62 BriefingSaudi Aramco The EconomistNovember 2nd 2019
21mate change hit oil consumption. “If this
ipowas 15 years ago, it would be a compel-
ling investment opportunity,” says Oswald
Clint of Bernstein, a financial firm. “But the
outlook for oil demand and the energy sec-
tor is opaque.”
Aramco maintains that, regardless of
the oil market’s broader troubles, it will
outcompete its rivals. Recently the com-
pany has used deals and new business un-
its to secure customers, diversify its rev-
enue and maximise the value of its oil. Its
boosters like to say that the world’s last bar-
rel of oil will come from Saudi Arabia. But it
is unclear what value investors will ascribe
to such a distant possibility. As interna-
tional energy giants and petrostates jostle
to find their footing in an uncertain era, no
company will loom larger than Aramco.
The company’s history is in some ways
similar to that of other national oil giants.
Americans drilled their first successful
well in Saudi Arabia in 1938; the Arabian
American Oil Company once had its head-
quarters in New York. The nationalisation
of Aramco from 1973 to 1981 was part of a
wave of requisitions that swept oilfields
from Venezuela to Malaysia.
However Aramco is no ordinary nation-
al oil company. It is widely regarded by
those within the industry as being well
run, with professional managers and a dis-
tinct culture. The Aramco compound in
Dhahran, in Saudi Arabia’s Eastern Prov-
ince, is a world unto itself, home to 15,000
people. It has schools, gyms, food shops
and streets lined with quaint houses—the
campus resembles an Arizona suburb, with
more mosques. About 90% of Aramco’s
employees are Saudi, but women are as
likely to wear trousers as an abaya.
Nor is Saudi Arabia an ordinary petro-
state. Much of its treasure resides in the
Eastern Province, including oilfields such
as the celebrated 48.3m-barrel Ghawar,
shaped like a dancer’s leg en pointe. Oil is
also tucked beneath the rolling dunes of
the Empty Quarter and the seabed of the
Gulf. In all Aramco has nearly 500 reser-
voirs, with 260m barrels of proved re-
serves. That is more than triple the com-
bined proved reserves of the five
supermajors. Last year Aramco pumped
one in eight of the world’s barrels of crude.
Such astonishing scale has ensured that
Saudi Arabia remains the de facto leader of
the Organisation of the Petroleum Export-
ing Countries (opec). American frackers
may collectively produce more oil, but they
operate independently. Saudi Arabia alone
can ramp production up and down quickly
in the attempt to tame volatile oil markets.
Oil has brought the kingdom prosperity.
Saudi Arabia sustains its absolute monar-
chy by offering citizens a safety-net, in-
cluding free education and health care, as
well as a guaranteed-income programme.
The kingdom’s natural resources benefitsome Saudis more than others. In posh
parts of Riyadh and Dammam, lush green-
ery peeks above the concrete walls separat-
ing residential compounds from the dusty
streets beyond. As a whole, however, Saudi
Arabia is dangerously dependent on crude.
Oil accounts for nearly 70% of the gov-
ernment’s revenue and almost 80% of ex-
ports. Non-oil activity is often the result of
government spending, which is itself de-
pendent on oil. It is hard to find a person or
service in the kingdom that does not some-
how rely on oil or gas. The arid climate re-
quires the use of energy-intensive desali-
nation plants—in Saudi Arabia, even water
depends on fossil fuel.Swing consumer
The country has long been vulnerable to
shifts in the oil price. However the king-
dom faces three new, big problems. First,
shale has transformed America into the
world’s largest oil producer, vexing opec’s
efforts to maintain high, stable prices. Sec-
ond, Saudi Arabia has a burgeoning, youth-
ful population. The oil industry, which re-
quires capital but not much labour, cannot
employ enough of them. The imfreckonsthat up to 1m jobs could be needed in Saudi
Arabia in the next five years.
The third risk is the largest and most
uncertain: global oil demand may subside.
Economic growth and demand, which have
risen in sync, could be decoupled as the
threat of climate change grows. However
no one knows whether this might happen,
or when. America’s Energy Information
Administration, within President Donald
Trump’s energy department, expects the
world to remain thirsty for oil, with de-
mand rising up until 2050. ExxonMobil
also takes a bullish view. Mohammed al-
Qahtani, Aramco’s head of upstream, ex-
pects that “demand will be robust for the
next two decades plus”—the company
models its reservoirs to 2200. Some oil
companies tactfully present a variety of
scenarios, as does the International Energy
Agency (iea), a forecaster. Any tidy predic-
tion belies a tangle of assumptions and de-
bate, according to an independent expert
who has reviewed the iea’s drafts.
Little wonder, then, that Prince Mu-
hammad wants to diversify. His Vision
2030 aspires to transform the economy
through strategic investment—for in-
stance in manufacturing and “special eco-
nomic zones”, such as a planned robotic
city called neomnear the Red Sea. Raising
cash for that depends on the Aramco ipo.
There have been many reasons to delay,
including concern over legal exposure that
might come from listing in New York, the
desire to acquire Sabic, the kingdom’s giant
petrochemical company, as well as the val-
uation question. This time last year, plans
for an offering seemed postponed indefi-
nitely amid uproar over the murder of Ja-
mal Khashoggi, a dissident journalist, at
the Saudi consulate in Istanbul.
Since then, however, Aramco has an-
nounced a $69bn deal to buy Sabic. To raise
money for the transaction, in April Aramco
issued $12bn in bonds, which investors
lapped up. The publication of a 469-page
bond prospectus eased anxiety about let-
ting the world pore over Aramco’s books.
Meanwhile, the rationale for pursuing aEven bigger oilSource:BankofAmericaMerrillLynch2018*Millionbarrels of oil equivalent1SaudiAramco
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