Aramco’s IPO shows oil, climate fears don’t mix
Last month was the world’s hottest October on record. When it ended, Saudi Aramco said it would launch an initial public offering to private investors. Coincidence? I don’t think so. Climate change has progressed to the point that the average person can now feel and understand the effects. Individual perceptions have not yet translated into the collective behavioral changes needed to reduce oil consumption.
But climate change is creating a lot of uncertainty around straight-line predictions showing global oil demand climbing to 2040 and beyond. This uncertainty appears to be holding back the valuations of oil companies, even as their non-oil peers enjoy record share prices.
And for Saudi Aramco, Saudi Arabia’s state-owned oil company, 2040 is the short term.
Aramco has at least 66 years of reserves at current output levels, and the Saudi Arabian government has granted it monopoly access to those reserves for at least 40 years and potentially until 2117.
Right now, a century of monopoly access to Saudi oil still sounds positive.
That’s because Saudi Aramco is a money machine. It enjoys the world’s lowest cost of production, $7.50 per barrel, which brought it pretax profits last year of $244 billion, which is splits evenly with the Saudi government. That total is more money than all 28 European Union countries spent on defense. No other company comes close.
So why would Saudi Arabia let foreigners join the party?
Saudi Aramco wants to go public before attributes like “100-year reserves” sound like warnings about stranded assets, and before more investment funds follow the lead of Norway’s and divest from fossil fuels.
The company expects to privatize 5 percent of its ownership and the IPO proceeds, as much as $100 billion, will be used to incubate non-oil businesses in the kingdom that reduce the Saudi economy’s exposure to climate action.
It’s not just Saudi Aramco making these calculations. Many oil firms, whether owned by national governments or shareholders, are tweaking their business models to stay relevant.
Exxon and Aramco are making side bets on petrochemicals. Shell and Total are making small wagers on wind and solar. Occidental and Aramco have ambitions to compete by reducing the carbon footprint of their oil and gasoline.
The supermajors, with an average of 11 years of proven reserves, are more nimble than a national oil company like Aramco. They’ve proven during past crises that they can reorient their businesses. For them, climate risks are not as potentially dire.
Also comforting for the oil firms is the basic truth that 92 percent of global transportation services use oil, and that there are no ready substitutes. Yes we have electric vehicles and biofuels, but neither is expected to reduce oil consumption in freight, air travel or seaborne shipping. Oil demand in those sectors is growing faster than in personal vehicles.
If that’s the case, why’s Aramco selling? Again, uncertainty is the answer.
Saudi policymakers have always incorporated a level of long-range strategic planning that is unusual in shareholder-owned firms. That’s partly due to the scale of Saudi reserves, but also because the Saudi political system survives by distributing patronage from oil profits.
After all, Saudi Arabia is the only country named after the family that rules it. The royal family cannot afford to “wait and see” how climate action will play out.
So, while it’s painful to bequeath a piece of the world’s most profitable company to foreigners, the kingdom needs to hedge.
Saudi Aramco would be better off selling shares while investor sentiment remains strong, rather than to try to launch an IPO amid lower oil prices and greater investor aversion to fossil fuels.
The longer the kingdom delays the IPO, the greater the risk that additional institutional funds will purge fossil fuel from their portfolios, undercutting Aramco’s valuation.
And the longer the kingdom delays, the less time it has to diversify its one-track economy.
New businesses created in Saudi Arabia are unlikely to be as profitable as oil, but policymakers hope they’re more durable.
If Saudi Arabia were to ignore warnings about climate change, it would be betting the monarchy on optimistic forecasts for oil demand.
And as Saudis know better than anyone, the only certainty about the oil business is that it’s uncertain.
Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute. He is the author of the 2019 book “Energy Kingdoms.”