Houthis, US Shale could hamper Saudi Aramco IPO success

Saudi Arabia has finally begun the process to execute the long-awaited Initial Public Offering (IPO) of State-run oil company, Aramco. Analysts believe that around half of the five percent of shares that the world’s biggest polluter intends to make public will first be offered on the Tadawul, the Kingdom’s local stock exchange. The idea is to inflate the value of the firm through local investment first, so that it appears appealing to foreign investors.

The IPO is a go, but not before Crown Prince Mohammed bin Salman had to settle for a reduced valuation. His $2 Trillion price tag on Aramco has been considered untenable. Realistically, it’s no more than $1.5 Trillion. So be it, MbS thought, and decided to relent. He didn’t really agree to it in so many words, but his silence and refusal to contradict the experts speak volumes.

The five percent stock sale would bring in approximately $100 billion. It’s a decent number to help him with his ambitious economic reform agenda. The Saudi royal family has always been heavily reliant on the oil giant. The Kingdom’s budget is largely made up of contributions from Aramco in the form of royalties, taxes and dividends. Clearly, the company is Saudi Arabia’s mother lode.

The road ahead is long and challenging, though. There are multiple factors that could potentially put a huge dent on the expected realization of $100 billion return from the IPO sale.

Serving vision 2030 or climate emergency

The entire objective behind floating the IPO is to redevelop the Kingdom. Saudi Arabia’s vision is not based on global climate considerations, but on how to steer the dwindling economy to a better place. It does not care about the seven and a half billion people who are adversely affected by Aramco and other such companies. Astonishingly, Aramco is behind nearly 5% of all global emissions over the last half century.

And why would any smart, futuristic company invest in Aramco?

The significance of oil is nearing its end. Analysts believe Aramco, which is truly a financial monster at present, will hardly have any value in another four to five decades. The world will turn to electric cars. Renewable fuels will in future include fuels that are synthesized from renewable energy sources, such as wind and solar. So even if one were to focus on returns on investment at the cost of dangers to planet earth, where is the benefit in the long-term?

Aramco and others, like Chevron, Gazprom, ExxonMobil, National Iranian Oil Company, have continued to expand their operations despite being aware of the industry’s devastating impact on the planet. It’s a moral failing on the part of our political system.

Fossil fuel companies have an important role to play in addressing the climate crisis. Investors, too, must wake up to this reality and contribute towards tackling global warming. It’s a question of short-term gain vs long-term pain and a number of large global asset managers are already steering clear of fossil fuel assets.

The looming Houthis

The Gulf region is a tinderbox right now.

On 14 September 2019, drones were used to attack the Aramco oil processing facilities at Abqaiq and Khurais in eastern Saudi Arabia. The Houthi movement in Yemen claimed responsibility, tying it to events surrounding the Saudi Arabian interference in the Yemeni Civil War that has seen tens of thousands of innocents killed.

The attack caused large fires at the refineries. Both facilities were shut down for repairs, cutting Saudi Arabia’s oil production by about half and causing massive destabilization of global financial markets.

The drone attacks have exposed the oil giant’s defenselessness in the flammable Middle East region. The Saudis patched up the damage and reportedly restored output in record time, but potential investors will want to see the accounts and details before even considering paying any kind of premium for its shares in an IPO.

Such strikes have instilled fears in investors. They believe there is every possibility of more attacks in future. The Houthis have no incentive to stop. The risk factors are simply too high.

US-China trade war

The trade war between the world’s two largest economies has dragged on for more than a year and ticked off financial markets. There are no signs of truce as neither party appears to be in a compromising mood.

The escalating trade war has led to a decrease in crude oil prices. Analysts fear this will impact global economic growth and cut demand for crude. Hardly any experts agree that MbS’ dream could be achieved with crude trading at around $60 per barrel.

The oil market is not favorable either. In September, the US Energy Information Administration (EIA) declared that the prospect for oil demand growth is 890,000 barrels per day for 2019, the first time the market would have plunged under 1 million barrels per day since 2011.

These are not approving conditions. In any case, international investors have been coming under intense pressure to strip its current holdings in fossil fuel producers like Aramco. Better still, just keep away from the sector altogether.

The Shale challenge

A shale boom has helped the United States become the world’s largest oil producer, ahead of Saudi Arabia and Russia. Producers are pumping without restraint, potentially posing grave danger to the Kingdom’s reform programme. It is nothing short of an existential threat.

According to consultancy Wood Mackenzie, approximately 4m barrels a day of US crude will likely reach export markets by the mid-2020s, up from just over 1m b/d in 2017. This will impact Saudi Arabia’s share in the crude market.

This, in return, undermines Aramco’s value. The competition from Shale is a clear and present danger that the Saudis can do very little about.

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