Monday, May 9, 2016

House Of Saud In Extremis

The original post was dated May 9, 2016.  This page was originally linked at the sidebar at the right as "Saudi (Re)Surgence," following it's trillion-dollar mistake, the 2014 - 2016 debacle. Saudi started to recover from the debacle by 2018 or so but then inexplicably tried to destroy US shale again, in early 2020, resulting in a plunge in oil prices worldwide. At one time, WTI actually went negative.

This post, as of today, May 25, 2020, will now take on a broader, longer range outlook. 

Saudi's very continued existence depends short-term (between 2020 and 2022) on the price of oil, and longer term (after 2022) on whether the country can diversify away from an economy solely based on production and exporting of oil. The success of Prince MbS' Vision 2030 plan is absolutely critical. The Saudi Aramco IPO was part of that plan.

My price points for WTI:
  • $30 - $39: US shale survives;
  • $40 - $49: US shale shows life;
  • $50 - $59: US shale thrives;
  • $60 - $69: US shale does very well;
Both Russia and Saudi Arabia need to see Brent at $60, and even that is barely enough for Saudi Arabia. 

If I can have only metric to follow to follow Saudi's long term prospects, it would be Saudi's monthly foreign reserve assets.

The House of Saud is in deep, deep trouble
Data links:

Government reserves:

  • 2021: 280 billion riyals ($75 billion)
  • 2020: 346 billion riyals ($92 billion)
  • 2019: 500 billion riyals ($133 billion)


  • 2020: 1.02 trillion riyals ($272 billion)


  • 2020: 833 billion riyals
  • 2019: 917 billion riyals

Budget deficit:

  • 2020: 187 billion riyals

PIF (sovereign wealth fund):

  • 2019: around $300 billion

Foreign exchange reserves: link here.

Policy: Saudi Arabia does not openly publish the amount of assets it holds within its sovereign wealth fund, known as the Public Investment Fund (PIF). The Institute of International Finance estimated in a report in June that the kingdom has assets worth around $300 billion with roughly a quarter of its holdings overseas. The Sovereign Wealth Fund Institute puts the figure closer to $320 billion. December, 2019. Link here.


December 16, 2020: reining in their budget.

December 15, 2020: from Reuters,  Saudi Arabia expects to maintain government reserves at the Saudi Central Bank of 346 billion riyals ($92.23 billion) in 2020 and 280 billion riyals in 2021. $1 = 3.7513 riyals.

November 23, 2020: Simon Watkins weighs in: not a pretty picture

November 20, 2020: Aramco's "strength" is a mirage -- The WSJ.

November 16, 2020: Aramco to issue US dollar-denominated bonds to cover $75 billion annual dividend. 

November 3, 2020: Saudi Aramco profit plunges

October 7, 2020: Saudi Aramco may have to sell some assets

October 2, 2020: in deep doo-doo, The Mideast Monitor.

September 14, 2020: Saudi Arabia's crude oil production down to 8.03 million bopd. Say what? May, 2020, data. A long way from their threat of producing 13 million bopd. Is this Prince Salman's third change?

September 12, 2020: update; view from Foreign Policy (May, 2020); more recent articles;

September 9, 2020: Saudi Arabia squeezing its cash cow to stay afloat.

September 8, 2020: OPEC basket in free fall, trading below $42.

September 6, 2020: is Vision 2030 already dead?

September 6, 2020: update here;

August 27, 2020: Saudi Arabia sees oil revenues plunge in June, 2020 -- oilprice.

August 19, 2020: Kuwait: a canary in the coal mine?

June 12, 2020: the Bakken vs Saudi? XOM's decision. Saudi Arabia's petrochemical unit losing money. Lots of money.

June 12, 2020: price of oil declines 6% this week

June 10, 2020: why Saudi Arabia will lose the next oil price war.

May 25, 2020: plan disrupted

January 5, 2020: Saudi's foreign exchange reserves surge after the IPO is launched. 

