Sukru Cildir of Lancaster University wonders how Saudi-Iranian oil rivalry has been shaped by American power. It has not historically been going for a long time and the recent decarbonisation wave sweeping the world does not seem to affect either party.
The relationship between Saudi Arabia and Iran, both oil-rich states in the Middle East, has oscillated from co-operation to conflict throughout history. Alongside a range of factors that shape their rivalry including sectarianism and nationalism has been the politics of oil.
Oil is a strategic international commodity, and its use as a political tool is widespread. Its role in the Saudi-Iranian rivalry can’t be understood without unpicking the international context, and the power structures that govern the way countries interact with each other. At the heart of this is the dominance of the US over this international system.
The dynamics between the US, Iran and Saudi Arabia over oil were laid bare in September 2019, after a series of drone attacks on Saudi oil facilities. The attacks caused the suspension of 5.7m barrels per day (mbpd) of crude oil production, nearly half the Saudi output.
The Houthis, a Yemeni faction, claimed responsibility. However, American and Saudi government officials accused Iran of committing these attacks. In return, the Iranians blamed foreign forces in the region for the insecurity and told the US to leave the area.
While the Saudi-Iranian oil rivalry is ostensibly the business of these two countries, it has always had an international dimension, overshadowed by the US.
The 1979 Iranian revolution marked a turning point for the place oil played within the Saudi-Iranian relationship. Before then, both countries were important allies of the US, a position which brought with it political and economic benefits, particularly to their oil industries. But the 1979 Islamic revolution in Iran paved the way for a separation of paths.
As a result, ever since 1979, the Iranian oil industry has been subject to American pressure, through a range of economic sanctions and embargoes, which has crippled Iranian oil production. Iran has been unable to reach the level of oil production of over six mbpd that it had in the pre-revolution years. Meanwhile, Saudi oil production reached over 12 mbpd in 2018.
This led to the Iranian oil industry being deprived of necessary foreign investment and technology transfer, and it has fallen behind Saudi Aramco, the kingdom’s state-owned oil company, and other regional competitors. Saudi Arabia has largely backed the US policy of isolating and sanctioning Iran, particularly the Iranian oil industry, which has, as I’ve argued elsewhere, contributed to the ongoing tensions in the Saudi-Iranian relationship.
As Saudi Aramco prepares for an IPO in December that could make it the world’s biggest publicly listed company, Iran is desperate to revitalise its own outmoded oil industry. As Iranian oil minister Bijan Zanganeh admitted in early 2019, many of Iran’s ageing oil facilities are in fact “operating museums”.
The US continues to have such an influence on Middle Eastern oil politics because of the way it has successfully pushed its own international agenda since 1945. After World War II, the US cemented its dominance over an international system built on the basis of liberal and capitalist principles. While the US rewards its allies with economic and political benefits, it punishes its challengers through a range of political and economic measures, not least economic sanctions.
Oil became a strategic international commodity in the post-World War II period, and began to play a pivotal role in the way the US maintained its global dominance. To do this, the US aimed to open up and transnationalise oil-rich economies in the Global South such as Saudi Arabia and Iran, to both promote its national interests and solidify its privileged position within the current system.
Accordingly, the supply of Middle Eastern oil into international markets without disruption – and at a reasonable price – became an essential instrument for maintaining American dominance, even though the US didn’t need to import oil from the Middle East.
A world of US dominance
The political economist Susan Strange provided a theoretical framework back in 1987 to explain the structure of US dominance over the international system through four main dimensions: production, finance, security and knowledge. This is also a useful way to understand how the US shapes the international oil market – and the Saudi-Iranian rivalry.
By 2018, in the wake of a shale boom, the US became the largest oil-producing country in the world by reaching production of 15 mbpd. Financially, oil has been priced and traded in US dollars, in particular since the early 1970s when a series of negotiations and agreements linking the sale of oil to the US dollar were made between Saudi Arabia and the US. This has increased global demand for US dollars, and helped the US deal with its trade deficit and keep its interest rates low. It has also helped the US to monitor the petroleum trade by controlling global bank transfers.
