Page 9 - AsianOil Week 45

AsianOil EAST ASIA AsianOil
The final offer price will be announced, as will the number of shares to be sold on December 5, following the book-building period.
Investor attention will no doubt have been attracted by a short line on page 71 of the doc- ument, which notes the government’s reduction to 15% of the state’s “royalty rate on crude oil and condensate production [from 20%] on Brent pricesupto$70perbarrel”.
Aramco said most of its fields had been pro- ducing for “many decades at low depletion rates of 1% to 2% per year relative to estimated ulti- mate recovery”, noting that as of December 31, 2018, “more than 80% of the Kingdom’s proved crude oil reserves were in reservoirs that were less than 40% depleted”.
Giving an idea of the quality of reserves, Ara- mco said that the “main recovery mechanism” for its oil reserves was “peripheral water injec- tion” to maintain “reservoir pressure, maximise reservoir sweep and minimise water produced over time”.
Despite Aramco speaking of its vision of maintaining “its position as the world’s leading crude oil producer by production volume and thelowestcostproducer”,thecompanywillneed more than words to win over the sceptics.
Tough crowd
Sugimori poured cold water on speculation that Japanese investors were as enthusiastic for the IPO as some others in Asia reportedly were.
“It’s difficult to think that many Japanese investors will make investments,” Sugimori said. “Japanese companies have stakeholders and they need good reasons to explain to shareholders why they would make such hefty investments andweneedtodostrictduediligence.”
Elaborating on potential investor concerns, Sugimori underscored the lack of concrete infor- mation on Aramco’s reserves as well as the com- pany’s contracts with the Saudi royal family as areas that needed full disclosure. He questioned, however, Aramco’s willingness to provide this level of detail.
At the same time, Sugimori revealed that his company’s refining division JXTG Nippon Oil & Energy was looking to reduce term crude oil imports from the Middle East from next year.
While the low cost and ready availability of Middle Eastern crudes have allowed them to
dominate Japan’s oil import basket, Sugimori said economics were also behind the move to cut term deliveries.
“We are looking to reduce fixed deals as much as possible in order to be able to buy light and heavy grades as needed on a spot basis,” said Sugimori. “This would be most economically rational as well as helping [us] to respond to the IMO [2020 standards].”
While the executive noted that his company’s motivations were economically motivated, he admitted that “security issues surrounding the Strait of Hormuz” were also a concern for JXTG.
S&P Global Platts noted that around 80% of Japan’s crude imports came via the strategically vulnerable waterway, which Iran has previously threatened to block. The Middle East accounted for 88% of the East Asian country’s oil imports in 2018.
However, the attacks on key Saudi oil facilities on September 14 that knocked out 5.7mn barrels per day (bpd) of the kingdom’s production have shaken buyer countries’ faith in the security of Saudi supply.
Of the September attacks at facilities in AbqaiqandKhurais,AramcosaidinitsIPOpro- spectus it did not expect them “to have a mate- rial impact on its business, financial condition or results of operations”. However, the fact that the country’s infrastructure is so vulnerable to assault, an event which could lead to a wider war in the region, has not escaped the notice Japanese importers.
What next
Sugimori’s concerns about the Aramco IPO and his comments about JXTG’s feedstock diversifi- cationgoalsunderscoretherisksassociatedwith Middle Eastern oil.
Japan’s downstream has witnessed a number of government-driven capacity rationalisations over the years on the back of weakening national oil demand. This trend is likely to continue, pro- viding Japanese refiners with the opportunity to reduce their exposure to Middle Eastern crude.
There seems to be little economic or strate- gic appeal for Japan’s investors to commit large sums of money to Aramco’s offering. Based on those concerns, other foreign investors may also want to exercise similar levels of caution over the IPO.™
Week 45 13•November•2019 w w w . N E W S B A S E . c o m P9