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Thursday, February 15, 2024

Saudi Aramco & US oil giants nearing collapse; Will Trump bailout?

The worldwide corona pandemic has caused havoc in all economic spheres. The Saudi oil giant company, Aramco and the US shale industry are facing unprecedented levels of downturn and losses. Both the Saudi and US Governments are taking steps to ameliorate the anticipated negative effects that may arise due to the recess in oil industry. Are we heading towards bigger economic crisis than that of 2008?

Oil giant Saudi Aramco on Sunday posted a 21 per cent decline in 2019 net profit due to a drop in oil prices and production, and said it plans to “rationalise” capital spending in the wake of the coronavirus outbreak.

This was Aramco’s first earnings announcement after it listed in December in a record $29.4 billion initial public offering (IPO) that valued the company at $1.7 trillion.

Its shares fell below the IPO price last week for the first time, as oil prices crashed after the collapse of an output deal between Opec and non-Opec members which led to an oil price war between Riyadh and Moscow.

Aramco CEO Amin Nasser said in a statement the oil giant has taken steps to rationalise planned capital spending in 2020 following the coronavirus outbreak.

“The company expects capital spending for 2020 to be between $25b and $30b in light of current market conditions and recent commodity price volatility. Capital expenditure for 2021 and beyond is currently under review,” Aramco said in a statement.

Read more: Oil prices gain but Saudi hikes output to escalate price war

Brent crude LCOc1 futures last traded at $33.85 per barrel on Friday, down from about $64 when Aramco listed its shares.

Despite a drop in income, Aramco said it paid a dividend of $73.2b in 2019 and intends to declare a cash dividend of $75b in 2020, paid quarterly.

Aramco, which is 98pc owned by the Gulf kingdom, reported a net profit of $88.2b in 2019, down from $111.1 in 2018.

Analysts had expected Aramco to post a net profit of 346.6b riyals ($92.6b) in 2019, according to an estimate of 15 analysts polled by Refinitiv.

In a separate turn of event, the Trump administration is considering bailing out US shale industry.

The White House is considering a rescue package for the US shale industry, although the idea is getting pushback from so many sides that it faces challenging odds of passing into law.

According to the Washington Post, the White House warmed to the idea of aid for shale drillers after taking calls from oil executives “who have voiced concern and at times exasperation,” following the sudden crash in oil prices.

Of note, Continental Resources’ Harold Hamm reached out to the Trump administration, though Hamm said he had not made “direct” contact. He has been a personal supporter of President Trump.

Read more: China & India will be the two countries dictating oil prices in 2020

Hamm reportedly lost $2 billion personally on Monday from his 77 percent stake in Continental Resources. Hamm said the administration should consider “any action that the administration might take to protect and preserve American interests at this time from being unfairly disadvantaged by whatever government — and we’re talking governments here, whether it be Russia or Saudi Arabia,” according to the Post.

The help would involve low interest loans to shale companies because access to credit has been largely choked off, the Post said.

Indeed, with much of the industry heavily indebted, access to capital is a critical issue.

During the 2014-2016 downturn, so many drillers survived and returned to growth due to a nearly endless supply of credit and equity supplied by banks, investors and private equity. The major recapitalization effort revived shale drilling after a brief downturn.

This time around, investors are no longer interested in financing unprofitable drilling. Trump wants the government to step in to prop up failing companies.

But the idea was met with howls of criticism immediately after the Post broke the story. The proposal was panned by Democrats, who Trump will need to pass anything.

Instead of lining the pockets of Big Oil, Democrats are working on legislation to protect the financial security of working families affected by the spread of the coronavirus,

” Evan Hollander, communications director for the House Appropriations Committee, told Oilprice.com “No matter how many oil billionaires lose their shirts and call President Trump, House Democrats will stay focused on the real needs of the American people.”

Read more: Donald Trump thanks Saudi Arabia for lower oil prices 

Instead, he said the Democratic side wants any economic stimulus should focus on things like paid sick leave, enhanced unemployment insurance, food security, free coronavirus testing and affordable treatment. Not rescue packages for shale drillers.

But, perhaps more surprisingly, the proposed shale bailout was also met with skepticism from traditional allies of the oil and gas industry.

The head of the American Petroleum Institute, the oil industry’s most powerful lobby group, shot down the idea. “We believe we shouldn’t be reacting to one day of a market downturn,” API CEO Mike Sommers said, according to the Washington Examiner.

Anne Bradbury, CEO of AXPC, an industry group representing 25 independent oil and gas producers, told the Post: “We believe in the free market system and will advocate for policies that support a level playing field to address geopolitical manipulation of the market,” Bradbury said. Reading between the lines, one could interpret “support” for a “level playing field” as support for government assistance, although the language is obviously vague. Bradbury later said in a follow-up interview with the Post that “we are not seeking a bailout.”

On Wednesday, Secretary of Treasury Steve Mnuchin said that aid to struggling industries, including airlines, cruises and the oil industry should not be described as a “bailout.”

“I want to be clear: This is not bailouts. We are not looking for bailouts,” he said. “But there may be specific industries that are highly impacted by travel and have issues with lending.”

There was skepticism elsewhere. “It sounds like a bailout to me,” Paul Winfree of the Heritage Foundation, a conservative think tank, told the Post. “We are going to have to see specifics, but when you are dealing with special treatment given to one industry or sector of the economy, that is, almost by definition, a bailout.”

Read more: Kuwait’s Ruler Dissolves Parliament, Citing Security and Oil Prices

Meanwhile, Bloomberg reports that oil lobbyists are pushing the Trump administration to buy up oil for the strategic oil reserve (SPR), in order to mop up some of the excess supply on the market. Bloomberg reported that the administration is also considering lowering royalty rates for drillers on federal land. Already, many in Congress on both sides of the aisle consider the royalty rates too low.

But help for the shale industry will be difficult. Even an anonymous “senior administration official” told the Post that political blowback might scuttle the idea.

RT with additional input by GVS News Desk