "net zero" for carbon emissions in 2050. How that is possible is a mystery.
The Westwood report is excellently written and causes me pangs of professional jealousy, I will confess. Kudos to Terry Childs.
I reproduce the key graph below:
Note that Saudi Arabia is locking in future production by contracting rigs today for drilling. Its 2022 rig count is already 50 per cent higher than in 2021, and next year's rig count is likely to be double the rig count of 2017. This is based on 26 jackup rig contracts awarded this year plus another five that are likely to be awarded over the next few weeks, which will bring the total Aramco contracted rigs up to 78 at year end. Westwood expects another ten new awards over the next year.
Importantly, these are not spot fixtures or short-term drilling campaigns. Aramco is contracting the new rigs for three to five years firm, plus additional options, thus taking a big chunk of capacity out of the drilling market.
Of course, Aramco's onerous and one-sided contract terms still give it the right to terminate its rig contracts at 30 days' notice should a global recession cause crude prices to plunge once more. You don't become bigger than Apple and Google by being nicer than Apple and Google.
ADES, owned by the Saudi Arabian Public Investment Fund (PIF), has emerged as the dominant rig owner in the latest round of Aramco bids. The Saudi Arabian state controls Aramco, and its sovereign wealth fund now controls the biggest supplier of rigs for Aramco.
ADES has been transformed from a publicly-listed owner of tatty, aged 1980s-built jackups in the Red Sea into one of the largest owners of modern jackup rigs in the sector, controlled by the Saudi state. ADES has now spent close to one billion dollars on newbuildings, as well as bareboating units from Keppel in Singapore. We have already covered its extensive spending spree, scooping up rigs from as far afield as the laid-up Rio Negro units in the Bahamas, and a pair of laid up Valaris units in the Philippines.
There is now a clear, long-term trend towards the Gulf states owning the majority of oilfield services equipment, both rigs and offshore support vessels, across the Gulf, as we discussed here.
So much for the idea that Saudi Arabia's PIF has a mandate to help move the Kingdom away from its historic reliance on oil revenue. Instead, Crown Price Mohammed Bin Sultan seems to be doubling up his bet on oil.
Westwood reports that sixteen of the units contracted are rigs coming out of long lay-up and another five are stranded newbuildings, which were abandoned by buyer default in shipyards in China and Singapore. We have covered the Keppel/Asset Co saga here.
The consequences of this decision to vastly increase the number of wells drilled in Saudi Arabia by Aramco are far-reaching for the entire offshore industry. What are they?
The increase in rigs has already had a knock-on increase in rig rates in the Gulf and in the rest of the world. Twenty-one of the 31 jackups that Aramco is contracting under the new charters will be mobilised from outside the Gulf region. The new Aramco contracts, and additional fixtures by Adnoc Drilling in Abu Dhabi, look likely to push the utilisation of jackup rigs above 90 per cent.
The Westwood report notes that Abu Dhabi is also moving to secure extra rigs:
"ADNOC Drilling recently signed an agreement to purchase ex-Oro Negro managed Argent 1, Argent 2, and Argent 3. All three units are currently stacked in the Bahamas and have not worked since late 2017. In November 2021, ADNOC bought the former Aban Offshore managed jackup Deep Driller 3, which was already working for parent ADNOC Offshore. In addition to the above, ADNOC has purchased three former Shelf Drilling units, giving the company seven additional jackups for its fleet. All the purchased units have begun or will shortly commence contracts for ADNOC Offshore."
Already, this increased demand in the Gulf is driving up day rates. Terry Childs reckons that jackup rates in the Middle East have moved up from US$83,000 per day last year to US$93,000 today.
But 90 per cent utilisation is often a tipping point. Once utilisation moves above 90 per cent, day rates typically move exponentially upwards, and so we should not be surprised to see jackup rates internationally start to swing well above US$100,000 per day.
This is great news for Borr Drilling and its peers. Maybe the war in Ukraine has provided Borr with the boost it needs to deliver on its promises.
At the same time, a huge influx of 26 extra rigs into the Kingdom this year and likely another ten next year means that Aramco also needs more anchor handlers for rig moves and platform supply vessels (PSVs) to support the drilling operations. The big winner here appears to be Saudi Arabian operator Al-Rawabi and its Singaporean subsidiary Vallianz Holdings. These companies recently won the lion's share of a 15-anchor handler and five-PSV tender awarded by Aramco.
The giant sucking sound you can hear is the final few DP2 OSVs sitting in Chinese yards being swept up by Rawabi and put on contract in the Kingdom. All the surplus capacity of abandoned units is being systematically absorbed into the market at last.
Aramco has traditionally chartered DP2 anchor handlers with 60 to 80 tonnes bollard pull and relatively small cargo deadweight and deck space. Aramco's shallow draught fields and limited supply base capacity in Tannajib and Ras Tanurah have restricted the company's use of bigger vessels.
But in a ground-breaking move, broker Braemar ACM reports that Aramco has chartered what is believed to be its first diesel-electric, battery hybrid PSV, with much greater capacities than its traditional OSVs – the 4,600 DWT Seacor Parana. The fixture is reported at just below US$15,000 per day. For Seacor's hybrid new-build programme, see here.
A move to a more North Sea-style logistics with higher-capacity PSVs would be revolutionary, but it would would also threaten to make all the smaller vessels owned by Saudi Arabian operators, especially Al-Rawabi, obsolete. In Qatar, RasGas and Qatar Petroleum have already moved towards using PSVs of over 3,000 DWT, as their supply base facilities are much larger, and their fields in deeper water. Will Saudi Aramco move to a similar model of more centralised logistics and higher deadweight ships?
Saudi Aramco's benefits from high prices are limited, however. Saudi Arabian government royalties on oil production rise to 45 per cent when oil prices are above US$70 per barrel, and to 80 per cent when they are above above US$100. Analysts at Citibank report that at US$110 per barrel, cash flow from operations for Aramco increases at less than five per cent for every additional US$10 per barrel move in oil prices.
Aramco's profits (and thus the need pay dividends to its small sliver of foreign shareholders) is strictly capped by the Saudi government's sliding scale of royalty payments. Unlike the UK, the government in Riyadh doesn't need to think about a windfall tax on the energy industry – the Kingdom has structured Aramco so that its benefits from high oil prices are capped, and most of the benefits flow straight to the Saudi Arabian treasury.
Thus, in the oil markets, so long as prices remain high, the Saudi government will be the biggest winner. Aramco may be the largest company in the world, but Saudi Arabia as a whole is the biggest beneficiary of higher oil prices, and of western sanctions on Russia.
Only when a wind-power or solar energy company is bigger than Aramco will we really know that the energy transformation to net zero is underway.