The US also stands as a main security provider to oil-rich Gulf monarchies, with publicly acknowledged military bases in over 12 countries in the Middle East. Additionally, it has a supremacy over global knowledge, most obviously through its continued domination and control of the sector’s technological needs. By leading global innovation and technological development in the shale revolution, for example, and having the highest budget for research and development, the US largely controls global technology transfer. This has also deprived Iran of necessary technology, capital and know-how to modernise its ageing oil industry, constraining production.
Therefore, despite the fact that the Saudi-Iranian oil rivalry seems like a regional issue, the role of American power in a globalised world has been key to shaping this regional political competition over oil.
The largest oil and gas producer, Saudi Aramco, is due to become the world’s most valuable publicly listed company. The Saudi government is planning to sell a small fraction of the firm’s shares on the Riyadh stock exchange before seeking a listing for 5% of the firm on an international market.
The company is so big that this would be the largest ever initial public offering (IPO) and could value the whole company at around US$1.5 trillion. This is less than the government’s hoped-for valuation of US$2 trillion, but would still make Aramco 50% larger than Microsoft, Apple or Amazon (which are all valued at about US$1 trillion).
And yet the future doesn’t look good for oil. The threat of climate change means most countries are looking for ways to reduce their use of fossil fuels and many investors are trying to reduce the number of oil company stocks they hold. So why is the company considered so valuable? A closer look at the data suggests the market sees Aramco as a short-term money maker but with much worse long-term prospects.
While this sounds like the company is in a strong position, the numbers actually reveal a more complicated situation. Other large public oil companies such as Shell typically pay shareholders a dividend of 6% on their investment value. If Aramco pays a similar percentage and its total dividends reach around US$75 billion, then the actual value of the company could be closer to US$1.25 trillion.
Of course, that would still make the company the most valuable in the world. But there’s another problem. A 6% return on investment from buying shares in the company represents the success of the company now. But the return from the company’s long-term bond represents what the market expects the company’s future prospects to be, and right now the bond yield is about 4% a year. When the bond yield is less than the yield from shares, it implies that prospects for capital growth are lower than in other sectors and that investors view oil as a declining industry.
The problem for Aramco and other oil firms is that climate change and falling demand has turned their oil reserves into “stranded assets”. This means they could be worth much less than investors expected and perhaps even become worthless. Global investors are not looking to increase the proportion of their portfolios devoted to oil and gas firms. Many, particularly sovereign wealth funds such as Norway’s, are decarbonising their investments.
Aramco’s difficult flotation comes in the middle of this process. With its high prospective yield, Aramco may well be attractive to “sin stock” investors who are happy to benefit from large short-term gains in socially unacceptable companies. But investors that buy in for financial or strategic reasons risk being left with stocks that become increasingly unmarketable. Who wants to be the last fund holding oil?
What’s more, the Saudi government will have to keep selling further shares in Aramco to fund its ambitions to transform its economy away from dependence on oil. This will depress Aramco’s share price, causing future valuations to occur on even worse terms. If it has proved difficult for the company to get the first valuation it wanted, what will happen later if the first sale doesn’t go well?
At the beginning of the 18th century, Wall Street was one of the locations in the US that traded slaves. Soon we may look back and find it just as alien that markets were trading investments related to oil combustion at the beginning of the 21st century.
DUBAI/RIYADH (Reuters) – Saudi Aramco aims to announce the start of its initial public offering (IPO) on Nov. 3, three people with direct knowledge of the matter told Reuters, after delaying the deal earlier this month to give advisers time to secure cornerstone investors.
The people also said Aramco’s chief executive officer, Amin Nasser, was not present at the conference on Tuesday as he was meeting investors abroad ahead of the offering.
Aramco is looking to float a 1% to 2% stake on the kingdom’s Tadawul market, in what would be one of the largest ever public offerings, worth upwards of $20 billion.
Aramco, in response to queries by Reuters, said on Tuesday the oil company “does not comment on rumour or speculation. The company continues to engage with the shareholders on IPO readiness activities. The company is ready and timing will depend on market conditions and be at a time of the shareholders’ choosing.”
The people declined to be identified due to commercial sensitivities.
The company will soon have more shareholders from institutions, the head of the kingdom’s sovereign wealth fund, Yassir al-Rumayyan, said.
