Ne base 18 march 2018 energy news issue 1150 by khaled al awadi

Copyright © 2018 NewBase www.hawkenergy.net Edited by Khaled Al Awadi – Energy Consultant All rights reserved. No part of this publication may be reproduced, redistributed,
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NewBase Energy News 18 March 2018 - Issue No. 1150 Senior Editor Eng. Khaled Al Awadi
NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE
Abu Dhabi fund allocates $17m to Seychelles renewable projects
The Indian Ocean state has set a renewable energy target of 5 per cent by 2020 The National - Jennifer Gnana
Abu Dhabi Fund for Development, the UAE’s government-backed development aid
entity, has allocated Dh64.2 million ($17.4m) towards two renewable energy projects in
the Seychelles, it said in a statement on Monday.
Around Dh31.2m of the aid will be dedicated to an upcoming solar farm developed by
Abu Dhabi clean energy company Masdar in the artificially-built island of Romainville,
while the remainder will be channelled as investment for a 33 kilovolt power grid to be
built in Mahe.
“These projects are focused on strategic sectors that promote sustainable economic
development in the Seychelles including housing, telecommunications, transport and
energy,” said ADFD director general Mohammed Al Suwaidi.
He added that around Dh399m had been spent in financing development projects
across the Seychelles so far. An archipelago in the Indian Ocean to the East of Africa,
Seychelles meets nearly all of its energy needs through crude imports.

To lower imports that have added to the high cost of electricity and transportation, the
government announced an energy policy to produce around 5 and 15 per cent of its
energy from renewables by 2020 and 2030 respectively.
Seychelles' remote location and
dependence on tourism revenues has
increased the importance of development
aid to finance energy projects.
Financing for the Romainville solar farm
project is part of the fourth funding cycle
of a project facility launched by ADFD
and Abu Dhabi-headquartered
International Renewable Energy Agency.
The 5 megawatt project could benefit as
many as 90,000 people and would
include storage batteries “to help stabilise electricity prices and reduce dependence on
biofuels,” said the fund.
The 33kv power project will be built on the island of Mahe - the largest in the
archipelago. A 12.5km line will be constructed alongside two feed stations to
strengthen the transmission network in the northern areas of the island.
ADFD’s funding will meet 90 per cent of the project cost, which is estimated to be
around $10.5m. Electricity demand growth from commercial, residential and tourism
entities on the island will be supported by this power project.

UAE: Dubai's ABB bids for $700mln energy projects in UAE
Copyright © 2018 Khaleej Times. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).
Dubai-based company ABB, which produces electrification, robotics and motion, industrial
automation and power grids, is bidding for nearly $700 million (Dh2.57 billion) worth of power
projects in the UAE, a senior official said.
"We are bidding for a 132kv substation of the Dewa [Dubai Electricity and Water Authority]. We
are also bidding for all construction projects and developers such as solar plant with Acwa. We
are also quoting for Adnoc [Abu Dhabi National Oil Co] oil and gas for their expansion projects.
Plus, we are also bidding for different Adwea [Abu Dhabi Water and Electricity Authority] projects.
So overall, we are pitching for more than $600 million to $700 million of projects here," said
Mostafa Al Guezeri, managing director of ABB.
The company has also been involved in a 400KV substation at the Mohammed bin Rashid Solar
Park. Last month, it was also awarded 400KV substations for Shams projects from the Dewa.
Regionally, the company also operates in Bahrain, Oman, Iraq and Pakistan, among others. The
company has also installed the region's largest privately-owned rooftop solar energy system at its
premises in Al Quoz, Dubai.
Al Guezeri said prices of solar energy has dropped significantly. He expects to it to drop further
due to advancements in technology and increased production from Chinese companies. "The
price of solar panels has gone down substantially, thanks to new and advanced technology.
Plus China has also taken the lead in this sector. These brought down prices dramatically from
$10 a kilotonne in less than 15 years to less than $3 now. The latest Acwa power project that it
won was $2.4, which was the lowest worldwide.
We are seeing transformation in technology not on a yearly basis but on a daily basis. In the next
10-15 years, the solar cost could go down below $1 a kilotonne," Al Guezeri added.
He noted that on average, a UAE residents can save up to 40 per cent on energy bills by installing
solar energy.

