Author: Ricardo Perez

Chinese privately-controlled refiner Rongsheng Petrochemical (002493.SZ) and Saudi Aramco (2222.SE) are in talks for the Chinese company to buy a 50% stake in the Saudi company’s refining unit SASREF, a filing showed on Tuesday.

Rongsheng is also negotiating to sell Aramco an up to a 50% stake in its unit Ningbo Zhongjin Petrochemical Co, the Chinese company said in a statement to the Shenzhen stock exchange, citing a memorandum of understanding signed on Tuesday.

Saudi Aramco Jubail Refinery Company (SASREF), located in Jubail Industrial city, processes crude oil into petroleum products and has a production capacity of 305,000 barrels per day (bpd), its website shows.

If the SASREF stake acquisition happens, it would be the first investment by a private Chinese firm in a significant Saudi refining asset. State refining giant Sinopec Corp is so far the only Chinese company that owns a refinery stake in Saudi Arabia.

The companies also discussed expanding the Saudi refinery and upgrading its products.

The final investment decision is pending due diligence on Ningbo Zhongjin and SASREF by the two buyers respectively, Rongsheng Petrochemical said.

Aramco said in March it had agreed to acquire a 10% stake in Rongsheng, an investment attached to a 20-year crude oil supply deal with Rongsheng-controlled Zhejiang Petrochemical Corp. The deal closed in July at a valuation of $3.4 billion.

It has also been in talks to buy a 10% stake in Shandong Yulong Petrochemical Co, which is building a refinery complex that can process 400,000 barrels of crude a day in eastern China’s Shandong province.

In September, Aramco announced plans to become a strategic investor in another private Chinese refiner Jiangsu Shenghong Petrochemical, which operates a 320,000 bpd refinery and petrochemical complex in the eastern province of Jiangsu.

In a separate filing to the stock exchange, Rongsheng said it plans to invest 67.5 billion yuan ($9.46 billion) in new materials at its base Zhoushan in east China that makes products such as high-performing plastic material ethylene vinyl acetate (EVA)and polyolefin elastomers used in solar panels.

Reuters, Aizhu Chen, Andrew Hayley and Roxanne Liu, January 2, 2024

As the energy mix transitions to meet decarbonisation demands, natural gas and hydrogen are expected to play major roles.

The contribution of natural gas in terms of capacity and generation is crucial for the decarbonisation of the electricity sector. This is true as we move towards zero emissions and on reaching that target.

However, the degree to which natural gas can be effective depends on several vital factors including the design of relevant policies, the availability of technologies for carbon removal, the effectiveness in reducing methane emissions from upstream sources and the risks associated with transitioning to new technologies.

Hydrogen is equally important in the mix.

The New Climate Institute states, “Hydrogen is expected to play an important role in the decarbonisation effort to keep global warming at 1.5 degrees. Net-zero models foresee its share in final energy consumption ranging between 3-20% by 2050.

“For hydrogen technologies to fulfil this role, sizeable investments need to be made to reduce production costs and improve end-use applications.”

Elixir Energy Ltd (ASX:EXR) has a foot in both camps.

The company is focused on an exploration and appraisal program targeting natural gas in the form of coal-bed methane (CBM – known as coal seam gas or CSG in Australia) in the South Gobi, Mongolia and Queensland, Australia. It has also been developing the Gobi H2 green hydrogen project and solar project in Mongolia.

Elixir has built a strong foundation of multiple-level government and other energy stakeholder relationships that are now being used as a platform to grow cleaner energy options.

Elixir’s energy mix
Elixir is focused on three main projects close to important infrastructure in Mongolia and Queensland.

Its projects include:

The 100%-owned Nomgon IX Coal Bed Methane (CBM) Production Sharing Contract (PSC) Project in the South Gobi region of Mongolia.
The Grandis Gas Project in Queensland covers an area of 1,000 square kilometres located close to existing gas transmission infrastructure centred on the Wallumbilla gas hub. This hub is connected to domestic and international markets.