December 9, 2019: Saudi Arabia denies it is running out of money.

August 21, 2019: Motiva, fully owned by Saudi, enters the US petrochemical industry.

August 10, 2019: update on the IPO

August 3, 2019: update on "Fantasy Land." 

July 30, 2019: SABIC's profits plunge

June 13, 2019: XOM-Sabic joint venture; ethane cracker in Louisiana.

May 22, 2019: Saudi Aramco's first entry into production of oil or gas outside Saudi Arabia. And, it was with Sempra Energy's export terminal in Texas. Whoo-hoo!

October 21, 2018: with the Khashoggi murder, hard to see where this "plan" will go. 

August 25, 2018: the Saudi Aramco IPO is believed to be dead, but Saudi's "minister of energy" says the IPO is not dead. Okay.

July 24, 2018: rumors that Prince Salman/Saudi Aramco might buy 70% (or all) of SABIC, the huge Saudi Arabian petrochemical company whose #1 product seems to be free cash flow. 

March 19, 2018: international IPO shelved. The WSJ story here. This is an interesting spin: Higher price of oil has diminished push for large international public offering.

March 11, 2018: IPO delayed until 2019. Prince Salman wants a $2 trillion market valuation. Guys in the back room wearing visors can't get to $2 trillion.

March 4, 2018: SaudiLand. SinaiWorld.

February 22, 2018: Saudi Arabia will invest $64 billion in developing its entertainment industry over the next decade.

February 19, 2018: Saudi Arabia plans to build sixteen (16) nuclear reactors within the next 20 - 25 years -- total cost: over $80 billion.

February 13, 2018: Wood hired by Saudi Aramco to support in the delivery of one of its "mega projects."

The new multi-million dollar, five-year, contract will see teams from Wood’s UK, Saudi Arabia and India offices undertake front end engineering design (FEED), major increment and overall project management consultancy work to develop the Marjan oil field in the state’s eastern province.
February 11, 2018: renewable energy needed to save the kingdom.

October 26 2017: update in the Financial Times, deep doo-doo.

October 24, 2017: Prince Salman wants to build a $500 billion economic zone in the Red Sea area. One problem: no money.

August 13, 2017: Prince Salman's plan -- earnings miss. LOL. 

August 7, 2017: Prince Salman's plan is "on hold."

July 13, 2017: Saudi wants to spend $300 billion over the next decade for oil infrastructure. 

May 18, 2017: if his plan is based on "efficiency" savings, good luck

May 13, 2017: Saudi Arabia to invest $40 billion in US. To be announced as early as next week when Trump visits Saudi Arabia.

April 20, 2017: partner with XOM to build $10 billion ethylene cracker plant near Corpus Christi. 

April 18, 2017: Gaza's only power plant has run out of fuel due to lack of money This begs the question: to what extent does (lack of) foreign aid from Saudi Arabia explain this?

April 16, 2017: is Aramco IPO behind Saudi eagerness for OPEC cut extension, asks

April 12, 2017: Saudi Arabia on a debt binge to finance Prince Salman's plan. 

February 24, 2017: at Reuters -- 
... misgivings among substantial parts of the public and the business community about the sale. Some fear Riyadh is relinquishing its crown jewels to foreigners cheaply at a time of low oil prices. Those misgivings are not likely to block the IPO, which is a central part of a drive to make the economy more efficient and diversify it beyond oil exports. Since 2015, the government has shown it is willing and able to carry out contentious reforms, such as cuts to civil servants' financial allowances. But the public criticism, rare in a country where there is usually little open debate about government policies, could influence the way the IPO is structured. Up to 5 percent of the company is due to be sold next year, with listings in Riyadh and at least one foreign market.

February 17, 2017: is the Prince Salman plan already in trouble?

January 14, 2017: why Prince Salman's "Vision 2030" plan will fail

January 13, 2017: Saudi Arabia: production now below 10 million bopd; cuts will deepen.