Iraq:Dana Gas to seek financing for Kurdish projects,
The National - Jennifer Gnana
Dana Gas plans to secure third-party financing to fund gas
development projects in Iraqi Kurdistan but will refrain from further
investment in Egypt pending payments, its chief executive said on
Thursday.
The Pearl Consortium, in which Dana Gas and its parent Crescent
Petroleum are the largest stakeholders, wants to boost production
in Khor Mor and Chemchemal fields by 20 per cent this year and 170 per cent over the next two to
three years, Dana Gas said yesterday as part of its full annual results for 2017.
“The amounts of capital expenditure that will be spent at the Pearl Consortium level will either be
funded through third-party financing or from the funding pot that has been retained for the
purposes of development fund or retained operating cash flow,” Dana Gas chief executive Patrick
Allman-Ward said on Thursday.
Austria’s OMV, Hungary’s MOL as well as Germany’s RWEST hold minority stakes in the
gasfields, which Mr Allman-Ward said held enough potential to meet 10 years of gas consumption
in Germany, France and the United Kingdom combined.
The consortium is currently undertaking a de-bottlenecking project in the fields that will see
production of 50 to 80 million cubic feet of gas per day “by September or October time frame”, Mr
Allman-Ward told The National, as well as 3,000 additional barrels of condensate production
within the same time span.

Pearl also hopes to boost gas production from the twin Kurdish fields to around 880 million
standard cubic feet of gas per day, with condensate production of 36,000 barrels per day by 2021.
Financing for the de-bottlenecking project had been secured, while the consortium is in the
process of obtaining third-party finance for two 250 million cubic feet capacity gas trains that will
come on stream over the next two to three years.
The third-party financing will allow $400m paid to the company last year by the KRG for
development in Iraqi Kurdistan - obtained as part of the $1 billion settlement - to be “released back
to the shareholders,” said Mr Allman-Ward.
“So there is an interest form the shareholders to secure as much as third-party financing as
possible.” The firm is also considering bidding after becoming qualified on blocks being tendered
by the federal Iraqi oil ministry's this year, he said.
While investment plans for Iraq are advancing, Dana Gas said it would withhold further investment
in Egypt until the government cleared its dues. The company, which earlier this month received
$10.4m in payments for the sale of Egyptian condensate, noted that receivables from the state
gas authorities had been “sporadic and disappointing” in the second half of 2017.
“Absent payments, absent investments,” Mr Allman-Ward said. “Future investment in Egypt
depends on the monies that are owed to us as a result of the investments we have already made,”
he added.
Dana Gas swung to a net profit of $83m compared with a loss of $88m a year earlier, as first
reported in February, helped by a $1bn payment from the KRG as part of the settlement of a long-
running dispute over gas payments.
Mr Allman-Ward declined to take questions on the ongoing court battles between Dana Gas and
its sukukholders but confirmed media reports that the firm received threatening letters from a
delegate and trustee in May 2016, forcing the company to see injunctions to “protect the value of
its assets” on behalf of all shareholders.
A Sharjah court hearing on the ongoing case will be held on March 22.

Egypt: BP seeking buyers for stake in Egyptian business
Source: Reuters
BP is seeking buyers for its stake in a 50-year-old oil and gas business in Egypt as it focuses on
newer deepwater gas fields off the country’s Mediterranean coast, banking sources said. BP has
in recent weeks pitched to potential buyers its stake in Gulf of Suez Oil Company (GUPCO), a
joint venture with the Egyptian General Petroleum Corporation (EGPC) that was set up in the
1960s.
A spokeswoman for BP declined to comment.
GUPCO produces over 70,000 barrels per day of oil and 400 million cubic feet per day of gas, the
sources said. The business was estimated to be worth around $500 million, the three banking
sources said. BP was managing the sales process, they added.
'We have successfully managed to maintain oil production flat in the Gulf of Suez and our goal is
to grow and sustain production levels for the years ahead,' BP’s website says.
Egypt has become a key hub for BP in recent years as it ramped up gas production in the eastern
Mediterranean from fields such as the West Nile Delta development and its stake in the Eni-
operated giant Zohar field.
BP currently produces almost 15 percent of Egypt’s entire oil output and close to 30 percent of its
gas production with its partners, according to its website.

