The Saudi government is set to earn an additional $1.9bn in royalties from state oil giant Saudi Aramco for every $1 increase in the price of crude above $70, according to Bank of America Merrill Lynch (BofAML) estimates.
The firm’s calculations are based on a royalty regime outlined by Bloomberg, which claimed to have obtained Aramco financial data ahead of a potential listing.
The news service said the data showed Aramco made nearly $34bn in net income in the first half of last year when Brent crude prices averaged $53 a barrel and was likely to make a significantly higher profit during the same period this year after the recent rally to more than $70.
It also detailed a royalty regime with the government set at 20 per cent on oil liquids production up to $70 a barrel, 40 per cent between $70 and $100 and 50 per cent in excess of $100.
Aramco has denied the figures are accurate.
BofAML said if the figures were correct they would support a further narrowing of the kingdom’s fiscal deficit and borrowing requirements.
“We estimate the central government will earn an annual additional royalty fee of $1.9bn (0.3 per cent of GDP) for every $1/bbl of oil prices above $70/bbl, based on the royalty regime described in the Bloomberg article,” it said.
The bank estimates Aramco brought an additional $4.5bn, or 1.4 per cent of GDP, to the budget in the first half of last year.
However, it also noted that there was a discrepancy between the government fiscal intake implied by the Bloomberg article and reported fiscal oil revenues, which could suggest off-sheet transfers to sovereign fund the Public Investment Fund (PIF).
The government should have received $71.4bn in combined tax, royalties and dividend in the first half of 2017 but only received $60bn, according to the figures.
“Annualised data exhibits similar dynamics, suggesting to us this is unlikely to be an accounting inconsistency. The PIF, as the potential holder of Saudi Aramco shares under Saudi reform plans, was likely the dividend’s recipient,” BofAML said.
“If so, it may have retained a sizeable portion as its budget transfers could be just $2bn in 1H17, as per fiscal data.”
The PIF is set to be the recipient of the proceeds when Aramco does eventually list.
The government has estimated a 5 per cent initial public offering on the local exchange and another international venue could raise $100bn and value the company at $2 trillion.
Some analysts suggests a $1bn-$1.5bn is a more realistic figure.