Al-Rumayyan, governor of the Public Investment Fund (PIF) and chairman of Aramco’s board of directors, was speaking at a panel at the conference in Riyadh.
Aramco will start subscription for investors in its initial public offering on Dec. 4, Saudi-owned news channel Al-Arabiya said in a news flash on Tuesday citing sources.
The oil giant plans to announce the transaction’s price on Nov. 17, it added. The company will begin trading on the local stock market, the Tadawul, on Dec. 11, the broadcaster reported.
The prospect of Aramco selling a piece of itself has had Wall Street on tenterhooks since Crown Prince Mohammed bin Salman first flagged it three years ago.
However, his desired $2 trillion valuation has always been questioned by some financiers and industry experts, who note that countries have been accelerating efforts to shift away from fossil fuels to curb global warming, putting oil prices under pressure and undermining producers’ equity value.
Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), is working on a consortium of investors for Aramco’s IPO, its chief executive said.
“There are several Russian pensions funds who are interested to invest in the Aramco IPO and we have also received indications from our Russia-China fund of some Chinese major institutions also interested in Aramco IPO,” Russian Direct Investment Fund (RDIF) head Kirill Dmitriev told reporters on Tuesday.
Separately, Aramco has not approached the Kuwait Investment Authority (KIA) to invest in the IPO, the sovereign wealth fund’s managing director Farouk Bastaki said on Tuesday.
“KIA has not been approached by Aramco or its advisers for the IPO, and KIA will look at the IPO like any other investment,” Bastaki told reporters on the sidelines of an investment conference in Riyadh.
Reporting by Hadeel Al Sayegh in Dubai, Davide Barbuscia and Saeed Azhar in Riyadh; Additional reporting by Rania El Gamal and Marwa Rashad in Riyadh, and Asma AlSharif in Dubai; editing by Giles Elgood and Jason Neely
The key factors of all energy policies across the MENA are about reducing carbon emissions and conserving hydrocarbons reserves per this article, dated September 30, 2019, of Power Technology reporting (see below) on the latest World Energy Council’s congress of Abu Dhabi, early this month.
With an estimated $100bn-worth of renewables projects under study, design and in execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities across the Middle East and Africa.
Reducing carbon dioxide emissions and conserving hydrocarbons reserves are key factors shaping energy policy in the Middle East and North Africa (MENA).
But it is the more immediate combination of lower oil prices and the fall in the cost of renewable energy technologies that have seen every country in the region announce ambitious clean energy targets.
Clean energy, which includes renewables such as solar and wind power, as well as alternative fuels including waste-to-energy and nuclear, accounts for only a small proportion of electricity generation in the MENA region today.
Change is coming
According to the International Renewable Energy Agency (Irena), installed solar and wind capacity across the MENA region reached respectively 2,350MW and 434MW in 2017, up from just 91MW and 104MW in 2010.
And with an estimated $100bn-worth of renewables projects under study, design and in-execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities in the region.
The significance of the region’s energy transition was clear to see at the latest edition of the World Energy Congress, which was hosted in Abu Dhabi in September.
Unsurprisingly, Saudi Arabia’s pavilion was the most-buzzing hive at the congress.
In addition to its broad programme of structural economic reforms and the recent appointment of a new energy minister, the region’s biggest economy has by far the most ambitious clean energy programme planned in the Middle East.
As Riyadh’s Renewable Energy Project Development Office (Repdo) outlined plans to launch tenders for its third round of its ambitious National Renewable Energy Programme (NREP) before the end of 2019, representatives from Saudi Arabia’s sovereign investment wealth fund, the Public Investment Fund (PIF), were meeting technology providers on the sidelines of the event to discuss the opportunities for building large-scale solar manufacturing facilities in the kingdom.
While solar and wind power are the main focus of the region’s energy diversification plans, some of the world’s largest energy companies were keen to showcase the potential for emerging technologies including waste-to-energy.
Another glimpse into the future was provided by discussions about the potential to store energy from peak-power sources such as solar and wind.
With the race to achieve cost-effective battery-storage solutions already underway, other technologies using hydrogen are being piloted in the region to offer another method to mitigate the intermittency issues of solar and wind power.