Saudi Aramco Gets Cool Response on IPO From U.S. Investors
By Javier Blas
Saudi Arabia Energy Minister Khalid Al-Falih discusses the Saudi Aramco IPO, OPEC output cuts
and nuclear energy.
Saudi Arabia’s willingness to delay the initial public offering of state oil company Aramco to 2019
has several motivations, from regulatory risk to competing projects in the government’s crowded
agenda. There’s another, perhaps more significant hurdle: it appears some American investors
aren’t that interested.
Over the past few weeks, Aramco executives and government officials pitched their plan for what
could be world’s largest share sale to some of the biggest U.S. mutual fund firms and hedge
funds, according to people familiar with the discussions.
At the informal dinners and meetings in New York, Houston and Washington, investors pushed
back at several aspects of the deal, the people said, asking not to be identified discussing private
meetings. Among the issues raised were the $2 trillion valuation Saudi Arabia wants for the
world’s largest oil producer, the scale of dividends Aramco’s prepared to pay and the impact of the
shale boom on oil prices over the next few years.
Aramco said in a statement it wouldn’t "confirm or deny whether such meetings took place." The
company added its policy is not to provide running commentary on the course of the IPO.
Saudi Crown Prince Mohammed bin Salman, who’s made the IPO a key part of his ambitions to
ready the economy for the post-oil age, is preparing to visit the U.S. for a trip that will include a
White House meeting with Donald Trump on March 20. Trump has said that he’s keen for the
listing to come to New York, which is vying with London and Hong Kong to win the international
portion of the share sale. Prince Mohammed is set to travel to Houston, America’s oil capital, as
part of his U.S. trip.

Aramco produces almost 10 million barrels of oil a day -- just over 10 percent of the world’s total
supply -- from some of the largest, lowest-cost fields in the world. Even with a market value of $1
trillion it would comfortably be the planet’s most valuable company ahead of tech giants Apple
Inc., Alphabet Inc. and Amazon.com Inc.
During a visit to London last week, Saudi
officials signaled a possible delay in the IPO
to 2019, from an original target of 2018. Oil
Minister Khalid Al-Falih became the first
senior official to publicly acknowledge the
possibility, describing the deadline for the
second half of 2018 as “artificial.”
Senior officials said privately they remain
committed to achieving the Crown Prince’s
valuation of at least $2 trillion, however,
which is based on Aramco’s access to the
kingdom’s 261 billion barrels of oil reserves.
Riyadh is planning to sell about 5 percent of
the company, potentially raising $100 billion and dwarfing the $25 billion banked by Chinese
internet retailer Alibaba Group Holding Ltd. in 2014, currently the world’s largest ever IPO.
Saudi officials hope American investors will buy a large chunk of the shares, irrespective of
whether the company lists in London, New York or Hong Kong.
Preliminary meetings with investors have pitched the IPO as a bond-like security, paying a higher-
than-average dividend yield. Yet U.S. investors said Aramco would have to pay more than
industry leaders Exxon Mobil Corp. and Royal Dutch Shell Plc. The world’s top publicly listed oil
companies trade today at an implied dividend yield of 4.1 percent and 6.2 percent respectively.
Saudi Arabia’s own 10-year U.S. dollar sovereign bond currently yields more than 4 percent,
suggesting that investors wanting exposure to the kingdom could achieve a relatively high payout
without owning Aramco equity.
By aiming for a lower valuation, Aramco would be able to offer a more competitive dividend yield,
making the giant share sale a more attractive proposal, some of the investors said.
Nonetheless, at one dinner, several hedge funds said they saw a wave of shale oil growth putting
pressure on prices, according to people familiar with the encounter. The hedge funds also
expressed concern that OPEC and Russia won’t continue cutting oil production to keep prices
high after the current deal expires at the end of the year.
Aramco is planning to sell shares at a moment when some of the world’s largest equity investors
are questioning their exposure to fossil fuels. Fund managers are worried that some oil fields
could become worthless as governments try to reduce fossil-fuel consumption to fight against
climate change. Moreover, some investors believe that electric vehicles will reduce demand
growth over the next two decades.
The Saudi state-owned oil giant has publicly sought to allay those concerns.
“I am not losing any sleep over ‘peak oil demand’ or ‘stranded resources,”’ Aramco Chief
Executive Officer Amin Nasser told the CERAWeek by IHS Markit energy conference in Houston
earlier this month.