A Mongolian natural gas business run via wholly-owned subsidiary, GOH Clean Energy LLC, that pursues renewable energy ventures, including hydrogen and solar.

The projects – Grandis Gas Project
In August 2022, Elixir Energy expanded its portfolio by acquiring a 100% interest in the petroleum exploration permit ATP 2044 in Queensland.

This was achieved through the acquisition of the special-purpose vehicle EnergyCapture Pty Ltd, now rebranded as the Grandis Gas Project.

Spanning 1,000 square kilometres, the Grandis Gas Project is advantageously located near the Wallumbilla gas hub, which is connected to domestic and international markets. The site, part of the long-established Taroom Trough oil and gas province, benefits from easy road access to well locations.

The project could also benefit from market factors driving new rounds of drilling in the Taroom Trough, including by majors.

Elixir, along with these majors, hopes to capitalise on the growing demand/supply gap in the East Coast gas market, spare capacity in Queensland’s LNG plants and international buyers’ requirements for reliable supply – especially given the Ukraine War and other geopolitical factors.

The Taroom Trough has been described as an emerging energy super basin. Wood Mackenzie described the concept of the super basin as “basins with the co-location of upstream hydrocarbons, clean electricity, standalone and/or hub-scale CCS”.

Currently in the Taroom Trough are Shell, Santos (with whom Elixir recently executed a Data Sharing Agreement) and Omega.

Santos CEO Kevin Gallagher recently said of his company’s presence: “If the play works, then we believe there is multi-Tcf potential”.

A recent milestone for the Grandis project was drilling of the Daydream-2 appraisal well, which reached a total depth (TD) of 4,300 metres on December 7, 2023. This depth exceeded the initial plan by about 100 metres due to higher-than-expected gas levels and provides greater operational flexibility for future appraisal phases.

The drilling process encountered a rapid increase in well penetration rate associated with a gas influx, leading to an estimated 50,000 cubic feet of gas being flared. Following standard drilling practices, this influx was safely managed, and the well was drilled to its final depth.

This discovery, deep within the well, indicates potential for substantial reservoirs, though further work is needed to fully understand its implications.

Nomgon CBM PSC
Elixir’s most mature asset is the Nomgon IX Coal Bed Methane (CBM) Production Sharing Contract (PSC) project in Mongolia’s South Gobi region.

The 100%-owned foundation asset is located on the Mongolian/Chinese border with excellent infrastructure, mines and planned pipelines.

The project is being managed by a highly experienced CSG team and is a first mover in taking Australia’s industry-leading skills to Mongolia.

Exploration started in 2019 and the first CBM discovery was made in 2020. The Production Pilot Project will continue through 2024.

Elixir aims to dewater coals and flow gas from the Nomgon CBM discovery; provide proof of concept for commercial development; conduct its first extended production test in Mongolia and continue to grow cooperation with other operators in the region.

Varied flow rates are typical of a first pilot in the region and measured up to 200,000 cubic feet per day.

Water and gas production will continue into 2024.

Gobi H2
Elixir’s green hydrogen project, Gobi H2, in the Gobi region of southern Mongolia, represents a significant venture into renewable energy, specifically hydrogen produced from renewable electrical sources.

Leveraging its extensive experience in Mongolia’s energy sector and robust stakeholder engagement with governments at various levels, communities, and customers, Elixir has laid a strong foundation for the development of the Gobi H2 business.

The project’s potential was highlighted in mid-2022 when Elixir announced the signing of an MoU with Japan’s SB Energy Corp, which later became Terras Energy following a takeover by Toyota Tsusho. This partnership underscored the viability and strength of the Gobi H2 concept.

To further solidify this venture, Elixir commissioned a pre-feasibility study (PFS) from the global consulting firm AECOM earlier in the year. The positive and encouraging results of this confidential PFS led to a significant advancement in February 2023.

Elixir and SB Energy expanded upon their initial MoU by executing a term sheet. This crucial document set forth an exclusive framework for both parties to work towards establishing a binding 50/50 joint venture later in the year.