The challenge facing the region’s utilities is to convert their ambitious clean energy ambitions into actual investment projects.
This article is sourced from Power Technology sister publication www.meed.com, a leading source of high-value business intelligence and economic analysis about the Middle East and North Africa. To access more MEED content register for the 30-day Free Guest User Programme.
Despite or in spite of the far from peaceful happenings in one of the four corners of the Arabian peninsula, life carries on unperturbed elsewhere and the following is about what is happening in the opposite corner, i.e.:
ABU DHABI, September 15, 2019 — In the vast air-conditioned halls of an Abu Dhabi conference centre, the world’s much-vaunted transition to clean energy is the buzzword in sessions of a top industry gathering.
But many executives and officials from oil-dependent Gulf states insist that while the change to renewables is essential, fossil fuels remain the future at least for the next few decades, despite the urgent need to fight climate change.
The debate has taken centre stage at this week’s World Energy Congress, with many officials calling for accelerating the process of moving to clean power sources and minimising carbon emissions.
Speakers addressed issues like the role of nuclear, hydrogen gas and other non-conventional sources of energy as a replacement for fossil fuels which currently account for over three-quarters of the world’s energy consumption.
However, delegates from oil-producing countries and particularly those in the Gulf argued that although the transition to clean energy sources must be supported, they will not be able to meet rising demand any time soon.
“For decades to come the world will still rely on oil and gas as the majority source of energy,” said the head of Abu Dhabi Oil Co. Jaber Sultan.
“About $11 trillion of investment in oil and gas is needed to keep up with current projected demand,” over the next two decades, he told the congress which was attended by representatives of 150 nations and over 400 CEOs.
Energy from increasingly competitive renewable sources has quadrupled globally in just a decade, but insatiable demand for energy particularly from developing economies saw power sector emissions rise 10 per cent, a UN report said last week.
“All energy transitions — including this one — take decades, with many challenges along the road,” the CEO of Saudi energy giant Aramco, Amin Nasser, said at the conference.
Nasser said his country supports the growing contribution of alternatives, but criticised policies adopted by many governments that do not consider “the long-term nature of our business and the need for orderly transition”.
Addicted to oil
Oil is still the lifeline for the Gulf states, contributing at least 70 per cent of national revenues across the region which has been cushioned by decades of immense profits from the flow of “black gold”.
Gulf nations have invested tens of billions of dollars in clean energy projects, mainly in solar and nuclear.
Dubai has launched the world’s largest solar energy project, with a price tag of $13.6 billion and the capacity to satisfy a quarter of the energy-hungry emirate’s current needs when it comes online in 2030.
But critics say the addiction to oil is a tough one to kick, particularly when supplies remain abundant and the massive investment in infrastructure necessary to switch to renewables is daunting.
“A global shift from dirty fossil fuel to renewable energy is economically, technically and technologically feasible… All that is missing is political will!” said Julien Jreissati from Greenpeace in the Middle East.
He said while the United Arab Emirates has put plans into action, “Saudi Arabia which has always made big announcements regarding their renewable energy ambitions is lagging behind as their projects and targets remain ink on paper.’
“There is no doubt that the world will leave oil behind. The only question remaining is when will this happen?”
Despite important technological advances made in the past decade, renewable energy sources still make up just around 18 per cent and nuclear adds another 6 per cent of the world’s energy mix.
In the past decade, the adoption of wind and solar energy picked up rapidly as the production cost plummeted to levels close to that of oil and gas.
But the Abu Dhabi conference saw calls for accelerated innovation and “disruptive” technology to speed the transition as the world prepares for global energy demand to peak between 2020 and 2025, according to the World Energy Council.
Estonian President Kersti Kaljulaid said that sustainable and environmentally friendly energy practices must be aligned with national and global economic policies in order to have the required impact.
“It makes more economic sense to apply all green technologies globally, and if this happens we might go to being CO2-free energy users 5 or 10 or 20 years quicker,” she told the conference.
“I prefer that market forces, pushed by smart policymaking and legal space-setting, act quickly and save us all from the alternative.”
