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Iran’s 53 Billion Oil Barrel Dig May Spoil Sworn-Foe Saudis’ Aramco IPO

Last Updated September 23, 2020 1:16 PM
Mark Emem
Last Updated September 23, 2020 1:16 PM
  • 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 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 the major 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-enemy Iran came out with a statement  to 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 53 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 80m (262ft).

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 reserves  as of 2018.

Saudi Aramco
World’s proven oil reserves as of 2018 | Source: BP

Iran’s 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’s new oilfield could easily last the world nearly 18 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 2019  showed a decline in both revenues and net income compared to a similar period in 2018. Revenues fell by 7.6% from $264 billion to $244 billion during the period. Net income declined even more drastically from $83 billion to $68 billion, a fall of nearly 20%.

Between January and September of last year the price 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 shown signs of recovery following drone attacks on Saudi oilfields in September but are now back below the $60 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.

The average production cost per barrel  in Saudi Arabia was $8.98 in 2016. Iran was just ten cents more expensive!

Cost of oil production comparison | Source: The Motley Fool

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’s part, the announcement of the ‘discovery’ sure does throw a spanner in the works.