Saudi Aramco financials released: Despite huge net profit, financials reveal fundamental problems

For the first time in over four decades of operation state-owned oil major Saudi Aramco released financials, revealing the firm to have produced the highest net profit of any company in the world. Despite the attractiveness of headline figures, the financial condition of the firm falls far short of the $2tn valuation the government declared when launching an IPO was first mentioned publically. Evidence on which that valuation could be supported is lacking, exacerbating the economic problems the state has experienced of late, thus revealing the need for diversification. In buying most of SABIC, Saudi Aramco provided much needed funds for the Public Investment Fund (PIF), from which the government is seeking to use funds to diversify the economy in what is planned to be a spectacular spate of investments to move away from a heavy reliance on oil production.

Precisely how much oil is contained within the Ghawar field, the largest conventional oil field in the world, was for a long time a state secret, known only to a select few in government and in the senior management of Aramco. Prior to public release of the financials, those trading oil had to work of what were regarded as best guesses on the potential value of the field. Saudi Arabia is not about to run out of oil, though: the country has proven reserves of 261.5 billion barrels of oil, enough to keep current production rates up until 2088. But running out is very different from reduced production, and it is production the country requires if the funds needed to undertake the radical transformation outlined in the Vision 2030 strategy is to be achieved.

Attention grabbing figures, such as the decline of the largest oil field in the world, massive earnings and net profits that dwarf those of what is now the second most profitable company in the world (Apple) detract from some important statistics concerning production that should help fund the transition away from oil. Costs of extracting a barrel of oil are lower than expected, which at least proves the competitiveness of the company but also reveals there is no easy space to move into for the company to boost valuation close to what the government would like.