Taking place from September 9 to 12 at Abu Dhabi National Exhibition Centre (Adnec), the prestigious event will cover an area of 35,000 sq m and will feature over 200 exhibitors, representing more than 150 countries altogether, said the UAE Organizing Committee. This year’s World Energy Congress, which will take place for the first time in the Middle East, will see more than 300 speakers among the thousands of global attendees during the four-day event. More than 80 sessions will be held during the Congress, focusing on the entire energy spectrum including oil and gas, electricity, coal, nuclear power and renewable energy, as well as transport, energy efficiency, finance, investment, consultancy and other sectors that are affected by the energy sector. It will provide an opportunity for business leaders, decision-makers and other industry professionals to discuss the trending topics of the industry as well as taking action to deliver a sustainable future through panel discussions and sessions. At a press conference to announce the details of the congress, Faisal Al Dhahri (PR and communications director – Department of Culture and Tourism Abu Dhabi), Khalifa Al Qubaisi (acting chief commercial officer of (Adnec) and the chairperson of the International Congress and Convention Association), Dr Matar Hamed Al Neyadi (chairman of the 24th World Energy Congress) and Engineer Fatima Alfoora Alshamsi (CEO of the 24th World Energy Congress) participated. Dr Al Neyadi, Undersecretary at the UAE Ministry of Energy and Industry and chairman of the UAE Organizing Committee, said: “The World Energy Congress has gone from strength to strength with every edition. The large attendance, the diversity of exhibitors and the comprehensive conference programme for the 24th edition in Abu Dhabi signifies the importance of the Congress. “Boasting a rich history, the World Energy Congress has attracted a wide array of experts, business leaders and government officials from around the world and Abu Dhabi will be no different. “The UAE has outlined ambitious plans in transforming the energy sector including two of the largest solar generation projects in the world and we are proud that Abu Dhabi is the first city in the Middle East to stage this prestigious event, which is another feather to our cap.” The tri-annual event is now considered the ‘Davos of energy issues’, with every Congress enabling hundreds of global experts to convene, share and discuss the latest trends from around the world; it has also attracted distinguished speakers over the years. Prominent physicist and former Nobel Prize recipient, the late Albert Einstein, is among those to have shared his extensive knowledge as part of a lecture session during the Berlin Congress in 1930. Confirmed to take the stage in Abu Dhabi are Engineer Suhail Mohamed Al Mazrouei, UAE Minister of Energy and Industry, Dr Sultan Ahmed Al Jaber, UAE Minister of State and CEO of Abu Dhabi National Oil Company Group (Adnoc) and Awaidha Al Marar, chairman, Abu Dhabi Department of Energy. Also speaking are Saeed Mohammed Al Tayer, managing director and chief executive officer, Dubai Electricity and Water Authority; Engineer Mohamed Al Hammadi, CEO, Emirates Nuclear Energy Corporation (Enec); and Musabbeh Al Kaabi, CEO, Petroleum & Petrochemicals, Mubadala Investment Company. The World Energy Congress will also see a number of leading companies exhibit their services and products. Among those who will be offering their expertise are Emirates Water and Electricity Company, Abu Dhabi Global Markets (ADGM), Expo 2020, Federal Electricity and Water Authority (Fewa), Dubai Electricity and Water Authority (Dewa), Total, Siemens, Korea Electric Power Corporation (Kepco), Emirates Authority for Standardization and Metrology (ESMA), UAE Federal Insurance Authority and Industry and DP World. During the four days, the congress will also feature more than 30 side events including workshops and roundtables that will be hosted by various organisations. One of the notable side events to take place is the Start Up Energy Transition – 100 (SET100), which will feature the top 100 international start-ups showcasing the most innovative products and services that will address climate change and improve energy efficiency. Among other side events taking place is the World Economic Forum – Global Energy Transition and a workshop hosted by the UAE Ministry of Energy and Industry and the German Federal Ministry of Economic Affairs and Energy on how other nations can learn from German practices. The World Energy Leaders’ Summit will see the attendance of global energy leaders while young professionals will be able to voice their opinions as part of the Future Energy Leaders’ Summit.