NewBase March 18 - 2018 Khaled Al Awadi
NewBase For discussion or further details on the news below you may contact us on +971504822502 , Dubai , UAE
Oil prices jump, Brent hits highest in more than 2 weeks
Reuters + NewBase + Bloomberg
Oil prices jumped on Friday, with Brent crude futures hitting their highest in more than two weeks
as U.S. stock prices rose and investors covered short bets ahead of a weekend in which the U.S.
news program “60 Minutes” will air an interview with Saudi Arabia’s crown prince.
Brent futures rose $1.09 to settle at $66.21 a barrel, a 1.7 percent gain. During the session, Brent
hit $66.42, its highest since Feb. 28.
U.S. West Texas Intermediate (WTI) crude futures for April, which will expire on Tuesday, rose
$1.15 to settle at $62.34 a barrel, a 1.9 percent gain. WTI hit a high of $62.54, its highest since
March 7.
Brent futures gained 1 percent for the week, while WTI marked a weekly rise of 0.4 percent. It was
the second straight weekly rise for both contracts.
Oil price special
coverage

Gains on Wall Street also supported crude futures, which have recently been moving in tandem
with U.S. stock indices.
Hedge funds and other money managers cut their bullish bets on U.S. crude oil futures and
options in the week to March 13, as crude prices fell for a second week, the U.S. Commodity
Futures Trading Commission (CFTC) said.
The speculator group cut its combined futures and options position in New York and London by
24,667 contracts to 453,864 during the period. The cuts marked the second consecutive week in
which speculators cut their net long positions in the market.
U.S. drillers added four oil rigs this week, bringing the total count to 800, General Electric Co’s
Baker Hughes energy services firm said. It was the seventh U.S. rig count rise in eight weeks.
On Thursday the International Energy Agency (IEA) predicted global oil demand would pick up
this year, but supply is growing at a faster pace, which should boost inventories.
The agency raised its forecast for oil demand this year to 99.3 million barrels per day (bpd) from
97.8 million bpd in 2017, and said it expected supply from non-OPEC nations to grow by 1.8
million bpd in 2018 to 59.9 million bpd, led by the United States.
OPEC and other producers have cut output to reduce a global crude glut. On Wednesday, the
U.S. government reported that crude stockpiles in the United States increased by a more-than-
expected 5 million barrels.

Oil could soon see the mid-$50s again, Louise Yamada's chart
Stephanie Landsman | @stephlandsman
Wall Street technician Louise Yamada sees a pullback scenario unfolding for oil, which has rallied
briskly this year.
She drew her conclusion based on a chart showing West Texas Intermediate (WTI) crude's
trading patterns since September 2016.
"Over the past couple of months, you have what's created a descending triangle with lower highs
on the rallies, and $58 [a barrel] comes in as a support level for this little triangle. So, on a short-
term basis if $58 is broken on the downside, you could see the price slip," Yamada said Thursday
on CNBC's "Futures Now."
In that situation, she sees levels that could fall to where the two moving averages are interacting
on the chart — at $55 a barrel.
"If it were to go further, then the next support would be close to the uptrend, around the 2016
uptrend around $53," said Yamada, who runs Louise Yamada Technical Research Advisors.
Yamada points out the momentum indicators are negative, so odds are in the favor of a very
short-term downturn before going back into rally mode. Since Feb.13 the commodity has been
hugging the low $60s level.
It's not her first short-term bearish oil call on "Futures Now." Late last May, Yamada predicted a
dip and it materialized. Three weeks later, WTI crude was down by about 15 percent before
rallying again.
This time around, Yamada sees only one factor that could prevent an oil price drop to the $50s.
"If this doesn't break $58 and instead you see the price move up through $63.64, that would abort
the trade." Yamada said.

