Aramco has the lowest production costs for oil projects in the world, the company said in its newly released IPO prospectus, adding that partner producers such as Russia, Venezuela, and Nigeria had much higher production costs.
The Saudi state company said its after-tax breakeven costs for producing fields were below $10 per barrel, compared with just over $20 per barrel for the UAE, more than $40 per barrel for Russia, and almost $50 per barrel for Nigeria.
Low production costs are one of the main reasons Aramco is considered an attractive investment opportunity for energy investors, along with its massive reserves.
However, there have been several factors that may discourage international investors from betting on the Saudi giant, including the intensifying climate change fight that many worry will affect oil demand negatively as well as the risk of outages after the September attacks on Saudi oil infrastructure that took off the market some 5.7 million bpd in production capacity.
Aramco released its IPO prospectus earlier this week but the 658-page document did not address some important questions such as the exact day of the float, the number of stock to be offered—though it said it will constitute 0.5 percent of Aramco’s total shares—and the price per share. Related: Why 2020 Could Be A Crisis Year For Refiners
There is also the issue with supervolatile oil prices that have some wondering how close Riyadh could get to its desired $2-trillion valuation for the company. Now, some analysts are also warning investors to consider the overwhelming influence of the Saudi royal family over the business of Aramco.
“The biggest issue with Aramco is that everything about this company is controlled by the Saudi royal family — shareholder opinions, your board votes, none of that makes any difference,” Pavel Molchanov from Raymond James told CNBC.
“There’s a lot to think about when buying Aramco,” State Street senior global multi-asset strategist Daniel Gerard said, adding the focus should be on “how much political influence would there be over the investment decisions.”
By Irina Slav for Oilprice.com
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While Saudi Aramco says that the cost of producing a barrel of oil from its oilfields is below $10, it is not the cheapest in the world. Iraq has the cheapest production cost in the world.
In 2003 Iraqi production cost was less than a dollar a barrel according to a special report on Iraq by Time Magazine, May 19, 2003, p. 37. The foreign oil companies which signed re-development contracts with the Iraqi government in 2009 to increase production from Iraqi giant oilfields were paid $2 for each barrel of oil produced.
Iraq has the lowest production costs in the world because of two reasons. The first is because of the location of its oil near the surface. The second is because, for geological reasons, Iraq boasts the world’s most prolific wells.
Before Iraq’s oilfields were devastated by three wars between 1979 and 2003, its wells produced an average of 13,700 b/d each compared with 10,200 for Saudi Arabia, 5,700 for Iran, 3,100 for Kuwait, 2,300 for Libya, 1447 for UAE, 988 for Nigeria, 200 for Venezuela and 17 for the United States according to Time Magazine May 19, 2003.
Russia’s current production cost ranges from $17- $20 a barrel and not $40 as Aramco claimed since the Russian economy can happily live with an oil price of $40 or less. It is possible that Russian oil production in the Arctic region could cost $40 a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London