December 6, 2016: a $100 billion investment fund to invest in US and US jobs. $50 billion from SoftBank (Japan); $50 billion from Saudi Arabia.

November 23, 2016: the honeymoon for Prince Salman is over; scathing report. 

November 8, 2016: Saudi Arabia will "modify" $266 billion worth of mega-projects; and, will close the books on 2016, by paying all debt owed to government employees, contractors, and its citizens with back pay, IOUs, etc. 

November 3, 2016: new projects in Saudi Arabia; McDermott adds new office, adds 300 employees in Saudi Arabia; Saudi Aramco sets up new division to facilitate in-kingdom projects

October 20, 2016: Exxon's CEO comments not good news for Saudi Arabia.

October 19, 2016: Saudi Arabia will offer $17.5 billion in bonds, and announced that they will pay less interest than originally "advertised." Stingy, huh?

October 17, 2016: not getting any better for Saudi.

October 8, 2016: Saudi Arabia halts aid to Egypt. No explanation given

October 5, 2016: Prince Salman's plan after one year has been incredibly unimpressive. It appears the only thing worse has been ObamaCare's track record.

August 14, 2016: Saudi Arabia's cash reserves could be exhausted by the time your high school freshman graduates from high school.

August 9, 2016: OPEC to meet in September. It is "rare" OPEC to meet "outside" of its normal twice-a-year schedule.

July 25, 2016: ExxonMobil, Saudi Arabia in discussions to develop a petrochemical complex in Texas or Louisiana. 

July 21, 2016: Saudi Aramco signs off on $13.3 billion gas processing plant

July 18, 2016: an update on Saudi Arabia's disappearing foreign exchange reserves

June 27, 2016: OPEC has lost a huge amount of revenue in the past year (2015). 

June 26, 2016: has Saudi Arabia just made a huge change in strategy on oil? The tea leaves suggest that Saudi Arabia is making a huge bet taking a new tack. [The third definition of "tack":

change course by turning a boat's head into and through the wind.]

June 6, 2016: apparently approved

June 1, 2020: Saudi foreign exchange reserves fall again. Around $40 billion in foreign current reserves were transferred to the kingdom's wealth fund in March-April, 2020. Money needed to finance an investment spree by its sovereign wealth fund. --Bloomberg.

Net foreign assets in the Arab world's biggest economy declined by $20.9 billion in April, a decrease of 4.5% from the previous month, according to data released Sunday by the Saudi Arabian Monetary Authority. The fall follows a $27 billion plunge in March, when the stockpile shrank at the fastest pace in at least two decades.

"We're still in a comfortable situation," the central bank's governor, Ahmed Alkholifey, said in an interview with Al-Arabiya television on Monday. The change in the level of reserves between the end of May and the end of April is "not significant" and the stockpile is still enough to cover more than 40 months of imports, he said.

May 31, 2016: Chinese diesel exports surge on Saudi's trillion-dollar mistake; Saudi's attempts to crush US shale oil industry backfired

May 27, 2016: favorite global production graphic has been updated by the EIA

May 27, 2016: could possibly see the IPO launched in 2017 - 2018

May 23, 2016: The Salman Plan -- the death knell of OPEC

May 23, 2016: GE announces deals with Saudi Arabia totaling $1.4 billion. Data points:

  • $1 billion: Saudi Arabian Industrial Investments Co, formed in 2014, royal order to boost the country's manufacturing industry
  • $400 million toward building a forging and casting manufacturing facility for marine and energy industry in the kingdom; target date for completion, 2020; employ 2,000
  • another $2 billion likely in near future
  • note: Zacks says GE will invest $3 billion but does not break it down
May 18, 2016: it may be worse than we think

May 17, 2016: someone's bluffing. CNBC reports an Energy Aspects analysis of Saudi Arabia's plans for increased oil production. For the archives.

May 16, 2016: GS "talking up oil" as the IPO is being finalized.