The project’s relevance and potential are further amplified by the development of green hydrogen infrastructure projects in neighbouring China. These include the creation of a regional hydrogen pipeline transmission network.

The strategic location of the Gobi H2 project positions it to benefit from these developments, as the network could be expanded northwards to harness the Gobi region’s exceptional renewable resources. This expansion presents a unique opportunity for Elixir’s Gobi H2 project to play a pivotal role in the broader regional green energy landscape.

Elixir Energy, Jonathan Jackson, January 4, 2024

After enduring a torrid season for much of the second half of 2023 due to falling commodity prices, the energy sector is looking to close out the year on a high after a long-awaited Fed pivot finally arrived. Not surprisingly, Wall Street and investors have started peering into their crystal balls to try and divine what the new year holds in store for energy markets, with some predicting we shall see more of the same while others are saying to expect an oil price rebound.

Investors will also be watching closely to see if another corner of the market will finally sputter back to life: dealmaking. The value of global oil and gas mergers and acquisitions (M&A) has declined to only 3% of the industry’s market capitalization per annum, down from a peak of 10% in 2014. Thankfully, there’s a glimmer of hope: the U.S. oil patch recorded a small 3% Y/Y increase in the third quarter with 105 M&A deals announced, worth a total value of $47bn. Interestingly, the global energy sector has suddenly come alive with all manner of deals from M&A and asset sale/purchase deals to supply deals being announced in the final month of the year. Here are some notable ones.

Tokyo Gas To Acquire Rockcliff Energy
Japan’s largest gas supplier Tokyo Gashas entered an agreement to acquire privately held Haynesville Shale gas producer Rockcliff Energyfor $2.7 billion in an all-share deal. The agreement comes nearly a year after Tokyo Gas’ partially owned Houston-based subsidiary TG Natural Resources (TGNR) and Rockcliff were reportedly in advanced talks on a merger that was at the time reported to be worth ~ $4.6 billion. The deal fell apart after US natural gas prices collapsed to $2 per million Btu from a summer 2022 peak around $9/MMBtu.

TGNR has been active in the Haynesville after acquiring Shell Plc’s (NYSE:SHEL) assets in the Texas/Louisiana play in 2019. Haynesville has seen little M&A action over the past two years amid volatile gas prices.

Brookfield To Sell Renewable Assets
Canada’s Brookfield Corp. (BN.TO) has announced plans to sell renewable assets owned by its company Saeta Yieldworth 1.5 billion euros ($1.64 billion) including debt. The assets to be sold are wind and photovoltaic plants located in Spain and Portugal. Saeta owns 28 wind farms and 10 photovoltaic parks; however, its seven solar thermal plants are not part of the sale process.

Spain and Portugal’s abundant solar and wind resources have made them a hotspot for both domestic and foreign firms looking to leverage the growing demand for renewable energy. This has sparked a flurry of renewable energy deals in the region with the broader global trend towards sustainable investments.

Carlos Slim Bets on Mexico’s Mega Oil Projects
Mexican billionaire Carlos Slim’s Grupo Carso SAB has agreed to acquire PetroBal SAPI’s stake in two oil fields in Campeche in southern Mexico for $530 million, expanding its bet on energy production. Under the deal, Grupo Carso will take a 50% stake in the Ichalkil and Pokoch oil fields, the company has revealed in a statement. According to the company, the fields produce about 16,350 barrels of crude oil equivalent per day. Carso shares have jumped to record highs of 181.79 pesos after the deal was announced.

Mexican President Andres Manuel Lopez Obrador has welcomed the deal despite earlier being critical of energy reforms that opened exploration to private investment, “Why do I celebrate this? Because it stays in the hands of Mexicans and I’m sure that they’re going to invest to extract crude. I consider that to be good news,” the president said at his daily news conference.