OPEC earned about $711 billion in net oil export revenues (unadjusted for inflation) in 2018
Saudi Arabia accounted for the largest share of total OPEC earnings, $237 billion
India only imports between 4.5 and 5 million barrels per day of oil, but it is shaping up to be the biggest competitive space for producers
OPEC is still making money, despite challenges coming from every which way.
Be it falling prices, market volatility, regional insecurity, trade wars, armed conflict, talks of recession, US production, electric vehicles and renewable energy, or US Iranian sanctions, OPEC still finds a way to generate billions in revenues.
Now, mixed with current production leaders are a few new players making a splash.
The 2018 net oil export revenues increased by 32% from the $538 billion earned in 2017, mainly as a result of the increase in average annual crude oil prices during the year and a slight increase in OPEC net oil exports.
Saudi Arabia accounted for the largest share of total OPEC earnings, $237 billion in 2018, representing one-third of total OPEC oil revenues.
EIA expects that OPEC net oil export revenues will decline to about $604 billion (unadjusted for inflation) in 2019, based on forecasts of global oil prices and OPEC production levels in EIA’s August 2019 Short-Term Energy Outlook (STEO), according to Hellenic Shipping News.
EIA’s forecasts that OPEC crude oil production will average 30.1 million barrels per day (BPD) in 2019, 1.8 million BPD lower than in 2018.
For 2020, OPEC revenues are expected to be $580 billion, largely as a result of lower OPEC production.
Important countries to watch for in the oil sector
5. India—Right now India only imports between 4.5 and 5 million barrels per day of oil, but it is shaping up to be the biggest competitive space for producers.
India is the third-largest oil consumer in the world. Previously, the biggest competition ground for oil producers was for sales to China, but with 1.37 billion people, India has the potential to impact the market much like China has.
4. Saudi Arabia—This Arab Gulf nation owns the world’s most profitable (oil) company, houses the second-largest proven oil reserves in the world, and has the most spare capacity of any country. Oil from Saudi Arabia fuels much of east Asia. Aramco is also expanding its exports to India to compensate for lost Iranian oil.
2. China—This country is the second-largest consumer of oil and is the largest oil importer in the world at around 10.64 million barrels per day. China is such an important oil consumer that any indication that economic growth in China is slowing sends oil prices tumbling.
1. United States –The U.S. is currently producing oil at record levels (12.3 million barrels per day according to the EIA). This is being driven by the shale oil industry. The U.S has shown its ability to impact other countries’ oil business, as it did with Iran’s exports in recent months. Presidential tweets also impact prices.
Author Hadi Khatib is a business editor with more than 15 years’ experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.
The state energy giant’s vast oil reserves – it can sustain current production levels for the next 50 years – make it more exposed than any other company to a rising tide of environmental activism and shift away from fossil fuels.
In the three years since Saudi Crown Prince Mohammed Bin Salman first proposed a stock market listing, climate change and new green technologies are putting some investors, particularly in Europe and the United States, off the oil and gas sector.
Sustainable investments account for more than a quarter of all assets under management globally, by some estimates.
Aramco, for its part, argues oil and gas will remain at the heart of the energy mix for decades, saying renewables and nuclear cannot meet rising global demand, and that its crude production has lower greenhouse gas emissions than its rivals.
But with the company talking again to banks about an initial public offering (IPO), some investors and lawyers say the window to execute a sale at a juicy price is shrinking and Aramco will need to explain to prospective shareholders how it plans to profit in a lower-carbon world.
“Saudi Aramco is a really interesting test as to whether the market is getting serious about pricing in energy transition risk,” said Natasha Landell-Mills, in charge of integrating environment, social and governance (ESG) considerations into investing at London-based asset manager Sarasin & Partners.
“The longer that (the IPO) gets delayed, the less willing the market will be to price it favourably because gradually investors are going to need to ask questions about how valuable those reserves are in a world that is trying to get down to net zero emissions by 2050.”
Reuters reported on Aug. 8 that Prince Mohammed was insisting on a $2 trillion valuation even though some bankers and company insiders say the kingdom should trim its target to around $1.5 trillion.
A valuation gap could hinder any share sale. The IPO was previously slated for 2017 or 2018 and, when that deadline slipped, to 2020-2021.
Aramco told Reuters it was ready for a listing and the timing would be decided by the government.
