Saudi Arabia warned about challenges to its economy

Ahead of a multibillion-dollar bond issue, Saudi Arabia warned investors of the challenges that cheap oil poses to its economy and said it would take 70 years to sell all of its oil, prompting concerns that some of it could go unrealized.

The disclosures—included in the government’s bond prospectus issued on Tuesday—raise questions over the ability of the oil-dependent kingdom to quickly turn around its economic fortunes after more than two years of low crude prices.

The uncertainty over kingdom’s ability to quickly sell its oil assets could carry implications for the valuation of state-owned oil giant Saudi Arabian Oil Co., or Aramco, whose planned public listing in 2018 could raise tens of billions of dollars for the Saudi government.

On the one hand, the 70-year timeline suggests that Saudi Arabia is confident that it is sitting on a bounty of petroleum that will last for generations. On the other, investors are worried about fast-changing climate-change regulations and technological advancements that could render oil less valuable in the future.

Even if expected new climate-change regulations don’t come to pass, the International Energy Agency has predicted crude-oil demand growth will slow in the next three decades.

“Will Saudi Arabia ever be able to monetize all the 70 years of reserves? Scientific modeling says no,” saidAmy Myers Jaffe, executive director for Energy and Sustainability at the University of California, Davis.

The prolonged period of cheap crude has strained Saudi Arabia’s finances, prompting the government this year to announce ambitious economic overhauls aimed at reducing its dependence on fossil fuels, which were responsible for nearly three-quarters of government revenue last year. Spending on the kingdom’s vast bureaucracy and the war in Yemen is draining government coffers and swelling the budget deficit.

To shore up its finances, the kingdom is turning to the international bond market for the first time, set to issue debt that bankers expect will exceed $10 billion this month.

In the prospectus sent to investors, the Saudi government outlined the risks of investing in the likely bond issue in the current economic climate, saying it expected the budget deficit for 2016 to be 326 billion Saudi riyals ($87 billion), or 13.5% of nominal gross domestic product. The budget deficit swelled to a record $98 billion last year, or 16% of GDP, after the government posted a fiscal balance in 2013.

The kingdom’s proven oil reserves, still the bedrock of the economy, stood at 266.5 billion barrels—or 18% of the world’s total—at the end of 2015 and are likely to last another 70 years at the average production levels of about 10.2 million barrels a day last year, according to the prospectus. The kingdom’s proven gas reserves were 303.3 trillion cubic feet, the fourth-largest of any country.

The Saudi government warned potential investors about the valuation of the energy reserves which is a “subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner.”


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