Obradors’ nationalist policies have seen the Mexican government become increasingly hostile to foreign companies. Earlier in the year, giant oil and commodities trading firm, Trafigura, was forced to scale back its oil trading business in Mexico thanks to shrinking margins. Trafigura has recorded margin compression due to fuel subsidies by the Mexican government.

Adnoc Signs LNG Supply Deal With ENN Natural Gas

Adnoc has just signed a 15-year agreement with ENN LNG, a subsidiary of China’s ENN Natural Gas, for the delivery of at least a million metric tonnes a year of LNG. The super-chilled fuel will primarily be sourced from Adnoc’s Ruwais LNG project in Abu Dhabi, with deliveries expected to kick off in 2028. According to Adnoc, the Ruwais plant will be the first LNG project in the region to run on clean power, making it “one of the lowest carbon-intensity LNG facilities in the world”, according to Adnoc.

As one of the largest private energy companies in China, ENN has been signing multiple long-term supply deals. Back in June, Cheniere signed a long-term LNG sale and purchase agreement with ENN Energy Holdings. Under terms of the deal, ENN will purchase ~1.8M metric tons/year of LNG on a free-on-board basis at Henry Hub prices for a 20-year term, with deliveries to commence mid-2026 ramping up to 0.9 million tonne per annum (mtpa) in 2027.

Egypt, Saudi Arabia Sign $4 bn Green Hydrogen Deal
Egypt has reached an agreement with Saudi Arabia’s ACWA Power to develop a green hydrogen project worth $4 billion, the Egyptian government has revealed. Egypt’s minister of Electricity, Dr. Mohamed Shaker, has revealed that an action plan will be implemented shortly for the first phase of the green hydrogen project. The initial phase will have a production capacity of up to 600,000 tons per year of green ammonia with total investments expected to exceed $4 billion.

Three years ago, Aramco made the world’s first blue ammonia shipment from Saudi Arabia to Japan. Japan is looking for dependable suppliers of hydrogen fuel with its mountainous terrain and extreme seismic activity rendering it unsuitable for the development of sustainable renewable energy.

Two years ago, Saudi Aramco announced that it had abandoned former plans to develop its LNG sector in favor of hydrogen. The company said that the kingdom’s immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants then convert the remainder into hydrogen.

Oilprice.com, Alex Kimani, January 4, 2024

Last week Robert Rapier pointed out in a TikTok video that the U.S. is poised to set a new oil production record. In response, someone took exception to my claim by stating that he works in the industry, and drilling rigs are stacking up.

It is correct that the rig count has fallen. According to data from Baker HughesBHI, the number of rigs drilling for oil and gas has fallen by about 20% in the past year.

This decline reversed a steady increase that began after the rig count bottomed out below 300 in the early stages of the Covid-19 pandemic in 2020. The rig count recovered back to nearly 800 rigs by the end of 2022 but has since declined back to about 620.

Nevertheless, U.S. oil and natural gas production are both poised to set new annual production records, after monthly production has risen steadily all year. How can that be if the rig count is falling?

Keep in mind that the rig count is a measure of rigs that are currently drilling for oil and gas. In many cases, the wells are drilled, but they aren’t completed. These are called drilled but uncompleted wells (DUCs), and that inventory is tracked by the Energy Information Administration (EIA) here.

What we can see is that since last December, the inventory of DUCs has declined from 5,300 to about 4,500. That reflects about 800 wells that started producing oil and gas, but that would not have been impacted by the falling rig count.

In addition, there are continuous technology improvements that have enabled a higher recovery of oil and gas per well. The biggest example of that can be seen in the natural gas rig count.

Back in 2007, there were around 1,500 rigs drilling for natural gas. In 2009, that fell below 1,000. In 2012, it went below 500, and it fell below 100 in 2016. Today it stands at about 120.

Yet, during the time, U.S. natural gas production increased by 80%.

It’s a similar story for oil. In 2014 there were 1,600 rigs drilling for oil. Today, there are 620, but oil production is 50% higher than it was in 2014.

Thus, using rig counts as a proxy for natural gas or oil production would have grossly misled you. Don’t confuse drilling with production.