Global oil demand picks up but still lags rising supply -IEA
The IEA raised its forecast for oil demand this year to 99.3 million barrels per day (bpd) from 97.8
million bpd in 2017
Global oil demand is expected to pick up this year but supply is growing at a faster pace, leading
to a rise in inventories in the first quarter of 2018, the International Energy Agency (IEA) said on
Thursday.
The IEA raised its forecast for oil demand this
year to 99.3 million barrels per day (bpd) from
97.8 million bpd in 2017.
Commercial oil inventories in industrialised OECD
nations rose in January for the first time in seven
months to 2.871 billion barrels, 53 million barrels
above their five-year average, the Paris-based
IEA said.
The January increase of 18 million barrels over
the December inventory level was roughly half the size of rises normally seen at this time of year,
according to the agency, which advises Western governments on energy policy.
But it said Venezuela, where an economic crisis has cut oil production by 50 per cent in two years
to lows not seen in more than a decade, could still trigger a renewed drawdown in stocks.
Solid economy underpins demand growth
A strong world economy is expected to underpin solid increases in oil demand. The International
Monetary Fund sees global economic growth at 3.9% in the early part of our forecast period with
all regions expected to perform well. Strong economies will, in turn, use more oil and we expect
demand to grow at an average annual rate of 1.2 mb/d. By 2023, oil demand will reach 104.7
mb/d, up 6.9 mb/d from 2018.
As has been the case for some years, China and India together will contribute nearly 50% of
global oil demand. As China’s economy becomes more consumer-oriented, the rate of growth in
oil demand slows down to 2023, compared with the 2010-17 period. In contrast, the pace of oil
demand growth will pick up slightly in India.
While there is no peak oil demand in sight, the pace of growth will slow down to 1 mb/d by 2023
after expanding by 1.4 mb/d in 2018. There are signs of substitution of oil by other energy sources
in various countries.
A prime example is China, which has some of the world’s most-stringent fuel efficiency and
emissions regulations. As the country recognises the urgent need to tackle poor air quality in
cities, efforts are intensifying.
Sales of electric vehicles are rising and there is strong growth in the deployment of natural gas
vehicles, particularly into fleets of trucks and buses. Our analysis shows that a rising number of
electric buses and LNG-fueled trucks in China will significantly slow gasoil demand growth.

Petrochemicals: a key driver of demand growth
The fastest-growing source of global oil demand growth are petrochemicals, particularly in the
United States and China. The shale revolution in the United States has opened up a major source
of cheap domestic feedstock. About 1.7 mb/d, or 25%, of our total demand growth to 2023 is
taken up by ethane and naphtha.
Global economic growth is lifting more people into the middle class in developing countries and
higher incomes mean sharply rising demand for consumer goods and services. A large group of
chemicals derived from oil and natural gas are crucial to the manufacture of many products that
satisfy this rising demand. Examples include personal care items, food preservatives, fertilisers,
furnishings, paints and lubricants for automotive and industrial purposes.
One of the biggest and most pressing issues is the implementation of major changes to marine
fuel specifications mandated by the International Maritime Organisation (IMO). The new rules
loom ever closer and the maritime and refining industries face a huge challenge to implement
them.
From the vantage point of early 2018, it is not clear how successful they will be, especially as
demand for non-marine gasoil grades is growing steadily. The new regulations will cause a
massive switch out of high sulphur fuel oil demand and into marine gasoil or a new very low
sulphur fuel oil. The total demand for oil products will not be dramatically altered, but the impact of
the changes on the product mix is a major uncertainty in our forecast.
Upstream investment
With global demand rising steadily, the response from the supply side is crucial. The recovery
from the historic drop-off in investments by 25% in both 2015 and 2016 has barely started.
Investment was flat in 2017, and early data suggests only a modest rise in 2018. This is potentially
storing up trouble for the future. An added concern is that investment is overwhelmingly focused
on the light tight oil (LTO) sector in the United States. As a result, upstream investment may be

