Here's an ideas for how to commoditize the Saudi oil reserves. Note that oil exploration market is about $350B/y to expand proven reserves about 600 to 700 M barrels per week. So the objective here is for the Saudis to tap that market without overwhelming it. It is also helpful to enhance transparency and price discovery. So with this in mind, the Saudis:
- Divide say 250 B in reserves into about a 1000 plots.
- Hold a weekly auction where investor bid on any available plot for drilling rights.
- Bids with the highest price per barrel of reserve win
- An average of about 500 million barrels of drilling rights are sold.
So in about 10 years the whole reserve is sold off. This is fast enough to capture most of the market for reserves, but slow enough not to depress market prices. Most valuable portions are sold first at the highest price, so most of the value is captured within just a few years. Price discovery happens weekly providing transparency to the financial markets. This makes the reserves something of a commodity in its own right. Price discovery also happens geographically as bids come in for individual plots. This provides transparency both to financial markets and infrastructure planners. As infrastructure is planned and built out that will impact bids on available plots benefiting from that infrastructure.
So how does Aramco benefit? Aramco continues to operate existing wells, but has no need to invest in further drilling. Rather, Aramco owns and operates downstream asset to transport, refine and market virtually all oil produced in Saudi Arabia. As developers increase production, these infrastructural downstream assets become more valuable. I've read that many of this assets are underutilized having been built up for strategic reasons so as to be a swing produces. So increasing utilization is key improving value. With this sort of strategy I think the market cap for Aramco could be stellar and quite durable even as the Saudis sell off 5%, maybe even 10%, every year. Essentially, every producer drawn into the Saudi oilfields will want to own a portion of Aramco as it holds a monopoly downstream of their wells. That is, to avoid the risk of losing excess profit to this monopoly, the upstream producers will want a share of the dividends. So as the share of the reserves become foreign owned, shares of Aramco become foreign owned too. If the balance of ownership in Aramco is too skew, then the weekly reserve auction prices could suffer. So market transparency both for the stock and the reserves provides feedback mechanisms to divest in a controlled way.
What do foreign producers get out of this? Saudi Arabia has some of the lowest production costs in the world around $5/b. Aramco infrastructure and the reserve auctions make it easy to enter this market. A producer needs to buy a claim in the auction, drill and pump. So the question is, how much is an oil producer willing to pay at auction for this opportunity? For the next ten years, this is easily the best opportunity on the planet for developers. Sure once the Saudi reserves are fully tapped, they can go back to exploring the arctic ocean floors or whatever, but in the next decade no one in the industry can afford to pass on bonanza in the Saudi reserves. And they can't afford to pass up on Aramco shares either.
Under this scheme, does it matter whether the oil industry understands that it is toast in 10 to 15 years? Not nearly as much, because while investment has flowed into the cheap oil in Saudi Arabia, this has diverted investment away from riskier investments in expensive oil such a deep sea operations. Even investors who understand how fasted demand will fall off ten years from now can make a more rational choice to invest in Aramco because there are substantial dividends to earn at the lowest risk in the industry.
Prince Mohammed has said that it won't matter what price oil trades at. $30/b or $70/b, it will be all the same to the Saudi. I think this sort of scheme fits that bill. They auction off nearly all the value in the reserves within five years capturing the future value of oil around $53/b right now, and Aramco makes money off of production with very little oil price risk. It's the foreign developers who bear the brunt of oil price risk against their investment in Saudi oil. So, yeah, the Saudis could pull in more than $2 trillion and become nearly risk neutral on the price of oil in less than ten years. And they can do this in a very upfront and transparent way.
