Saudi Aramco Is Now Suffering The Consequences Of A Failed Oil Price War
Saudi Aramco Is Now Suffering The Consequences Of A Failed Oil Price WarBy Simon Watkins for Oil Price
It was evident to anyone with even half a brain that the last Saudi-instigated oil price war would end in abject failure for the Saudis, just as the previous 2014-2016 effort did and for the very same reasons.
For Crown Prince Mohammed bin Salman (MbS), one of the masterminds behind the oil war – the economic and political problems that his country now face appear to come a very distant second to preserving whatever he thinks is left of his own reputation, with the most obvious public manifestation of this being the aftermath of the internationally-shunned omni-shambolic initial public offering (IPO) for hydrocarbons giant, Saudi Aramco (Aramco). Consequently, in order to stand by one of the inducements required to inveigle anyone to buy the shares – in the triple-locked guaranteed dividend payout – swingeing cuts to key projects for Saudi Arabia are now being announced.
Despite the 50 per cent plunge in Aramco’s net profit for the first half of this year – a result of the Saudi-led oil price war at a time when demand was already choked off by the COVID-19 outbreak – the company is still obliged to hand over US$18.75 billion in this quarter alone to those who bought the Aramco shares during the IPO. This dividend obligation – and it will total US$75 billion for the full year – will have to be paid for through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the profits figures. This will take the total down from around US$40 billion to around US$25 billion. Further reports have stated that even this US$25 billion figure is set to be reduced by another US$5 billion, taking the total capital spending in this year from US$25 billion to US$20 billion.
Whatever the cuts, it remains a stark fact that the two dividends together for the first two quarters of this year – US$37.5 billion – far outstrips Aramco’s total free cash flow of US$21.1 billion for the same period. This looks even worse for Aramco – and Saudi Arabia as a whole – in light of the recent release of results showing that the smoke-and-mirrors ‘purchase’ by Aramco of a 70 per cent stake in the Kingdom’s key petrochemicals company, Saudi Basic Industries Corporation (SABIC), for the originally-intended US$69.1 billion, looks increasinglylike a bad decision. According to results collected by data firm Mubasher, based on the companies’ financial results disclosed to the Saudi Tadawul Stock Exchange, SABIC was responsible for 91 per cent of the combined losses of SAR2.4 billion (US$639.89 million) made by Saudi Arabian listed petrochemical companies in just the second quarter of this year. Specifically, SABIC lost SAR2.22 billion in Q2 alone.