inadequate to avoid a significant squeezing of the global spare capacity cushion by 2023, even as
costs have fallen and project efficiency has improved.
Natural production declines are slowing, but more investment will be needed. Each year the world
needs to replace 3 mb/d of supply lost from mature fields while also meeting robust demand
growth. That is the equivalent of replacing one North Sea each year. Investment in maintaining
current production is one challenge, investing in future demand growth is another. Our analysis
shows that discoveries of new oil resources fell to another record low in 2017, with less than 4
billion barrels of crude, condensate and NGLs found.

In the past three years we have seen oil production from China, Mexico and Venezuela fall by a
combined 1.7 mb/d as a consequence of lower investment. China’s decline has slowed; in Mexico,
impressive reform proposals are being developed and production could return to growth by 2023.
Meanwhile, Venezuela remains a wild card. In the twenty years since former President Chavez
first came to power, oil production has more than halved to below 1.6 mb/d, and capacity will
plunge by nearly 700 kb/d more by 2023, a major acceleration of the decline we expected a year
ago.
With Venezuela in crisis, the net growth in total OPEC production capacity will be only 750 kb/d,
and this number includes an assumption that shut-in production of around 500 kb/d from the
Neutral Zone is finally re-started. It also depends on some degree of stability in Iraq, Libya, and
Nigeria.
The US dominates supply growth
With OPEC capacity growing only modestly, more attention is focussed on the non-OPEC
countries, led by the United States, which is becoming ever more dominant in the global oil
market.
Driven by LTO, by 2023 United States output grows by 3.7 mb/d, more than half of the total global
production capacity growth of 6.4 mb/d expected by then. Total liquids production in the United
States will reach nearly 17 mb/d, easily making it the top global producer, and nearly matching the
level of its domestic products demand. US production could be even higher by 2023 if prices rise
above the assumptions made in this report, which is based on the current forward price curve.
Brazil, Canada and Norway will also contribute to supply growth. Along with the United States,
they provide nearly all of the non-OPEC increase. Production of conventional crude oil in non-
OPEC countries, which excludes US LTO, will actually decline to 2023.

Refining
The downstream sector will see major change during our forecast period. Excess global refining
capacity is set to increase due to the slowdown in refined product demand growth. Global refining
capacity additions to 2023 are forecast to amount 7.7 mb/d.
At the same time, the rate of growth of refined product demand is slowing to 5 mb/d. The growing
excess refining capacity will eventually put pressure on margins. The Middle East sees the biggest
growth in capacity and national companies in the region are venturing into international markets,
targeting joint ventures, particularly in Asia. Even though Chinese capacity additions slow, the
country maintains its recently acquired role as a net product exporter.
With growing refining throughput, Asian import requirements grow by over 3.5 mb/d. The Middle
East countries will remain the largest suppliers, but their exports will only grow by 1 mb/d, given
their focus on domestic refining. Other sources such as Angola and Nigeria will have lower
availabilities as, respectively, their output dwindles and they process more crude locally. This
provides opportunities for new suppliers, mainly the US.
The United States
The United States is also making its mark in the refining industry. Conventional wisdom has it that
rapidly rising LTO production is incompatible with the need of refiners to process heavier, sourer
crudes, given earlier investments.
This will not, in fact, be the case. With Asian import requirements growing there will be
opportunities for new suppliers. As Canadian shipments to the United States grow, this frees up
lighter US crude for export, particularly to meet Asian demand for petrochemical feedstocks.
Shipments of oil from the United States to China are already significant. US exports will also be
ideally placed to meet the need, post-IMO, for more low-sulphur crude, with a low yield of fuel oil.
The United States is well-placed to increase its role in global markets. Since the ban on exporting
crude oil was lifted at the end of 2015, volumes have increased sharply, reaching 2 mb/d in some
weeks. In 2018 and 2019, there might be bottlenecks in pipeline capacity for moving oil from

