The world’s top oil exporter will soon sell shares in state-owned Saudi Aramco in what figures to be the largest initial public offering (IPO) in history.
That’s significant because the IPO has forced Aramco to reveal lots of information about the company to potential investors.
Last week, we reviewed the IPO prospectus, which provides an excellent overview of Aramco’s corporate structure and physical operations.
As a legal document, the standard for accuracy is obviously quite high. That raises an interesting question: Is there anything here that contradicts previous Aramco assertions?
A popular source of information on Saudi Arabia’s energy industry comes from the Joint Organizations Data Initiative (JODI), a Riyadh-based organization.
Saudi Arabia and other OPEC members report statistics every month to JODI which then publishes a bulletin that includes country-level data.
For almost two decades, JODI has been the source for information on indicators, like crude exports, production, refinery utilization & inventories, from otherwise opaque corners of the globe.
But can you trust it?
Questions about the reliability of JODI have existed since the start. Without alternative sources available, debate was futile because there wasn’t anything else to gauge the truth.
Complaints about JODI have also included the lack of timeliness. JODI data released November 18 covers September, for example.
The respondents could reduce the turnaround time since they are ultimately the ones in charge.
But that requires a willingness to change, and clearly not all respondents feel like increased transparency is in their interest.
We attended a conference earlier this year in London that highlighted the challenges faced trying to obtain reliable information on OPEC production and energy data.
One takeaway from that meeting was the emerging role of alternative data providers (such as Ursa) who use satellite radar.
Source: JODI
For example, we measure global crude inventories on a weekly basis. By using synthetic aperture radar (SAR), the data is reliable because the technology works regardless of cloud coverage, day or night — unlike optical satellite imagery.
Let’s take a closer look at Saudi Arabia.
Not only is Saudi Arabia hugely important, but Aramco’s foray into the equities and debt markets have forced the company to disclose information to potential investors.
Aramco also issued a prospectus earlier this year ahead of an international bond sale. We examined that prospectus with the same question in mind: how does this compare with JODI?
The biggest discrepancy then — and now — concerns crude inventories.
According to JODI data, Saudi crude inventories have fallen almost non-stop since late 2015.
That means crude production has fallen short of demand (i.e. exports, domestic refineries, domestic power plants).
Is this true?
Information on crude inventories in the Aramco IPO prospectus isn’t as detailed, but there is data showing year-end balances for 2016-2018. And the numbers don’t line up.
According to JODI, Saudi crude inventories fell by 52.852 million barrels in 2016, fell by 27.612 million barrels in 2017 and fell by 39.634 million barrels in 2018.
According to the IPO prospectus, Saudi crude inventories rose by 21.535 million barrels in 2016, fell by 33.58 million barrels in 2017 and were unchanged in 2018.
While 2017 was similar, the inventory data for 2016 and 2018 were starkly different.
What accounts for the difference?
One way of figuring out the discrepancy is examining the different components (production, exports, domestic consumption) that cause inventories to rise or fall.
Here’s a look at the Saudi crude production and exports, according to JODI, going back to 2002.
Source: JODI
And here’s a look at Saudi domestic consumption, which can be broken out into refinery intake and direct use (i.e. power plant burn).
Source: JODI
Refinery intake has trended higher as Aramco expands domestic refining capacity. Direct use is seasonal because power plants burn more crude in the summer, though a trend lower is discernible, reflecting an emphasis on switching to natural gas feedstock.
The Aramco IPO prospectus contains information on the above variables, though the data is shown as annual averages.
The main conclusions are as follows:
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JODI data in 2016 understated crude production and overstated crude exports.
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JODI data in 2018 overstated domestic consumption.
Those differences explain why JODI data and Aramco IPO prospectus diverge with respect to crude inventory changes in 2016 and 2018.
Why does this matter?
It might sound academic, but the fluctuations in Saudi crude inventories have real world implications.
Following the September 14 attacks, the amount of oil held in storage by Saudi Arabia became a major issue.
As long as Aramco could tap inventories, the full impact of lost production wouldn’t be felt. But once these reserves ran dry, the oil market would face a significant shortage causing oil prices to soar.
We were able to shed light on this topic by increasing the frequency of our satellite imagery collections, providing a daily pulse on inventory levels.
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