OilPrice.com, Robert Rapier, January 4, 2024

The oil and gas industry went on a $250 billion buying spree in 2023, taking advantage of companies’ high stock prices to secure lower-cost reserves and prepare for the next upheaval in an industry likely to undergo more consolidation.

A surge in oil demand as world economies shook off the pandemic downturn has stoked acquirers’ enthusiasm. Exxon Mobil, Chevron Corp and Occidental Petroleum made acquisitions worth a total of $135 billion in 2023. ConocoPhillips completed two big deals in the last two years.

The grand prize in this dealmaking is the largest U.S. shale-oil field, the Permian Basin in west Texas and New Mexico. The four companies are now positioned to control about 58% of future production there.

Each aims to pump at least 1 million barrels per day (bpd) from the oilfield, which is expected to produce 7 million bpd by the end of 2027.

And more transactions are on the horizon. Three-quarters of energy executives polled in December by the Federal Reserve Bank of Dallas expected more oil deals worth $50 billion or more to pop up in the next two years.

Endeavor Energy Partners, the largest privately held Permian shale producer, is exploring a sale that could further concentrate U.S. shale oil output.

“Consolidation is actively changing the landscape,” said Ryan Duman, director of Americas upstream research at energy consultancy Wood Mackenzie. “A select few companies will determine whether (production) growth will be strong, more stable or somewhere in between.”

The consolidation will have spillover effects on oilfield servicers and pipeline operators. The companies that provide drilling, hydraulic fracturing and sand and transport oil and gas to market are entering an era of fewer customers wielding more power over pricing.

“Consolidation is good for producers but doesn’t help service companies at all. It will squeeze their margins as existing contracts are renegotiated,” said an executive with a U.S. oil producer who declined to be identified because he was not authorized to speak publicly.

Pipeline operators face their own consolidation wave with fewer new oil and gas pipes being approved and built, said Rob Wilson of pipeline experts East Daley Analytics.

Expansions to existing lines out of the Permian Basin will provide some relief, but by mid-2025 pipeline capacity from the Permian will be 90% full, estimates East Daley.

Hanging on to Cash
The latest acquisitions illustrate oil companies’ quest for untapped and lower-cost oil and gas reserves.

Among the major deals of 2023 was Exxon’s $59.5 billion bid for Pioneer Natural Resources and purchase of Denbury Inc for $4.9 billion. Chevron offered $53 billion for Hess and bought oil rival PDC Energy for $6.2 billion. Occidental will pay $12 billion for CrownRock.

Helped by their strong share prices, most of the year’s major acquisitions were stock swaps, not the big cash outlays that would jeopardize buyers’ balance sheets if oil prices were to fall as they did in 2016 and 2020. Exxon, for example, is sitting on about $33 billion in cash, more than six times the amount it held four years ago.

Andre Gan, a partner at Wong & Partners law firm and an M&A expert, said fossil fuels were attracting new investment again.

Rising interest rates in 2023 made paying for acquisitions with stock more attractive to investors than funding new renewable energy projects with cash. Offshore wind projects in the U.S. and France were canceled due to increasing interest rates and supply chain costs.

Producers have also recognized that the U.S. move toward renewable fuels, electric vehicles and greater energy efficiency will cut fossil fuel consumption and squeeze companies with high production costs.

Oil demand globally rose about 2.3 million barrels per day (mbpd) in each of the last two years, to 101.7 mbpd. That increase tightened global stocks, helping bolster prices as OPEC and allies kept output constrained.

Wood Mackenzie expects oil output to rise an average of about 250,000 bpd annually over the next five years, half the level of the prior five years as big oil companies focus on boosting cash flow rather than production. Growing slowly helps companies with untapped reserves control expenses and boost margins.

Consolidation has prompted U.S. antitrust regulators to ask Exxon and Chevron for additional information on their purchases, pushing back deal closings. Both predict they will receive approval, pointing to the size of U.S. oil market and aggressive small rivals as signs that competition will remain robust.

