ARAMCO BOND PROSPECTUS

The following is from the Aramco bond prospectus.

My take on this is:

• Saudi's all in breakeven cost is around US$10
• The average breakeven cost in the US is around US$40 - given SEA have indicated a breakeven cost of US$40, it is in line with the average
• Interestingly, the Saudi government ran a budget deficit of $18 billion, $22 billion, and $13 billion in 2016, 2017 and 2018 - so it is likely that they require oil prices higher than 2018 levels to balance the budget

Based on my review, I think Saudi will continue to ensure that the market is balanced (supply = demand), as they require 2018 pricing to balance their budget. I see demand being the major driver of the price of oil, specifically growth in China and India. Given market is expecting poor growth, I believe there is more chance of a surprise especially given the latest quantitative easing in China.

Given the breakeven prices, I can't really see oil trading higher than $70 - $90, unless due to one off market shocks.

Given that the rally in oil has coincided with the release of the Bond Prospectus, I do feel that the market is "pricing in" the news that has just been disseminated, with the supply shocks further adding to the noise. All that seems to be lacking is the "pricing in" of equities within the sector (more so SEA).


"The hydrocarbon industry is the single largest contributor to the Kingdom’s economy. The oil sector accounted for 44.0% and 43.0% of the Kingdom’s real GDP in the years ended 31 December 2016 and 2017, respectively. Furthermore, the oil sector accounted for 64.2% and 63.0% of the Government’s total revenues in the years ended 31 December 2016 and 2017, respectively. The Government is expected to continue to rely on royalties, taxes and other income from the hydrocarbon industry for a significant portion of its revenue. Any change in crude oil, condensate, NGL, oil product, chemical and natural gas prices or other occurrences that negatively affect the Company’s results of operations could materially affect the macroeconomic indicators of the Kingdom, including GDP, balance of payments and foreign trade and the amount of cash available to the Government"

"In 2016, 2017 and 2018, the Government issued $18 billion, $22 billion and $13 billion, respectively, in the international capital and sukuk markets to fund its budget. A shortfall in funding to the Government or a decision to seek more revenue from hydrocarbons may lead the Government to change the fiscal regime to which hydrocarbon producers in the Kingdom, including the Company, are subject. Any such change could have a material adverse effect on the Company’s business, financial condition and results of operations and affect its ability to make planned investments or to make payments on the Notes."

"Based on a comparison of production cost data of the Five Major IOCs and other leading oil and gas companies, the Company is uniquely positioned as the lowest cost producer globally as at 31 December 2017. The Company’s average upstream lifting cost was SAR 10.6 ($2.8) per barrel of oil equivalent produced in 2018, following the Industry Consultant’s methodology. In addition, the Company’s upstream capital expenditures for the year ended 31 December 2018 averaged SAR 17.7 ($4.7) per barrel of oil equivalent produced also following the Industry Consultant’s methodology."