Canada and the Permian Basin. But a close look at investment in logistics finds that after 2019, on
the assumption that new projects being considered are actually commissioned, constraints will
ease.
This includes major Canadian projects such as Trans Mountain and Keystone XL pipeline, and the
TexStar Logistics’ 550 kb/d EPIC pipeline, due to be up and running in 2019 in Texas. Ten crude
oil export facilities are either being upgraded or built. As a result, by 2023 capacity is expected to
more than double from current levels to about 4.9 mb/d. Corpus Christi will become the main
export hub in the Gulf Coast.
Price volatility on the horizon
The upshot of our analysis is that the market could go through two phases during the
next six years. Through 2020, record supply from non-OPEC countries more than
covers expected demand growth.
But by 2023, if investments remain insufficient, the effective global spare capacity
cushion falls to only 2.2% of demand, the lowest number since 2007. This raises the
possibility of oil prices becoming more volatile until new supplies come on line.
The US shale sector responded quickly to rising prices both in 2010 and in 2017 and it
will continue to adjust to price signals in the future. But there will still be a continued
reliance on OPEC countries for a major share of global supply. Within OPEC, more
than 2 mb/d of spare capacity is held in Saudi Arabia. In turn, this emphasises the
crucial role OPEC’s largest producer continues to play in providing stability to global oil
markets.

NewBase Special Coverage
News Agencies News Release March 18-2018
The Saudi Aramco IPO Math Problem: Cash > Barrels
Getting to a $2 trillion valuation requires some heroic assumptions….
By Liam Denning
Rule number one with an IPO: Don't announce a target value years ahead of the actual sale --
especially if one is tempted to use the word "trillion."
That rule was broken way back with Saudi
Arabian Oil Co., or Saudi Aramco. In early
2016, when Prince Mohammed bin Salman
first unveiled plans to list shares in the oil
behemoth, he boasted about a price tag of $2
trillion. A couple of years on, the IPO hasn't
yet happened, and there are now signs it
could be pushed into 2019.
Naturally, it takes time to organize the sale of
a company as big and complex as Aramco.
But that $2 trillion figure may also be an
obstacle in itself, especially as Aramco's IPO
isn't just any share sale but a milestone in the
prince's plans to remake his country.
The figure looks like it resulted from a highly scientific process of multiplying Saudi Arabia's
roughly quarter-trillion barrels of proved oil reserves by a multiple of $8.
But the fact that Aramco is being privatized in the first place undercuts such simple valuation by
reserves, because the IPO acts as a hedge against weaker long-term oil demand. It makes little
sense to apply such blanket valuations against 60 years' worth of production (companies usually
carry about 10 - 15 years of proved reserves on the books).
As oil enters an era of greater competition between producers and with other fuels, investors
largely want one thing from the majors: yield. Growth is nice to have, but what counts is how much
free cash flow they can generate to fund dividends (hence, Exxon Mobil Corp.'s big spending
plans have met with disdain). Aramco's stock would need to compete on those terms.

Here are the free cash flow yields -- as a percentage of market capitalization -- for a
selection of Aramco's likely peers:
The Main Attraction
Free cash flow yields for large, integrated oil majors are mostly in the mid-to-high single digits
Source: Bloomberg
Applying this to Aramco is tricky until that IPO prospectus turns up. Still, I've got an envelope on
my desk, so I can sketch out some rough numbers on the back of it.
The upstream production business is the heart of Aramco -- and its value. I'm assuming output of
11 million barrels a day of crude oil. On top of that, using 2016 data from the company's website,
Aramco produces 1.9 million barrels a day of other liquids and 9.2 billion cubic feet per day of
natural gas and ethane. All told, that's about 5.1 billion barrels of oil equivalent per year.
For prices, I'm assuming $65 per barrel of crude oil 1 ; other liquids get half that amount; and gas
and ethane get fixed prices of $1.25 and $1.75 per million Btu, respectively 2 . On costs, Aramco
pays a 20 percent royalty off the top; operating costs and depreciation totaling $10 a barrel, split
evenly; and a 50 percent income tax.
The refining and chemicals businesses are trickier still, as there's little to go on, apart from some
plant and product capacities.
So I assume a healthy 80 percent capacity utilization for each business and net profit of $200 per
ton for chemicals and $2.85 per barrel for refining, similar to Exxon's average margins for those
divisions between 2012 and 2016 3 .
The resulting net profit of about $4.7 billion equates to roughly an extra buck per barrel of
upstream production.

