Saudi Arabia’s long-awaited bid to raise investment dollars through an initial public offering (IPO) for its massive, state-owned oil company, Saudi Aramco, has produced two equal and opposite results: the deal has taken its place as the biggest IPO in history and pegged the company’s value at about US$1.7 trillion, while simultaneously pointing to the fragility of the global oil and gas industry.
The basic numbers are a bit mind-boggling: CNN Business says the world’s most colossal fossil sold three billion shares at a price of 32 riyals, or US$8.53, for a total take of $25.6 billion on 1.5% of the company’s 200 billion shares. Aramco could yet release another round of shares that would drive the sale up to $29.4 billion.
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By establishing a price per share for Aramco—which analysts place at the high end of its market valuation—the deal sets the company’s total worth at US$1.7 trillion (200 billion shares x $8.53).
At first glance, it’s hard to look at such a massive investment deal as a partial failure—or a harbinger of the industry’s mounting decline. But that’s the takeaway from multiple news reports. “While setting a new record, the IPO still falls well short of Saudi Arabia’s initial lofty expectations,” CNN writes.
Saudi Crown Prince Mohammed bin Salman has been talking up the IPO since 2016, initially planning to sell off 5% of Aramco’s shares and raise as much as $100 billion to finance an ambitious plan to decarbonize his country and diversify its economy. “The aspiration was clear,” The Economist recalls. “First, list a portion of Saudi Aramco, a state-owned oil giant that is the world’s most profitable company. Then, use the windfall to diversify Saudi Arabia’s economy.” The UK-based business publication says bin Salman “expected investors to swoon over the company’s rich reserves, low costs, and $111 billion in annual net income.”
“If you want to invest in Exxon, Chevron, BP,” one of the bankers backing the IPO said in October, “why don’t you just go and buy Aramco?”
But “it turns out that many investors would rather not,” The Economist writes.
Before the IPO was even floated, CNN recalls, Saudi Arabia had to withdraw it in response to concerns about the $2-trillion company valuation bin Salman was looking for—not to mention legal complications in the United States, and international revulsion at the brutal torture and murder of journalist Jamal Khashoggi at the hands of Saudi agents. By the time the deal was revived earlier this year, “international investors were far less convinced about buying Aramco stock. Among their concerns: Low oil prices, the climate crisis, and geopolitical risks.”
In the end, CNN says the Saudis lured investors by promising an annual dividend of $75 billion through 2024, giving the share sale the feel of a bond offering with less risk and lower returns. With that, “the kingdom is expected to have relied heavily on rich Saudis, sympathetic sovereign wealth funds, and even major customers such as China signing up for shares.” The Guardian adds that “among local investors, demand for Aramco shares was almost three times oversubscribed after the Saudi government encouraged Middle Eastern investors and wealthy Saudi families to support the IPO.”
Writing for The Tyee in late November, Vancouver freelancer Mitchell Anderson pointed to the IPO as a sign that investment capital “is moving away from fossil fuels, and regions that have let their economies become dependent on oil revenues are showing signs of authoritarian abuses of power. (Sound familiar Alberta?)” The scaled-back offering may have shattered past records for IPOs, he noted—but in the end, the $25 billion it raised was “enough to cover the Saudi government deficit for about six months,” far short of bin Salman’s hope of funding a green transition from oil revenue. [Sound familiar, Trudeau and Trans Mountain?—Ed.]
Anderson painted a bigger picture that is disturbing for Saudi Arabia, and speaks volumes for the future of fossil fuel investment—in the Middle East, Canada, or anywhere else.
“The precarious balance in Saudi society is maintained through lavish government spending that has relied on oil prices of $85 a barrel to drive revenues,” he wrote. But world prices haven’t hit that level since the oil price crash began in 2014, and “Saudi Arabia is running deficits of around $60 billion a year to maintain services—and head off unrest.”
“It’s a fact that Saudi Arabia is gradually running out of money,” former CIA Director David Petraeus told CNBC last month. And “if Saudi Arabia is in trouble,” Anderson added, “the rest of the oil-producing world should probably start to panic.”
