Why Saudi Aramco is not just another super major

Two things to start: First, the debate over natural gas’s role in the energy transition is about to heat up as the EU weighs whether to label it as sustainable in its new investor rule book — a decision with huge consequences for future investment.

And on the other side of the Atlantic, Americans are taking to the skies again. More than 1.5m passengers travelled through US airports on Sunday — the highest level since March last year.

Welcome back to Energy Source. Today’s newsletter starts in the Middle East and asks: Is Saudi Aramco just another oil major? It is safe to say no, based on its behaviour while other companies battened down the hatches last year. For our first note, Anjli Raval takes a look at what Aramco’s 2020 results tell us about its unique position as both an oil producer and national cash cow.

Canada is the focus of our second note. Derek Brower asks whether the $29bn rail deal announced this weekend really matters for the country’s oil exports.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Myles

Saudi Aramco: This one is not like the others

As Saudi Aramco prepared for its 2019 stock market flotation, the state energy company’s teams of bankers, consultants and PRs spent months trying to persuade the press that the company was just like other listed oil majors.

The company’s 2020 results show the extent to which it is not.

Saudi Aramco is a government cash cow like no other and it is being leaned on by the state in an unprecedented manner.

Despite being hit by the twin shocks of coronavirus and a slump in crude prices (that saw a 44 per cent drop in earnings last year), the company stuck by its pledge to pay $75bn in dividends, most of which goes to the government as its major shareholder.

At this time of heightened pressure, while its peers slashed dividends and curbed spending dramatically just to stay afloat, Saudi Aramco took on huge amounts of debt to pay a mega $69bn for a majority stake in chemicals company Sabic, from the kingdom’s Public Investment Fund.

The PIF, Crown Prince Mohammed bin Salman’s chosen vehicle for driving his economic reforms, needed a financial boost. Where better to look for a buyer than another arm of the state that is known for its ability to consistently generate huge amounts of cash?

(For some analysts it’s a purchase of convenience that takes the company down a different path from its core business as the world’s largest oil producer. Obviously, Saudi Aramco and the government do not agree and speak endlessly about “synergies” and future demand for chemicals.)

Amin Nasser, chief executive, spoke of 2020 as an “unprecedented and difficult year”. Part of the pressure he faced came from the state itself, in addition to the impact of government lockdowns and travel bans on crude prices and profits.

Saudi Aramco was forced to raise $10bn through loans and $8bn in bonds. The net debt-to-equity ratio more than doubled to 55 per cent in 2020 from 26 per cent a year earlier, the company said in the full report of its financials on Monday.

In fact, executives conceded on Monday that its current debt levels would not prevent the company (technically the government) from raising dividend payouts further should the state require it.

Where the government did see a hit though, was in income taxes and royalties. The company’s payments to the state, including dividends, fell 30 per cent to $110bn in 2020 from $159.5bn in 2019.

Still, Saudi Aramco’s ability to deliver hefty chunks of cash — via profits or raising it through other means — when needed is critical for the state as it grapples to contain a ballooning fiscal deficit.

But even Saudi Aramco realises it can’t carry on splurging without a plan to trim expenses elsewhere, which is why it plans to divest assets and curb capital spending on its traditional operations to create a further cash buffer.

Even the cash cow needs a break. (Anjli Raval)

A new bitumen pipeline by stealth?

Environmentalists were delighted when, earlier this year, Joe Biden cancelled the Keystone XL pipeline proposal to ship Canadian bitumen from Alberta’s oil sands to Texan refineries. Preventing KXL would stop future development of the carbon-intensive project, they believed.

Oil sands proponents think they have an answer: the $29bn deal between Canadian Pacific and Kansas City Southern that creates the first direct railway link between Alberta’s oil heartland and Texas, cementing Canada’s position as a rising oil exporter to the US.

Jason Kenney, the Alberta premier who called on Canada to hit the US with sanctions when Biden scrapped KXL, tweeted that the deal would deliver “direct access to the US Gulf Coast & beyond, allowing it seamlessly to transport Alberta energy directly to Gulf Coast refineries”.

Oil industry groups were positive about the “promising” new oil route too.

Stephen Schork, editor of the oil market newsletter the Schork Report, was equally bullish for Canadian bitumen.

“It gives Alberta oil another conduit,” he said. Rail “will be a much easier sell” for Prime Minister Justin Trudeau as he promotes exports from his country’s controversial oil projects. He thought it was no surprise the deal came fairly soon after Biden nixed KXL.

Some Canadian analysts aren’t so sure.

The market was not crying out for new rail capacity, said Rory Johnston, managing director and market economist at Price Street, a financial research company in Toronto.

“We’re still only shipping about half as much crude by rail as we were before the pandemic hit,” he said.

The $10-per-barrel price discount for Canada’s oil versus WTI, the US crude benchmark, would need to widen to $15-20/barrel before companies turned to more costly rail, he said.

And the rail deal would not add new rights of way, cross-border links, railcar capacity or tracks, noted Samir Kayande, a Calgary-based independent energy analyst.

In any event, forecasters are growing less certain that new export capacity from Alberta’s oil sands is as essential as operators say.

Until recently, it appeared that as new oil sands projects came on line total output would exceed physical capacity of existing or planned pipelines. This would widen the discount in the price of Canadian versus American oil, undermining the investment case for the oil sands. (This is a reason why oil sands opponents have sought to stop new pipelines.)

Alberta has seen this happen before. In recent years, the province has compelled oil sands operators to shut in some of their production to hold up local prices.

But as investors turn away from high-cost, high-carbon oil projects, fast oil sands growth is no longer guaranteed.

“Nobody has greenlighted a new oil sands project in the last five years,” said Andrew Leach, an energy and environmental economist at the University of Alberta. That’s true even of big oil sands operators that have booked future export capacity on new pipelines, suggesting it is not the pipeline capacity question stopping investment.

“That sends a pretty strong signal,” Leach said.

The Canadian energy regulator said recently that if climate policy kept evolving at the pace of recent years, existing and planned rail and pipeline capacity was more than ample to handle future exports. KXL, in that scenario, would have been surplus to requirements anyway.

The rail companies themselves didn’t spend much time talking up the crude oil elements of their deal, preferring to focus on grain, car parts, propane and other business lines.

And they insisted they were “advancing North America’s climate goals”, given energy savings from rail over trucking.

(Derek Brower)

Data Drill

US liquefied natural gas exports are headed for a record month in March as they bounce back from February’s winter storm disruptions, according to consultancy Kpler. Shipments of the super-chilled gas have been rising as the country expands export capacity, mostly at facilities along the US Gulf Coast.

Power Points

• The US Securities and Exchange Commission directed ConocoPhillips and Occidental Petroleum to hold shareholder votes on new emissions targets — a sign that the regulator will take a tougher approach to climate under the Biden administration.

• US energy and power companies have raised more than $20bn in the high-yield bond market so far this year, an all-time record for data going back to 1996.

• The UK government must take urgent steps to make its draughty homes more energy efficient if it is to meet its net-zero goals, according to lawmakers in the country’s parliament.

• Must-read FT Big Read. An explosive cocktail of climate change and aggressive road and dam building is threatening the people, economies and security of the eight countries in the greater Hindu Kush Himalayan region.