Saudi Arabia and the Trump Administration Entanglement

Updated May 2017

The Trump Administration's early 2017 moves to suppress the flow of citizens from six nations because of security concerns and its backing of the failed raid in Yemen, is rather interesting, given that the majority of the perpetrators of the September 11, 2001 terrorist activities came from one nation; the Kingdom of Saudi Arabia (KSA).  This does come as a bit of a surprise in one sense but, given the current Secretary of State, Rex Tillerson, and his past position as Chairman of the Board and CEO of ExxonMobil, this posting will show you that this should not be a shock to anyone.

According to ExxonMobil, the corporation is one of the largest foreign investors in Saudi Arabia through its subsidiary, ExxonMobil Saudi Arabia Inc. (EMSA) and has a very long history of operating in the Kingdom as shown here:

ExxonMobil has an 85 year track record of being one of the largest investors in the KSA as a joint venture partner with the now 100 percent Saudi-owned Saudi Arabian Oil Company (Saudi Aramco) and Saudi Basic Industries Corporation (SABIC).  ExxonMobil is also one of the KSA's largest private sector purchases of Saudi Aramco crude oil 

Let's look at a bit of background.   Back in 1948, Standard Oil Company (now Exxon) and Soccony-Vacuum Oil Company (became Mobil) became part owners of the original Arabian American Oil Company (Aramco), providing market outlets and capital investments to develop the massive Saudi oil and natural gas reserves.  In 1950, then-Saudi King Abdulaziz threatened to nationalize the nation's oil facilities, a move that forced Aramco to share its profits 50/50 with the KSA.  This also resulted in a move of the company's headquarters from New York City to Dhahran.  In 1973, the Saudi government purchased a 25 percent interest in Aramco, increasing its participation interest to 60 percent in 1974.  In 1980, the Saudi government completed its purchase of Aramco, owning 100 percent of its crude oil concession rights, production and facilities.  Saudi Aramco now owns the largest oil reserves among all companies in the world and is the world's largest producer of oil.

Let's look at ExxonMobil's current activities in the KSA which include petrochemicals manufacturing and petroleum refining operations starting with this screen capture of the first two pages of the company's ExxonMobil Saudi Arabia brochure:

Here is a list of the company's facilities in Saudi Arabia:

1.) Saudi Aramco Mobil Refinery (SAMREF):  This 400,000 BOPD refinery is owned 50/50 by Saudi Aramco and a subsidiary of ExxonMobil and is one of the world's largest single-train crude oil refineries.  It employs 727 Saudi nationals, a 90 percent Saudization level.  Most of its production is domestically consumed.  Here is a photo of the facility:

2.) Saudi Yanbu Petrochemical Company (YANPET):  This facility has two world-class 800,000 metric ton per year crackers, producing mainly ethylene and is one of the largest and lowest-cost producers in the world.  It is equally owned by the Saudi Basic Industries Corporation (SABIC) and a subsidiary of ExxonMobil.  It employs 1300 workers of which 87 percent are Saudi nationals.

3.) Al-Julbail Petrochemical Company (KEMYA):  This facility has the capacity to produce 900,000 tonnes of ethylene and 1.3 million tonnes of polyethylene annually.  It is equally owned by SABI and an ExxonMobil affiliate.  It employed nearly 1200 people, over 98 percent of which are Saudi nationals.  The two shareholders have also developed the $3.4 billion Al-Jubail Elastomer/Saudi  Elastomers Project (SEP) as part of the KEMYA facility which will produce about 400,000 tonnes per year of synthetic rubber. 

Let's put some of these numbers into perspective.  In 2015, the Al-Jubail and Yanbu facilities produced 1.6 million tonnes of ethylene, 17.8 percent of ExxonMobil's total global production of 9.0 million tonnes.  These facilities also produced 1.4 million tonnes of polyethylene, 16.3 percent of ExxonMobil's total global production of 8.6 million tonnes.  The SAMREF refinery produced 200,000 BOPD (ExxonMobil share), 4 percent of ExxonMobil's 5.035 million BOPD global total.  As you can see, the ExxonMobil-owned facilities in the Kingdom of Saudi Arabia provide a significant portion of the company's cash flow.   

Not only is ExxonMobil helping to develop Saudi infrastructure, it supports educational programs including one rather interesting prorgram, the Global Women in Management project which trains 30 Saudi women annually since its inception in 2011.  The project seeks to strengthen their management leadership and technical skills to "build the next generation of women".  What I find fascinating about this is that Saudi women still have no voting rights, no right to drive their own vehicle and must be covered completely when in public, in fact, the KSA is one of the most female-repressive societies in the world.  I cannot imagine that training 30 women annually is going to make one bit of difference to Saudi Arabia's misogynistic society.  In the health realm, ExxonMobil founded the Prince Salmoan Center for Disability Research to support the Kingdom's disabled citizens.  They also support the Zahra Breast Cancer Association, the Saudi Alzheimer's Disease Association and the Disabled Children's Association.