The emergence of fewer, bigger oil producers focused on extending the longevity of their fossil fuel businesses may put the companies in greater tension with governments prioritizing a shift to clean energy sources.

Meanwhile, global oil prices are expected to be largely stable in 2024 after averaging about $83 per barrel in 2023, down from $99 in 2022. Analysts see oil in 2024 trading between $70 per barrel and $90, above the $64 a barrel average in 2019.

Reuters, Gary Mcwilliams, January 4, 2024

Low-emissions ammonia presents an opportunity for Australia to build a parallel export business mirroring the early rise of the liquefied natural gas (LNG) sector.

Similarly to what LNG did in the past, low-emissions ammonia allows Australia to supply a new, decarbonising energy source to critical export markets in Asia, who already have a well-established strategic relationship with Australia and see the country as a preferred supplier.

Australia is already the largest LNG supplier in the world with 87.6 million tonnes per annum of export capacity, supporting export revenue of $92.8 billion in 2022. The country already boasts the necessary infrastructure, relationships, technical expertise and political support.

Many companies are looking at electrolysis-based hydrogen and ammonia projects, but these face cost, schedule, and technology challenges. Companies recognising the early-mover potential for low-emissions ammonia from gas with carbon capture and storage (CCS) include Woodside (pursuing a project near Perth) and Mitsui and Wesfarmers (pursuing a project in the mid-west).

One company that recognised this opportunity early and has made significant progress is ASX-listed Hexagon Energy Materials though its WAH2 low-emissions ammonia project in the Pilbara region of Western Australia.

The WAH2 project aims to convert natural gas into ammonia using proven technology, capture the associated CO2 for sequestration at a nearby third-party facility, and export the product via existing facilities at the nearby Port of Dampier.

Hexagon describes WAH2 as one of only five proposed low-emissions ammonia export projects in Australia that use natural gas feedstock and CCS – and the only one that has the advantages of access to an existing deepwater port and multiple, mature CCS projects nearby.

The company is working towards entry into front-end engineering and design (FEED) in mid-2024 and project sanction in 2025. First production is anticipated in 2028, in good time to contribute to 2030 decarbonisation targets.

Australian Resource and Management, January 3, 2024

In its ‘Short-Term Energy Outlook’, the US Energy Information Administration (EIA) forecasts the lowest annual petroleum consumption in Japan in 2024 since at least 1980, in part due to its ageing and declining population. Japan’s reduced consumption is already affecting its refining industry.

Japanese refiner ENEOS permanently closed a 120 000 bpd refinery in western Japan in mid-October 2023, and another company, Idemitsu Kosan, plans to close a 120 000 bpd refinery in March 2024. These closures represent 7% of the country’s refinery capacity.

The EIA forecasts consumption of petroleum products in Japan will decline by 3% between 2023 and 2024 to 3.3 million bpd. Japan’s petroleum consumption declined by an average 2% per year through 2022 from its peak of 5.7 million bpd in 1996, largely because of demographic and economic changes. The oil intensity of Japan’s economy, measured as barrels of oil consumed per US$1000 of GDP, has been declining.

Japan’s population peaked in 2009, and the country has seen some of the slowest economic growth among OECD countries since then. In addition, the share of Japan’s population aged 65 and older was 30% as of 2022, compared with 21% in the EU, 17% in the US, and 14% in China, according to the World Bank.

Japan’s refineries were built mainly to serve its domestic fuel needs, and the country has trouble competing in international markets. These refineries are smaller and less complex than newer refineries in Asia, including those in China, South Korea, and India. Complexity refers to a refinery’s secondary processing capacity, such as hydrocracking and coking, which upgrades low-value heavy fuel oil into valuable transportation fuels. More complex refineries can produce more high-value products from the crude oil they process.

Less complex refiners, like those in Japan, also process lighter and sweeter grades of crude oil, which are more expensive than heavier and more sour grades. Higher yields of lower-value products, combined with using more expensive crude oils, makes refiners in Japan less profitable and less competitive in world markets. Complex refinery margins in Asia can be 30% – 50% higher than simple refinery margins.