The company also said it was investing in research to make cars more efficient, and working on new technologies to use hydrogen in cars, convert more crude to chemicals and capture CO2 which can be injected in its reservoirs to improve extraction of oil.
SELLING THE STORY
Some would argue this is not enough.
A growing number of investors across the world are factoring ESG risk into their decision-making, although the degree to which that would stop them investing in Aramco varies wildly.
Some would exclude the company on principle because of its carbon output, while others would be prepared to buy if the price was cheap enough to outweigh the perceived ESG risk – especially given oil companies often pay healthy dividends.
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At a $1.5 trillion valuation, Aramco would be the world’s largest public company. If it were included in major equity indices it would automatically be bought by passive investment funds that track them, regardless of their ESG credentials.
And as the world’s most profitable company, Aramco shares would be snapped up by many active investors.
Talks about a share sale were revived this year after Aramco attracted huge investor demand for its first international bond issue. In its bond prospectus, it said climate change could potentially have a “material adverse effect” on its business.
When it comes to an IPO, equity investors require more information about potential risks and how companies plan to deal with them, as they are more exposed than bondholders if a business runs into trouble.
“Companies need to lead with the answers in the prospectus, rather than have two or three paragraphs describing potential risks from environmental issues,” said Nick O’Donnell, partner in the corporate department at law firm Baker McKenzie.
“An oil and gas company needs to be thinking about how to explain the story over the next 20 years and bring it out into a separate section rather than hiding it away in the prospectus, it needs to use it as a selling tool. And also, once the IPO is done, every annual report should have a standalone ESG section.”
Unlike other major oil companies, Aramco doesn’t have a separate report laying out how it addresses ESG issues such as labour practices and resource scarcity, while it does not publish the carbon emissions from products it sells. Until this year’s bond issue, it also kept its finances under wraps.
The company does however have an Environmental Protection Department, sponsors sustainability initiatives and is a founding member of the Oil and Gas Climate Initiative, which is led by 13 top energy companies and aims to cut emissions of methane, a potent greenhouse gas.
On Aug. 12 Aramco published information on the intensity of its hydrocarbon mix for the first time. It disclosed the amount of greenhouse gases from each barrel it produces.
Aramco’s senior vice president of finance Khalid al-Dabbagh said during an earnings call this month that its carbon emissions from “upstream” exploration and production were the lowest among its peers.
A study published by Science magazine last year found carbon emissions from Saudi Arabia’s crude production were the world’s second lowest after Denmark, as a result of having a small number of highly productive oilfields.
THE OIL PRICE
Aramco says that, with the global economy forecast to double in size by 2050, oil and gas will remain essential.
“Saudi Aramco is determined to not only meet the world’s growing demand for ample, reliable and affordable energy but to meet the world’s growing demand for much cleaner fuel,” it told Reuters.
“Alternatives are still facing significant technological, economic and infrastructure hurdles, and the history of past energy transitions shows that these developments take time.”
The company has also moved to diversify into gas and chemicals and is using renewable energy in its facilities.
But Aramco still, ultimately, represents a bet on the price of oil.
It generated net income of $111 billion in 2018, over a third more than the combined total of the five “super-majors” ExxonMobil (XOM.N), Royal Dutch Shell (RDSa.AS), BP (BP.L), Chevron (CVX.N) and Total (TOTF.PA).
In 2016, when the oil price hit 13-year lows, Aramco’s net income was only $13 billion, according to its bond prospectus where it unveiled its finances for the first time, based on current exchange rates. Its earnings fell 12% in the first half of 2019, mainly on lower oil prices.
Concerns about future demand for fossil fuels have weighed on the sector. Since 2016, when Prince Mohammed first flagged an IPO, the 12-months forward price to earnings ratio of five of the world’s top listed oil companies has fallen to 12 from 21 on average, according to Reuters calculations, lagging the FTSE 100 and the STOXX Europe 600 Oil & Gas index averages.
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AN INFLUX OF CAPITAL
Using a broad measure, there was global sustainable investment of $30.1 trillion across the world’s five major markets at the end of 2018, according to the Global Sustainable Investment Review here, more than a quarter of all assets under management globally. That compares with $22.8 trillion in 2016.
