By Ellen Wald

Saudi Aramco held its earnings call for 2020 on Monday, and once again the company tried to highlight its success but instead it left serious questions about its unique relationship with the absolute monarchy that controls the kingdom of Saudi Arabia. Aramco’s net income for 2020 was $49 billion, meaning it did much better in the virus-stricken year than its competitors, most of whom lost money. Yet, there are two significant concerns for the future of Aramco that are unique to its position as the golden goose or gravy train or piggy bank of the world’s last remaining powerful absolute monarchy. Depending on how these two issues play out, Aramco could continue to be wildly successful or could falter in the future.

Saudi Aramco continued to be profitable in 2020 for two reasons. First, because of the natural blessings of the Saudi oil reserves, it is cheap to pump oil there. Aramco produces a barrel of oil at a cost of under $3 while its competitors face costs in the double digits. Some oil producers’ costs are estimated in the teens, but others—like the worst positioned U.S. shale producers—are thought to still be as high as around $60. Second, Aramco has a well-trained workforce and also a strong culture that it inherited from its American predecessor.

How Is the Saudi Oil Ministry’s Current Policy Impacting the Company?

Between 1995 and 2019, the post of Saudi oil minister had been held by a former Aramco CEO. As a result, Saudi Arabia’s oil policy always seemed to be crafted with an understanding of the company and its interests. This changed when King Salman appointed one of his own sons, Abdulaziz, as Oil Minster in 2019. Now, the Oil Ministry is run by a royal with an entirely different mindset and with different priorities, some of which do not seem consistent with maximizing profits.

Abdulaziz, in conjunction with the rest of OPEC+, has been pursuing a reactionary oil market strategy. Whereas OPEC used to meet twice a year to set oil policy and was often hesitant to change policy between meetings, the current expanded group of OPEC+ is now meeting monthly to react to changes in the oil market. This instability is bad for business.

Last March, amid rising concerns about demand due to the coronavirus and after Russia refused to cut production as Saudi’s Oil Ministry wanted, Saudi Arabia announced a production increase to 12 million barrels per day in April. This immediately crashed the oil market. At its lowest point, Brent fell below $20 as a result of this impetuous move. Moreover, the sudden production increase cost Aramco money and left the country with virtually no spare capacity. The lack of spare capacity embarrassed the state and left its pivotal industry vulnerable to outages and attacks. To remedy this, the kingdom needed to quickly order Aramco to prepare to increase its capacity to 13 million barrels per day, at significant cost to the company.

All in all, the April 2020 fiasco was a failure of the Saudi Oil Ministry that contributed to the global economic collapse. Still, Abdulaziz’s reactionary stances continue. In February 2021, he decided that Saudi Arabia would unilaterally cut 1 million barrels per day of production in an effort to stabilize markets without much support from the rest of OPEC+. Now, he is adjusting policy month to month, forcing Aramco to find ways to accommodate the company’s long-term supply contracts as well as plan production and transportation with little more than a few weeks of notice. Aramco’s investors should be concerned about what toll this reactionary behavior is having on Aramco’s books, its personnel, and the health of the crude oil reserves.

How Much Money Will Saudi Arabia Take from Aramco in Coming Years?

Until the second half of 2014, crude oil was selling for more than $100 per barrel. At the end of 2014, the price fell, and it has still not fully recovered. In 2020, demand dropped and the April fiasco sent oil prices spiraling downwards again. Oil businesses everywhere suffered, but for Saudi Arabia, low oil prices are a political problem, because more than 60% of the state’s budget is funded by Aramco.

Oil prices seem to be stabilizing above $60 and may rise even higher. The question for Aramco in 2021 must be: how much of any new revenues will be taken by the government? The government likely wants to make up for budget shortfalls and tightened budgets over the last few years. If the price of oil continues to rise, the government may desire a larger share of Aramco’s profits.

The company (under pressure from the king) guaranteed $75 billion in dividends annually to public shareholders when the company went public in December of 2019. The government gets its portion of that dividend only after the non-government shareholders are paid. Shortfalls mean the government loses out. The government also takes a royalty on barrels produced—which rises as the price of oil rises—as well as money in the form of fees, rents, income taxes and a special dividend. All of these payments except for the special dividend are set in formal paperwork and any changes to them would upset public shareholders.

A special dividend is one way the government will take more money from Aramco if it wants. Another way is to force Aramco to buy government owned assets, as it did last year when Aramco bought a stake in SABIC and paid the government $70 billion. It seems likely that the monarchy will insist on some form of additional payments if revenues at Aramco are high enough. Aramco will be on the hook for Saudi Arabia’s social, political and pet projects (like the Crown Prince’s favorite NEOM desert city project) at the expense of the company’s future.

If the price of oil stays high enough, Aramco probably won’t have a problem satisfying its public shareholders and filling the Saudi state’s coffers. But 2020’s financial challenges shouldn’t be dismissed as an outlier. Instead, it should be an example of the impact that unstable, reactionary oil policy can have on the company that provides for Saudi Arabia. Aramco is a wildly successful company blessed with the rights to unparalleled assets. Yet, Aramco is still controlled by an absolute monarch, and the king always gets his way.

Ellen R. Wald, Ph.D. is a widely cited analyst of the global energy industry. She is the president of Transversal Consulting which provides guidance on energy and geopolitics. Dr. Wald is the author of Saudi, Inc., detailing the history and relevance of the Saudi oil industry and Aramco.

A non-resident senior fellow at the Atlantic Council’s Global Energy Center, Dr. Wald earned a Ph.D. in energy history from Boston University and a Bachelor’s degree with honors from Princeton University. Her past academic appointments include positions at Boston University, the University of Cambridge, The American Heritage Center at the University of Wyoming and the University of Georgia.

She frequently provides analysis for print, television and radio news. Her weekly roundup of timely energy market expectations can be found on Thursday mornings at Investing.com and you can follow her on twitter @EnergzdEconomy