Saudis Quietly Raised Aramco Royalties by Switching Benchmark to Brent Oil

(Bloomberg) -- Saudi Arabia quietly raised taxation on Aramco by switching the oil benchmark used to calculate royalties, from the actual value of the kingdom’s crude to the more expensive benchmark Brent.

The switch, made in 2017 but revealed this week in the prospectus for Saudi Arabian Oil Co.’s first ever international bond, shows how the kingdom is squeezing its oil company for money even after lowering other taxes. The change could add nearly 7 percent to the price used to determine the royalty, according to Bloomberg News calculations based on the prospectus. It also exposes Aramco to a significant new risk, related to the price difference between Saudi crude and Brent, which over the past decade has been extremely volatile.

Aramco declined to comment on the switch. The company said the most significant change to its fiscal regime was publicly announced in 2017, when its income tax was lowered to 50 percent from 85 percent.

"An effective royalty rate will be applied to production value and will be based each month on the average daily price quotes for Brent crude on the Intercontinental Exchange (or any successor exchange) for each day during such period," according to the prospectus.

Aramco currently sells its flagship Arab Light crude at a discount of nearly $2 a barrel to Brent in Europe. In late 2016, the gap was as wide as $5 and it set a record of more than $7 in 2005.

The company said in its prospectus that in December 2017 -- a reference point used throughout the document -- it realized an average global price for its five export crude grades of $60.76 a barrel, compared with a Brent price of $64.37 a barrel.

The changes to the royalty scheme were applied in 2017, but weren’t publicly announced. Bloomberg News reported most of the changes last year, including a sliding royalty system that increases taxation as the oil price rises. At the time, Aramco said Bloomberg’s reporting on its financial performance and fiscal regime was inaccurate, but those changes were confirmed in the bond prospectus released on Monday.

Since January 2017, Aramco’s royalties have been "calculated based on a progressive scheme" linked to oil prices, replacing the old flat rate of 20 percent. The new system has a marginal rate of 20 percent of revenue for oil prices up to $70 a barrel, 40 percent between $70 and $100, and 50 percent when crude’s above $100.

Saudi Arabia’s economy relies heavily on oil. While Crown Prince Mohammed Bin Salman is implementing an economic program, dubbed Vision 2030, intended to reduce dependence on hydrocarbons, the government still gets most of its revenue from petroleum exports. According to the prospectus, the oil sector accounted for more than 60 percent of the Saudi government revenue in 2017.

"The government is expected to continue to rely on royalties, taxes and other income from the hydrocarbon industry for a significant portion of its revenue," Aramco said.

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