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“Given the influx of capital into the ESG space, Aramco’s IPO would have been better off going public 5-10 years ago,” said Joseph di Virgilio, global equities portfolio manager at New York-based Romulus Asset Management, which has $900 million in assets under management.
“An IPO today would still be the largest of its kind, but many asset managers focusing solely on ESG may not participate.”
The world’s top listed oil and gas companies have come under heavy pressure from investors and climate groups in recent years to outline strategies to reduce their carbon footprint.
Shell, BP and others have agreed, together with shareholders, on carbon reduction targets for some of operations and to increase spending on renewable energies. U.S. major ExxonMobil, the world’s top publicly traded oil and gas company, has resisted adopting targets.
Britain’s biggest asset manager LGIM removed Exxon from its 5 billion pounds ($6.3 billion) Future World funds for what it said was a failure to confront threats posed by climate change. LGIM did not respond to a request for comment on whether it would buy shares in Aramco’s potential IPO.
Sarasin & Partners said in July it had sold nearly 20% of its holdings in Shell, saying its spending plans were out of sync with international targets to battle climate change. The rest of the stake is under review.
The asset manager, which has nearly 14 billion pounds in assets under management, didn’t participate in Aramco’s bond offering and Landell-Mills said they would be unlikely to invest in any IPO.
Additional reporting by Ron Bousso in London and Victoria Klesty in Oslo; Editing by Carmel Crimmins and Pravin Char
The global energy economy is undergoing a rapid transition from ‘hydrocarbon molecules to electrons’: in other words, from fossil fuels to renewables and low-carbon electricity. Leading energy industry players and analysts – the energy-forecasting ‘establishment’ – are seriously underestimating the speed and depth of this transition. This in part reflects the vested interests that dominate that establishment. By contrast, the financial sector – which has little or no vested interest in fossil fuels – understands what is going on and is taking the transition on board.
The history of past energy transitions – including the US’s shift from wood to coal in the late 19th and early 20th centuries, and the French adoption of nuclear power on a wide scale in the 1980s – provides useful context for analysis of this trend. Such transitions have been triggered by factors ranging from market upheaval to technological change, with the technological element typically reinforcing the transition.
A similar dynamic, involving triggers and reinforcing factors, is in evidence today. The current transition in the global energy system has been triggered, in the first instance, by concerns over climate change and recognition of the imperative of shifting to a lower-carbon economy. In some places, growing concerns over urban air quality have overtaken climate change as a driver of government policy in support of the transition. The reinforcing factors include the falling costs of renewables and the rapid market penetration of electric vehicles (EVs). To these factors can be added ongoing uncertainty over the possibility of another oil price shock; and rises in oil product prices that are independent of movements in crude oil prices – a phenomenon sometimes known as ‘OECD disease’.
If the transition to renewables and low-carbon electricity happens faster than the energy establishment anticipates, the implications for exporters of oil and for the geopolitics of oil will be very serious. For example, the failure of many oil-exporting countries to reduce their dependence on hydrocarbon revenues and diversify their economies will leave them extremely vulnerable to reduced oil and gas demand in their main markets. The countries of the Middle East and North Africa (MENA) region will be particularly exposed, with the possible consequences including an increase in the incidence of state failure in a region already suffering the fallout from having signally failed to address the causes of the Arab uprisings since 2011. Increased political and economic turbulence in the MENA region would also have the potential to create serious migration problems for Europe.
The geopolitics of oil over the past 120 years have played a central role in international relations. Indeed some would argue that geopolitical rivalry over access to, and control of, oil supplies has been the source of much of the conflict witnessed in the 20th century (Yergin, 1991). The rise of renewables implicit in the current energy transition could well change this status quo. Renewables are widely used and widely produced. Currently, their availability is constrained neither by the agendas of dominant fuel suppliers nor by the threat of physical disruption to the strategic transit routes along which traded resources are typically shipped. There are certainly supply constraints associated with some minerals required for renewable energy technologies, but these hardly compare with the conflicts around oil supply, and most such constraints, in any case, are easily managed. Thus, as this energy transition proceeds, oil geopolitics will begin to fade away as an issue of concern.