Tie it all together and here's how Aramco's theoretical barrel breaks down:
Barrel Breakdown
Under our basic assumptions, Aramco's net profit per barrel of oil equivalent would be about $18
per barrel at a $65 crude oil price; with a $5 move in the oil price shifting net income by roughly
$1.70
Source: Saudi Aramco, Exxon Mobil, Bloomberg, Bloomberg Gadfly analysis
Note: Estimated breakdown of economics of Saudi Aramco's liquids and natural gas production
based on Gadfly assumptions detailed in accompanying column.
This rudimentary spreadsheet contraption spits out a net income figure of $88 billion. Add back
depreciation 4 , take off capital expenditure of $40 billion, and free cash flow clocks in at $78
billion. By way of comparison, Exxon's net income and free cash flow last year were roughly $20
billion and $15 billion, respectively.
Put that $78 billion of free cash flow over a $2 trillion valuation 5 , and the yield is just 3.9 percent.
Even Exxon doesn't get that much love, and it isn't a state-owned company involved in a radical
societal overhaul in the middle of one of the most dangerous neighborhoods on the planet.
A regular foreign investor might well want some sort of extra risk premium, as is often the case
with national oil companies. Put a 6 percent yield on that theoretical free cash flow -- still less than
Royal Dutch Shell Plc's yield -- and Aramco's implied valuation drops to $1.3 trillion.
Tough to say "ouch" when you're still talking north of a trillion bucks, but everything's relative,
right?
The table below gives a range of valuations at different crude oil prices and required free cash
flow yields:

Based on these limited assumptions, getting to $2 trillion looks very tough, barring a significant
repricing of oil, together with an unusual tolerance for political risk on the part of investors. If they
demand 7 percent, for example, then under these assumptions you would need a long-term oil
price of over $100 a barrel to get in the green zone.
The prospectus will no doubt uncover hidden pools of value. Equally, though, the "risk factors"
section is likely to offer enough material for a tome of its own. Aramco's debut may be delayed
until oil prices jump for some reason (roadshow stop in Caracas?). Even then, the underlying
meaning of this IPO is why reserves yield to free cash flow when it comes to valuation -- and that
$2 trillion aspiration likely yields to a harsher reality.
-- "A Princely Sum" graphic by Lauren Leatherby
This column does not necessarily reflect the opinion of NewBase and its owners.

NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE
The Editor :”Khaled Al Awadi” Your partner in Energy Services
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Khaled Malallah Al Awadi,
Energy Consultant
MS & BS Mechanical Engineering (HON), USA
Emarat member since 1990
ASME member since 1995
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Mobile: +97150-4822502
khdmohd@hawkenergy.net
khdmohd@hotmail.com
Khaled Al Awadi is a UAE National with a total of 28 years of experience in
the Oil & Gas sector. Currently working as Technical Affairs Specialist for
Emirates General Petroleum Corp. “Emarat“ with external voluntary Energy
consultation for the GCC area via Hawk Energy Service as a UAE
operations base , Most of the experience were spent as the Gas Operations
Manager in Emarat , responsible for Emarat Gas Pipeline Network Facility &
gas compressor stations . Through the years, he has developed great
experiences in the designing & constructing of gas pipelines, gas metering &
regulating stations and in the engineering of supply routes. Many years were spent drafting, &
compiling gas transportation, operation & maintenance agreements along with many MOUs for the
local authorities. He has become a reference for many of the Oil & Gas Conferences held in the
UAE and Energy program broadcasted internationally, via GCC leading satellite Channels.
NewBase : For discussion or further details on the news above you may contact us on +971504822502 , Dubai , UAE
NewBase March 2018 K. Al Awadi

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