Page 5 - FSUOGM Week 37 2019

FSUOGM COMMENTARY FSUOGM
Abqaiq
The targeting of Abqaiq was as symbolic as it was devastating. Crude processing facilities there deal with crude from Ghawar, the world’s largest oilfield, which produces 3.7mn bpd. Last year, Abqaiq facilities processed around 5mn bpd, more than half of Saudi output, and it has a capacity of 7mn bpd.
Its location is also important: it lies just 66km south of Aramco’s Dhahran HQ and the attack shows that the prized export facilities on Saudi’s East Coast may now be within range of forces with the capability to destroy them.
Abqaiq is the main strategic hub for Aramco’s exports too. From there, flows can be manipu- lated to go east to Ras Tanura and Jubail or west towards Red Sea export facilities at Yanbu, Jed- dah or Jazan via the East-West pipeline, which has also been the subject of drone attacks. The conduit has been running at around 2mn bpd.
Khurais
According to the 469-page bond prospectus published by Aramco in April, the Khurais com- plex, including the Abu Jifan and Mazalij satellite fields as well as Khurais itself, is the fourth largest onshore oilfield in the world, containing 20.1bn barrels of crude.
It had a maximum sustainable capacity (MSC) of 1.45mn bpd at the end of last year, fol- lowing commissioning of a 250,000-300,000 bpd expansion.
The complex is around 106km long and 18km across at its widest point.
Aramco IPO
The attacks have implications far beyond the futures price curve.
For Saudi Aramco timing is a disaster, com- ing just after it had sought to take control of the narrative surrounding its planned initial public offering (IPO).
Having replaced Khalid Al-Falih as Energy Minister and Aramco chairman in the last two weeks, Riyadh was setting the stage for a com- plete focus on the listing. With his replacements having experienced very busy first weeks, the IPO now looks likely to suffer from intensified scrutiny on the security of Saudi infrastructure and an increasing likelihood of wider conflict in the region.
An estimated 4% of Aramco stock will be auctioned internationally, with 1% to be sold on the local stock exchange. However, with the oil concession not included in the listing, doubts have been cast about the valuation it will be able to achieve.
The price eventually achieved for the 5% of shares in Aramco that will be made avail- able is expected to give the firm a total valua- tion of around $1.5tn, though Crown Prince Mohammed bin Salman (MBS) has previ- ously said he anticipates the firm will be val- ued at $2tn. The proceeds from the Aramco listing are due to go to the Public Investment Fund (PIF).
While the attacks may not result in a major change to Aramco’s valuation, several industry sources told MEOG that they might come as something of a wake-up call for potential inves- tors who had perhaps not factored in sufficient geopolitical risk.
There are reports of others who have sug- gested that the added risk could reduce the valu- ation by as much as $500bn. MEOG understands that MBS would be highly unlikely to accept such a valuation, leading to greater doubt about the future of the listing.
However, for the time being, the key concern will be to attract investors into a company that has been shown to be susceptible to attacks that will drain reserves and could, in theory, cut off more than half of its cash flow.
One question that prospective investors should be asking is how could 10 projectile-car- rying drones traverse around more than 500km of Saudi territory without being detected?
This reflects very poorly on the country’s air defence systems and once again illustrates the relative ineffectiveness of the Saudi mili- tary and the susceptibility to attack of major infrastructure.
Even though Aramco, and therefore Saudi Arabia, produced more than 9.7mn bpd in August, such fragility may affect investor appe- tite for the IPO and media buzz is already build- ing that the listing must be postponed for MBS to avoid losing face.
The IPO has already been delayed signifi- cantly and another delay, while perhaps unlikely given its importance to the House of Saud, could be preferable to a low price. ™
Map of oilfields in eastern Saudi Arabia. Source: Aramco.
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