Canada’s former ambassador to Saudi Arabia, Dennis Horak, traced the high stakes for the Saudi regime in an early November opinion piece for the Globe and Mail. “While Saudi Arabia has launched a far-reaching program of important social and economic reforms under its Vision 2030 program (of which the Aramco sale is a key part), the process of transforming the economy and making it less dependent on oil and imported foreign labour has created short-term hardships for millions of ordinary Saudis,” he wrote. “The Aramco sale will provide needed funds to help with the transition. The benefits will take time to fully realize, raising internal pressures in the short run. While Saudi citizens can be bought off for a time, their patience for change is not without limits.”
Horak’s analysis and Anderson’s post for The Tyee both showed up before the IPO results were known—but after Aramco scaled back the share offering, presumably after taking the pulse of global markets and getting a sense of how many shares would sell. Even though “oil is a cyclical business”, Anderson pointed to investors’ “more existential” reasons to be skeptical about buying in.
“Countries whose economies are exclusively reliant on oil and gas reserves are facing serious challenges,” the International Energy Agency warned, in a World Energy Outlook that took well-deserved criticism for downplaying the growth potential of renewable energy and energy efficiency and failing to properly model a 1.5°C pathway, but still called for global oil demand growth to “slow to a crawl” by 2025.
“That should be particularly worrying for Alberta,” Anderson wrote. “A recent report from the University of Calgary noted that despite Premier Jason Kenney’s corporate tax cuts and promises to restore the ‘Alberta Advantage’, the province has always relied on high oil prices for prosperity. And structural changes in the sector means the days of expensive oil and gas are over.”
Which means “the Wexit Albertans aspiring to create their own petro-state are doing so at the very moment in history when that would be a terrible idea,” Anderson added. “Before Alberta nationalists busy themselves designing new flags and passports, it would be wise to notice signs elsewhere that the oil and gas party is winding down.”
Explicitly, that decline is driven largely by concerns about the climate crisis, and the greenhouse gas impact of a product that fries the atmosphere when used as directed.
“It is a bad time to buy into an oil company whose major asset is reserves in the ground that can sustain current production levels of the carbon-laden fossil fuel until near the end of the century,” Bloomberg wrote in a mid-November news analysis. At a time when “oil is facing unprecedented headwinds,” Saudi Aramco “may boast that it holds the rights to the largest reserves of crude with the lowest carbon footprint to extract, but that rather misses the point. The climate concerns around oil are not about the carbon cost of getting it out of the ground, but of what is done with it afterward.”
In mid-October, environment groups tried to raise the heat on financial institutions like the Royal Bank of Canada that were helping Aramco prepare for the share sale. And the Paris-based investment group Callendar found the fossil’s own assets at risk, amid concern that “water levels near some of Saudi Aramco’s critical oil refinery infrastructure could rise 5.1 inches by 2030, potentially flooding facilities and damaging equipment,” Front Page Live reported in mid-November.
The Canadian Association of Petroleum Producers, meanwhile, accused HSBC of what the Financial Post called “stunning energy and human rights hypocrisy” for backing Aramco after pulling out of the Alberta tar sands/oil sands. (A more reasoned assessment might have acknowledged that, while the Aramco investment is riskier than HSBC might realize, divesting bitumen at least gets it clear of one of the world’s dirtiest, most expensive sources of fossil fuel.)
As for any prospect of Aramco moving into renewable energy, as other colossal fossils have made at least passing efforts to do, Greentech Media says the Saudi national company is mainly interested in diversification options that position it to extract more oil.
“Despite Saudi Arabia’s big plans for solar and Aramco’s own impressive spend on renewables, the state-owned petrochemical behemoth largely views clean energy as a means to improve the efficiency of extraction,” the industry publication writes, citing Bloomberg New Energy Finance analyst David Doherty. When it comes to diversification, its repertoire “includes 3D printing, which could boost the market for petrochemical-based composites, as well as carbon capture and storage. The company has invested significant amounts into renewable energies such as solar, but almost entirely with a view to powering extraction or refinery operations.”
“They’re moving toward using solar panels to power their refineries,” Doherty told Greentech, “looking at securing demand for their products—as opposed to jumping into wind like Equinor or everything like Shell.”
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