In the EIA’s recent ‘International Energy Outlook’, it projects Japan’s petroleum consumption will continue to decline beyond 2024, suggesting that refiners in Japan will face additional competitive pressures.

MRC Hub, January 2, 2024

QatarEnergy has entered a five-year crude oil supply agreement with Shell International Eastern Trading Company, Singapore (Shell).

The deal, commencing in January 2024, involves the annual supply of up to 18 million barrels of Qatar Land and Qatar Marine crude oils to Shell.

The agreement builds on QatarEnergy’s long-standing strategic partnership with Shell. The oil and gas companies have several shared investments in the energy industry both in Qatar and across the globe.
These joint ventures include QatarEnergy liquified natural gas (LNG) projects, the Pearl GTL Plant, and various other collaborative investments.

QatarEnergy president and CEO Saad Sherida Al-Kaabi said: “We are delighted to sign our first ever five-year crude sales agreement. This agreement further strengthens QatarEnergy’s relationship with Shell, which is not only a reliable crude oil off-taker, but also a major customer and a strategic partner of QatarEnergy.

“We look forward to building on our historic relationship and hope we achieve greater success with Shell.”

In October this year, the Qatar government-backed company signed long-term LNG supply deals with Shell in the Netherlands.

Starting in 2026, QatarEnergy will deliver up to 3.5 million tonnes per annum of LNG to the Gate LNG terminal in the Port of Rotterdam for a period of 27 years. The Middle East energy major has signed similar LNG supply deals with several oil and gas companies.

Some of these include China Petrochemical Corporation, France’s TotalEnergies, Italy-based Eni.

Rigzone, Rocky Teodoro January 02, 2024

Throngs of consultants wearing Western attire have become a common sight in the lobbies of Riyadh’s plushest hotels as Crown Prince Mohammed Bin Salman embarks on a multi-trillion dollar plan to wean Saudi Arabia off oil. In recent months they’ve been joined by another cohort of besuited individuals: fund managers, keen to get an early foothold in the next big emerging-market growth story.

The kingdom, which only joined the MSCI Emerging Markets index in 2019, has historically attracted very little from the billions of dollars that stock investors allocate to global stock markets. Fund managers were put off by the lack of liquidity in the Tadawul All Share Index, which limits full foreigner ownership, and by the nation’s over-reliance on fossil fuels.

Now, with Russia sanctioned out of the benchmark index and China losing its allure due to an economic slowdown, some investors are starting to view Saudi Arabia in a new light, attracted by a steady stream of reforms designed to encourage more foreign investment and the vast sums being thrown at MBS’s Vision 2030 transition plan. The increased interest has helped the Tadawul rally more than 11% this year, more than double the return of the MSCI benchmark.

“Saudi Arabia now feels like China in the noughties,” said Fergus Argyle, who helped launch a new emerging-markets fund for EFG New Capital two years ago that has an 8% allocation to the Saudi stock index.

Argyle says Saudi Arabia is still “very underrepresented” in investor portfolios even after the Tadawul index attracted net foreign inflows of over $3 billion this year. That’s a fraction of the $24 billion that poured in when the index joined the MSCI benchmark four years ago, but analysts say the volume will grow as reforms get under way.

The Saudi bourse is the biggest and most liquid in the Middle East and is home to the world’s largest oil producer – Saudi Aramco – after it raised almost $30 billion in a 2019 share sale. Over the past few years the exchange, traditionally dominated by banks and petrochemicals firms, has added large healthcare, retail and power companies. Low-cost airline Flynas is weighing a listing as soon as next year. The Tadawul trades at 12-month forward price-to-earnings ratio of 17.5 times, giving it a premium of over 50% to the MSCI Emerging Markets Index.

Saudi’s weighting in the MSCI Emerging Markets index has climbed to nearly 4.1% from about 1.5% when it was originally included in the benchmark as foreign interest grows and Saudi encourages more companies to go public. Saudi companies have raised $11.5 billion from listings since the start of 2022 at a time when initial public offerings have slowed elsewhere.

