The EconomistNovember 2nd 2019 BriefingSaudi Aramco 632 listing—to raise money to diversify the
economy—remains as urgent as ever.
Preparations for an ipoaccelerated after
the bond offering. Aramco held its first
earnings call with investors in August (an-
alysts, perhaps eager to establish good will,
have rarely been so polite). To co-ordinate
the listing the government has hired six
global banks, JPMorgan, Goldman Sachs,
Credit Suisse, Citi, hsbc, and Bank of
America Merrill Lynch, as well as Saudi
Arabia’s Samba and National Commercial
Bank. Michael Klein, Moelis and Lazard are
serving as advisers, say insiders. Investors,
at last, are on the threshold of owning a
sliver of Aramco’s shares.
The trouble with letting the market
loose on Aramco, however, is that it tends
to make up its own mind about valuations.
This seems to make the crown prince un-
easy. Bloomberg has reported that the gov-
ernment is exploring ways to limit volatil-
ity in trading after the Tadawul listing. The
government expects local business leaders
to buy shares enthusiastically to support
Aramco’s valuation. “It is seen as part of be-
ing loyal,” says one seasoned businessman
in Riyadh. “It’s not an explicit quid pro quo,”
says another. “However you cannot do
business in Saudi without being seen fa-
vourably by the power corridors.” Saudi
banks have asked local investors if they
would increase their stakes if offered new
lines of credit.
If an ipo does proceed, however,
Aramco’s valuation will eventually reflect
the business itself: a company of stagger-
ing scale, aggressive strategy and unique
complications. In recent years Aramco has
moved to strengthen its traditional busi-
ness and expand to new areas—Mr Qahtani
describes this as “opportunistic”, not de-
fensive. Changes include establishing a
trading operation and investing more in
natural-gas projects.
Its most important strategic shift is to
move downstream, into petrochemicals.
Its purchase of a 70% stake in Sabic, an-
nounced in March, serves the twin goals of
raising cash for Saudi Arabia’s sovereign-
wealth fund and diversifying Aramco’s rev-
enue. The ieaexpects petrochemicals to
account for almost half of the growth in oil
demand up to 2050. Sabic is already the
world’s fourth-largest chemical company,
generating $14bn of gross operating profit
last year. Its businesses span fertilisers in
India to plastics used in Range Rovers.
Aramco has also used its deep pockets
to bolster its standing in Asia. In August
Reliance, an Indian conglomerate, said
that Aramco had taken a 20% stake in its re-
fining unit, for roughly $15bn. Aramco has
announced other investments in Asia, in-
cluding projects in South Korea, Malaysia
and China. Joint ventures in refineries and
petrochemical plants help Aramco hedge
against low oil prices. They also include
agreements to be the projects’ long-term
supplier of crude. Deal by deal, Aramco is
securing customers for its oil in Asia,
where demand is most likely to rise. Asia
buys 71% of the company’s crude exports.
Some national oil companies are trying
to pursue a similar strategy. adnoc, of the
United Arab Emirates, is joining up with
Aramco on a big refining complex in India.
What makes Aramco most distinct, how-
ever, is how cheaply it can pump oil. Its
centralised resources, slick infrastructure
and decades spent honing its drilling mean
that extracting oil costs just $2.80 a barrel,
one-third the average level of international
oil companies. That helps Aramco achieve
margins more than twice that of Rosneft, a
Russian giant, and nearly four times that of
Shell (see chart 1 on previous page).Cheaper and cleaner
The Economistworked with Rystad Energy,
a research firm, to examine how the value
of Saudi Arabia’s reserves might stack up if
demand wanes—because of, say, the
strengthening of American climate regula-
tions after an election. The oil price at
which a company could make a 10% return,
the breakeven price, is one way of showing
which countries’ reserves are most vulner-
able. Another way is to look at how much
energy is used to extract oil, thereby in-
creasing emissions, which would add a fur-
ther layer of costs if carbon were to be
taxed. On both measures, Saudi Arabia
stands out.
Aramco’s breakeven costs for new pro-
jects, even after tax, are $31, according to
Rystad Energy’s data, slightly higher than
Iran, Iraq or Kuwait but less than half the
level of Russia and two-thirds the level in
America. Its carbon-dioxide emissions
from extraction and flaring are less than
half the global average. A separate analysis,
published last year by researchers at Stan-
ford University and Aramco, found similar
results (see chart 2). Indeed, Aramco ex-
poses its peers’ weakness. Canada and Ven-
ezuela are particularly vulnerable, owing toproduction that is both dear and dirty.
Compared with those of many rivals,
Aramco’s reserves therefore seem well sit-
uated, no matter what happens to demand.
Yet even with its relative bounty it faces
several big risks. The trove of oil assets un-
der Saudi soil remain vulnerable to attack.
Aramco executives, who usually refer to
the September strikes as “the incident”,
point out that repairs were done quickly.
However it was no one-off. The attacks in
September followed strikes on a large pipe-
line, airports and an oilfield. Further inci-
dents could complicate Aramco’s efforts to
secure more long-term customers.
The kingdom’s claim on Aramco also
makes investors nervous. Saudi Arabia has
tried to ease their concern. Reforms an-
nounced in 2017 included reducing
Aramco’s tax rate from 85% to 50%. In Sep-
tember Aramco unveiled a new dividend
policy, which envisions a total payout of
$75bn in 2020 and beyond. Non-state
shareholders will receive a proportionate
share of this, and their absolute payout will
be protected, even if the total value of
Aramco’s dividend drops. Further, it said
that dividend would probably rise.
However Aramco’s dividend yield, at a
valuation of $1.5trn, remains lower than
those of the European supermajors. Some
investors remain squeamish about what
might happen if oil prices were depressed
for a long period. Aramco could still be
profitable, but its profits might not be high
enough to sustain the kingdom’s budget.
Prince Muhammad’s Vision 2030 might
not go as planned—one of the Saudi sover-
eign-wealth fund’s big early investments
was in SoftBank’s Vision Fund, which made
a disastrous bet on WeWork. “If oil prices
are lower, you could expect that the state
would potentially increase taxes,” says
Dmitry Marinchenko of Fitch. The promise
to maintain high dividends to non-state
shareholders, he points out, would not be
legally sacrosanct.
There remains the question of what a
listed Aramco would mean for opec, and
therefore for oil markets. Historically Sau-
di Arabia has curbed its own output, often
beyond the levels required by opec, in the
effort to support oil prices. Khalid al-Falih
long served as both oil minister and
Aramco’s chairman. In September the gov-
ernment sacked him from both posts, en-
suring that one person now oversees
Aramco and another the oil ministry. Yet
the rational goals of a listed Aramco—
boosting production to lower prices and
squeeze rivals, for instance—may diverge
wildly from the historic goals of opec.
Such uncertainties will weigh on
Aramco, before and after any listing. Rivals
are watching with interest. Saudi Arabia’s
transition to oil’s new era is tortured. For
the many countries with higher costs and
less cash, it may be even more so. 7Carbon fingerprintsSources:StanfordUniversity; Rystad *For new projectsaftertaxEmissions from oil production
CO2 equivalent/g per megajoule
2015
0 5 10 15 20
Venezuela
Canada
Iran
Iraq
Nigeria
United States
Russia
Saudi ArabiaBreakeven
oil price*,
$ per barrel57.90
71.45
29.00
27.36
51.88
48.29
65.00
31.002