May 10, 2016: update here. Data points from the article:
  • "less than 5% of the company's value"
  • a single domestic listing; a dual listing with a foreign market (interesting, huh? A and B shares?)
  • Salman's reform drive to address falling oil revenue and sharp fiscal deficits
  • Aramco to expand globally via joint ventures in Asia and North America (US, India, Indonesia, Vietnam, China)
  • going public will require the company to release sensitive reserves data (something tells me the data will be less than "helpful")
  • company's valuation based on a) oil price expectations; and, b) Saudi Arabia's proven oil reserves
  • Saudi reserves (rounded)
    • 800 billion discovered
    • 140 billion already produced
    • 260 billion considered "proven" (industry term for reserves that can definitely be extracted)
    • 400 billion "could probably extract"
    • 100 billion "hope to be added by 2025 by increasing recovery rate by 50 - 70 percent using new technology
  • expects global demand to grow by 1.2 million bopd by end of 2016
  • maximum sustainable capacity stays at 12 million bopd; total capacity of 12.5 million bopd
  • 2015: 10.2 million bopd (see graph below; also at this post)
  • expansion of Khurais oilfield will come on stream in 2018; latest stage in this expansion project at the southeastern Shaybah oil field would be finished "in a couple of weeks"
  • increased capacity of 250,000 bopd will take Shaybah to 1 million bopd; to compensate for falling output at other fields as they mature
  • SABIC: state-run petrochemical and metals conglomerate; partner; downstream project to cost up to $30 billion
  • a "huge" ship repair and shipbuilding complex at Ras al-Khair on the kingdom's east coast to be fully operational by 2021; first phase to be completed by 2018; will eventually make oil rigs and tankers (both of which are now way over supplied)
  • shipbuilding complex would create 80,000 jobs; would allow Saudi Arabia to reduce its imports by $12 billion; will increase the country's GDP by $17 billion

The above graphic has now been updated.

Original Post
I track the 2014 - 2016 slump in oil prices here. Note the time frame: 2014 - 2016.

Once the Saudi Aramco IPO is "listed" I will add a new category to follow at the link. I am not quite sure how I will label it or "pigeon-hole" it. For now, I will call it the Saudi (Re)surgence but will probably call it something else once the (desert) dust settles, perhaps Salman's Folly or Salman's Strategic Plan, depending upon the mood I'm in. 

We can start with this story being reported by CNBC, a typical superficial story (much like my blog) but one that will develop over time. In this story, an "analyst" provides some opinion on what the shakeup in the Saudi government portends. This is the 30-second soundbite, the elevator speech: "you're going to see a much more robust Saudi Arabia going forward. There's no question about it."

Or perhaps we can start with this story also being reported by CNBC, another superficial story (but better than the "more robust Saudi Arabia going foward" story. The 30-second soundbite, the elevator speech for this story:
While newly appointed [oil minister] is a capable technocrat, he is unlikely to have the independent authority of his predecessor. Importantly, (the 30-year-old Mohammad bin Salman) is more focused on ending Saudi's dependence on hydrocarbons through sweeping reform and maintaining market share versus Iran than he is on pursuing higher oil prices. While it makes for a big news headline, it does not represent a shift in the Kingdom's current oil policy."
Let's drop back and think about this. If you are a prince and living the lifestyle of a playboy and it's clear that no matter how bad things get, you are set for life. If you are 80 years old, there is no question that you will outlive any problems that occur "now."

Something had to have happened that convinced at least a few princes that things might be more dire than the rest realized.

Despite all the upheaval in the Mideast, there seems to have been two "givens": the United States would always protect Israel and Saudi Arabia militarily. Israel proved that it could take care of itself pretty well. Saudi Arabia -- without oil -- no one cared about. Saudi -- with oil -- becomes a completely different story. Unlike Israel, Saudi Arabia never worried about its own defense: it had the assurance that the United States would protect it no matter what.