Passive investors could deliver inflows of $7.3 billion if Saudi Arabia lifts the level of maximum allowed foreign ownership to 100% from just under half currently for most stocks, according to Elia Alchaar, associate analyst at Arqaam Capital. That could also lead to a “substantial increase” in its weight on emerging-market indexes, he said.

Rising interest in Saudi Arabia mirrors the decline in foreign participation in the Chinese market. While India has emerged as one major beneficiary of the shift, Russia’s absence from the index means investors don’t have many other alternatives. The choice will become even more limited if South Korea is upgraded to developed-market indexes, which could happen at some point next year.

“We do see Asian institutional investors showing more interest in seeing and meeting companies from the Middle East because as an EM fund, you have to look at diversifying your investments,” said Harish Raman, Head of Asia ECM Syndicate at Citigroup Inc. “Latin America is relatively less interesting for Asian investors but they are seriously considering the Middle East.”

Political Risk
It’s not always easy to make an inroad though. The market is still geared toward locals and many of this year’s IPOs, including MBC Group’s $222 million listing and ADES Holding Co.’s $1.2 billion float, have been heavily oversubscribed.

“A number of the stocks that have IPOed have not been sold at all to foreign investors,” said Dominic Bokor-Ingram, a fund manager at Fiera Capital, whose bullish stance on Saudi helped him outperform 99% of peers this year. “There are three or four IPOs that we’ve been involved in in Saudi where we’ve been the only foreign investor.”

Geopolitical uncertainty is another potential challenge. The gruesome murder of Saudi dissident journalist Jamal Khashoggi in 2018 overshadowed the the Tadawul index’s promotion to the emerging-market benchmark. Now it’s the Israel-Hamas war that’s causing jitters. The index erased all of its 2023 gains in October as the fallout rippled across the Middle East, before rebounding as investors judged that the conflict would probably remain contained.

There are 147 emerging-market funds with over $127 billion of assets under management that have never invested in Saudi Arabia, according to Copley Funds Research. But in a sign portfolio managers are following up research trips with higher allocations, the portions of active EM funds investing in the kingdom has more than doubled since the start of the year, the research shows.

Daniel Difrancesco, a US-based portfolio manager and analyst at BNP Paribas Asset Management, recently visited Riyadh to meet with some listed Saudi companies and is now considering increasing his investments.

“We are currently underweight, but continue to identify opportunities to deploy capital,” Difrancesco said. “Visiting the country to meet with local business managers and witness the social and economic transformation that is underway has made us more constructive on the return potential for Saudi equities.”

Bloomberg, Farah Elbahrawy, December 26, 2023

An auction for drilling rights in the Gulf of Mexico, spearheaded by the Biden administration, has successfully concluded, generating US$382 million in revenues.

Oil firms such as Shell PLC (LSE:SHEL, NYSE:SHEL), Hess Corp. (NYSE:HES), BP PLC (LSE:BP.) and Chevron Corporation (NYSE:CVX) joined 22 other participants in an auction for secured offshore acreage; in what is expected to be the last auction until 2025.

These sales marked the highest total from a federal offshore oil and gas lease sale since 2015.

Anadarko, the US oil group, secured the highest bid, over US$25 million, for a block in the deepwater Mississippi Canyon area.

This auction is likely the final opportunity for oil and gas firms to bid on Gulf of Mexico acreage until 2025, due to the administration’s five-year schedule, which features a historically low number of planned lease auctions.

Industry advocates emphasised the Gulf of Mexico’s economic importance and urged Congress to mandate more leasing.

However, environmental groups criticised the prioritisation of profits over environmental concerns.

Over 72.7 million acres on the Outer Continental Shelf were part of the sale, including 6 million acres initially intended for withdrawal to protect the habitat of the Rice’s whale.

Proactive Investors, Leo Greco, December 21, 2023