With this background, I think that we can get some sense of why Saudi Arabia was treated differently than its Middle East neighbours when it came to moves by the Trump Administration and its ExxonMobil-sourced Secretary of State.  It certainly appears that it's more business as usual in the hallowed halls of the nation's capital.  

If Exxon can't find oil, who can?

As a geoscientist, yesterday's revelation by ExxonMobil that they have had some difficulty replacing their oil reserves is most interesting but not entirely unexpected.

While their reported 2010 reserve replacement numbers look good overall, if you dig a bit deeper, you'll find that things are not particularly what both investors and a world hungry for oil hope to see.  ExxonMobil announced that additions to its proved reserves in 2010 totaled 3.5 billion barrels of oil equivalent (BOE), citing that they replaced 209 percent of production.  The company also states that "our strategic focus on quality resource capture, a disciplined approach to investment and excellence in project execution have resulted in replacement of more than 100 percent of production for 17 consecutive years.".

Here’s a look at just how successful they have been from their 2009 Annual Report:

Bravo...I think.

In the following paragraphs, the real story starts to emerge.  I quote:

"The corporation’s reserves additions in 2010, the highest since the merger of Exxon and Mobil, reflect strategic acquisitions, new developments, as well as revisions and extensions of existing fields resulting from drilling, studies and analysis of reservoir performance. Reserves additions from acquisitions and subsequent revisions totaled 3 billion oil-equivalent barrels. Additions also came from the Sakhalin-1 Arkutun Dagi project in Russia and other countries including Canada, the United States, Nigeria, Norway and Abu Dhabi. Liquid additions totaled 905 million oil-equivalent barrels for a 102 percent replacement ratio and gas additions totaled 2.6 billion oil-equivalent barrels for a 328 percent replacement ratio.

At year-end 2010, ExxonMobil's proved reserves base increased to 24.8 billion oil-equivalent barrels, including 2.8 billion oil-equivalent barrels from XTO...." (my bold)

So, basically, of the 3.5 billion BOE ExxonMobil added in 2010, 2.8 billion BOE came from their December 2009 (closed in June 2010) all-stock, $31 billion (plus $10 billion in long-term debt) take-over of XTO, a major operator in the American shale gas resource play.  On December 31st, 2009, XTO had proven gas equivalent reserves of 14.827 Tcf which included a modest 294 million barrels of oil and 12.5 Tcf of natural gas.  The acquisition of XTO brought ExxonMobil's reserve mix to 53 percent natural gas and 47 percent liquids.  I do find it interesting how ExxonMobil states that the "resource base" associated with the XTO acquisition is as high as 60 trillion cubic feet equivalent; "resource base" does not mean recoverable, proven reserves, rather, it refers to the total amount of gas in the ground, much of which is not ultimately recoverable because of the nature of shale gas plays.  But I guess the 60 Tcf number looks and sounds sexier.

Now, let's look back at ExxonMobil’s numbers.  ExxonMobil added 3.5 billion BOE in 2010, 2.8 billion BOE of which came from the XTO acquisition.  That means that the XTO acquisition accounted for 80 percent of ExxonMobil's reserve additions with the balance of 0.7 billion BOE coming from other acquisitions, the drill bit, extensions of other fields and reserve revisions.  In fact, in the press release, ExxonMobil admits that 3 billion BOE of the total 3.5 billion BOE added came from acquisitions and reserve revisions meaning that a rather paltry 0.5 billion BOE or 14.3 percent came from the drill bit.  That's a pretty sad replacement rate for an exploration and development company.

According to ExxonMobil's Q4 2010 estimated results, they report the following daily production numbers:

If you take the 4.447 million BOE per day average for the 12 months of 2010, the company is producing around 1.65 billion BOE per year.  If you look at the 0.5 billion BOE in proved reserves that were added from everything but acquisitions and reserve revisions, the company is replacing only around 30 percent of what it produces in a year with the drill bit.

One last revelation from the press release states that:

"The long-term nature of the industry, and the large size of the discrete projects that provide a significant portion of the corporation’s reserves additions, make it appropriate to consider a time horizon longer than a single year. The 10-year average reserves replacement ratio is 121 percent, with liquids replacement at 95 percent and gas at 158 percent. The reserves additions made during this period comprise a diverse range of resource types and have broad geographical representation. ExxonMobil’s reserves life at current production rates is 15 years." (my bold)

Basically, for every barrel of oil that ExxonMobil produces, they are only finding 0.95 of a barrel.  That's not just the case for this past year, this is the average replacement ratio over the past 10 years.  It certainly appears that oil is rather hard to find, unless of course you have the money to buy someone else’s! 

It’s becoming rather apparent that significant volumes of oil are becoming increasingly difficult to find; the "elephants" are simply becoming a rather scarce commodity.  In light of last week’s WikiLeaks revelation that Saudi Aramco is having difficulty with both the size of its oil reserves and production levels, it appears that it is highly likely that high oil prices will be around for the long term.