Then two things happened. Maybe the two were simply coincidental; maybe there was cause and effect between the two. For the purpose of this discussion, it doesn't matter. What matters is the outcome.

The two "things" that changed for Saudi Arabia:
  • Iran began to flex its muscles
  • the US explicitly stated that it was no longer a guaranteer of Saudi's existence.
For a 30-year-old prince who actually thought about these things, it was no longer a matter of living out his life as a playboy; it was a realization that Saudi's very existence was at stake.

It is fortunate for Saudi Arabia that the "22nd Amendment to the US Constitution" limits a president to two terms in office, a total of eight years. Time is running out for President Obama's goal to elevate Iran to the lone superpower in the Mideast.

It's unfortunate for Saudi Arabia that most folks see Hillary Clinton's adversary as an unelectable buffoon. Unless I'm misreading the tea leaves, Saudi Arabia has to assume Hillary will be the next president and Hillary will continue the policies advocated by Obama.

It's possible I am quite wrong on this: Jarrett has strong ties to Iran; Huma has equally strong ties to Saudi Arabia.

But Jarrett has had eight years to help Iran get where it is today. Huma will arrive on the scene late, and possibly in a greatly weakened position, especially if the Clintons/DOJ/FBI need a scapegoat.

So, at the end of the day, reading the tea leaves, the 30-year-old prince knows his #1 job is to provide military security for his country. The US will no longer provider that security.

There is an element to truth about Salman seeing the need to end Saudis dependence on hydrocarbons but the question has to be asked, "why now?"

The 800-pound gorilla in the Mideast is the fact that Saudi's sovereignty is no longer guaranteed by America, under the Obama Doctrine.

Salman may want to end his country's dependence on hydrocarbons but he has a bigger problem: his dependence on the United States.

By the way, as a digression: can anyone name one thing that Saudi Arabia has that isn't related to hydrocarbons. Yes, there is one: Mecca as a travel destination. More on that later. 

As I was saying: Salman may want to end his country's dependence on hydrocarbons but he has a bigger problem: his dependence on the United States for Saudi's very existence.

Two recent stories bring this home, both of which have been reported in the past week or so as headline stories even though neither story is particularly new.

The first story: Saudi is working closely with Israel with regard to national security for both countries.

The second story: the 30-year-old has not ruled out Saudi Arabia "going nuclear" as they say.

Salman's Strategic Plan

The second linked story has it right: Salman's Stragetic Plan will get a lot of headlines, but not much will change. Certainly not much will change in the near term, and it's unlikely that his plans will amount to much in the long term, if his goal is to wean Saudi Arabia off hydrocarbons.

He can put some petrochemical plants in his country; he can add some refineries. He can expand operations in the US. But guess what: it's still a hydrocarbon-based economy. Saudi is nothing without oil and sand.

Because of the trillion-dollar mistake, Saudi Arabia has had to postpone/cancel solar energy programs. Saudi had hoped to sell solar energy to the rest of the region. Not gonna happen any time soon.

As an example of how limited their options, it appears (and I'm not making this up), Salman hopes to increase tourism to his desert kingdom. He feels that the required trek to Mecca by believers can be greatly expanded.

If Salman's stated intent is to get the country off its dependence of hydrocarbon, he is certainly taking baby steps. The IPO is projected to be worth no more than 5% of the value of the variously reported $2 to $3 trillion. My hunch: about 3% will be offered -- 3% of $3 trillion = $100 billion in round numbers.

But this is all getting deep into the weeds. Folks are asking the wrong question: why is Salman offering an IPO in the first place? Because Saudi made a trillion-dollar mistake and is burning through cash.

It was the trillion-dollar mistake that forced them to raise money through an IPO in the first place.

But even that is missing the bigger story. Why does Salman need to raise cash?

Salman needs cash to fund his military in light of a) a stronger Iran; and, b) losing the US security umbrella. "Going nuclear" requires a lot of money.

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