Change, Energy

Saudi Aramco Made $48 Billion in Three Months, So What?

You see a link to the same article in different unrelated WhatsApp groups and start wondering what the fuss is all about. In one group, it is infographics used to encode the same message, then in another group, someone drops a link to the article and asks what can be done for the Nigerian version to deliver massive petrodollars like its Arab egbon. As views begin to pour in, you decide to find time to craft a fluffy treatise for what is clearly a big deal.

Depending on what exchange rate you use, Saudi Aramco made more profit in Q2 2022 than the 2022 budget of the Federal Government of Nigeria. For more premium tears, consider that at least 30% of the 2022 budget would be borrowed, so effectively, one company in the deserts made more profit in just over a month than the Nigerian Government’s likely revenue for this year. As expected, Nigerians see the Saudi Aramco news and increase ongoing criticism of their own “Aramco” by an octave, wondering if the scarf worn by the Arabs somehow covers two heads.

Image Credit: Forbes

To understand the issues, let’s pick up what is arguably the most popular framework used by management consultants.

It is really a very simple concept that says if you want to increase profits, you need to do either or both of increasing revenue and reducing cost. We can now do a simplified analysis of the Nigerian situation by taking each of the two drivers under a hand lens.

First off is revenue. For the petroleum industry, the more you produce, the more your potential revenues. Saudi Aramco produces around 12 million barrels of crude oil per day and has interests in functional refineries and petrochemical plants within and outside Saudi Arabia. In contrast, Nigeria barely produces 70 percent of its 1.8 million barrels OPEC quota per day and might be losing up to 300,000 barrels to principalities and powers each day the sun rises in the East. Depending on the applicable arrangement, the international and local oil companies would take their share of the daily production, plus some additional share as payback for whatever Nigeria might be owing from its quota of field development and production costs before Nigeria can count its chickens. This means that in effect, Nigeria may own less than 60% of the crude oil exported officially from its shores.

Industrial-scale theft also means Nigeria gets less revenue from gas exports as pipeline sabotage routinely leads to producers deferring production, which means Nigeria LNG cannot even get enough gas to meet customer demands at a time when Russia has opened the market. Then, apart from some tiny modular refineries, Nigeria arguably makes nothing extra from refining and petrochemicals. That is like having a job with low pay and nothing on the side.

On the cost side, the Saudis have the least production cost on earth (around $6 per barrel), which allows them to sell crude oil at a discount where necessary to retain market share, and to sell even under price regimes that would wreck most competitors. Conversely, it costs Nigeria around $20 to pull up one barrel of crude oil from reservoirs that litter the Niger Delta. The higher cost does not seem to be due to any geological disadvantages, but can be framed under “the Nigerian factor”, which makes oil producers spend more on security, community issues, ‘unnecessary’ expatriates, contracting processes, backroom payments, etc. With some producers now looking to use barges to move crude oil from oil fields to export terminals to evade industrialised thieves, and some requiring separation processes at export terminals after pumping a blend of water and crude oil through compromised pipelines, Nigeria’s unit production cost is likely to add a few extra dollars. To add more fire to the flames, Nigeria still has a petrol subsidy cost (covering much of West and Central Africa) that should be accounted for before considering profit, except we are interested in ‘accounting profit’ not cash in the bank.

So, we now return to the profit framework. If you have been following the simplistic analysis, you should see why a direct comparison between Saudi Aramco and Nigeria would not work. We simply have far less revenues and far more costs. I would not do any pontification on how to grow our revenues and reduce cost since this is implied above. And the people in charge likely know what to do if national interest someday outranks personal interest. Until then, we keep our eyes on the Saudis, hoping to one day be like them. After all, what is 48 billion dollars that we cannot declare as profit?

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