Saudi Armco has many reasons to expand its ‘playground’
Times, Al Falih sketched out plans for Saudi Aramco to build an international exploration and production business for the first time.
The timing is interesting, as Aramco plans to take flight just as many of the listed oil majors have had their wings clipped. Oil investors demand more in the way of payouts these days.
That’s partly because returns on the mega-projects built during the oil boom have been poor. It also reflects creeping concern about whether largescale projects now risk being stranded to some degree by political or economic effects related to climate change.
Shorter-cycle assets, such as US shale, are in vogue, and ExxonMobil’s higher spending — predicated in part on developing a major new field offshore Guyana — now weighs on its valuation.
The drop in upstream spending has provoked warnings of a supply gap; although, with Saudi Arabia now entering year three of what was originally a six-month supply cut, this has yet to materialise. Still, if Aramco foresees that gap still emerging, then the oil world would effectively be on sale right now due to a lack of buyers.
Barring that, however, it is tough to see the upside from a strictly
Any argument for the benefits of geographic diversification runs into the problem that Aramco sits on roughly 270 billion of what are regarded as among the lowest-cost barrels on the planet. Diversifying from that into higher-cost assets would (a) require an enormous outlay in order to be meaningful and (b) probably be dilutive.
Hopes for Aramco’s valuation rest to a large degree on its free cash flow being priced with a relatively low risk premium. Big spending in foreign climes is likely to crimp the cash flow while doing nothing commercial perspective. for that risk premium. Al Falih says initial plans focus on building a global natural gas business. This has been a fairly mainstream strategy for the listed oil majors for years, but Saudi Arabia has lagged in this regard. Yet as the country seeks to build up its industrial base and stop burning valuable (and more polluting) oil for power generation, using more natural gas is a no-brainer. Contracting for foreign natural gas supply would seem a fairly straightforward (and less capital intensive) way to address this.
All in all, I’m guessing Aramco would prefer to produce and own natural gas rather than just buy it from someone else. With the biggest nearby gas giants, Qatar and Iran, unlikely to partner with Aramco, Saudi Arabia has been considering involvement in projects in Russia and the US — its chief Opec+ partner and chief defence partner, respectively.
Both have a vested interest in expanding their natural gas export capabilities, and that may give Saudi Arabia a chance to deploy its chequebook in the national interest. Amid the long-running talk of that IPO, it is all too easy to forget that Aramco is far from being a strictly commercial venture.