By Salman Parviz

Riyadh’s Aramco struggle

January 3, 2020 - 14:30

On the surface Aramco’s blockbuster IPO might seem like a sure bet. But investors who are looking to put their money into world’s most profitable company have to factor a number of risks before rolling the dice.

After an almost four-year delay Aramco’s shares were floated on December 11 at Riyadh’s small Tadawul exchange in Riyadh only to domestic investors. Aramco is the world’s most valuable company, leaving behind giants like Apple which recently clocked up $1.27 trillion in shareholder value passing the 13-digit market capitalization value for the first time.

The original plan was to split Aramco listing on stock exchanges in London, New York and Riyadh but due to lack of global investor confidence and the need for transparency that would be required in international stock exchanges, the shares were listed only at Tadawul where the Saudi royal family maintains strict control.

Instead of five percent only 1.5 percent of Aramco’s shares have been floated only to regional and domestic clientele. For the rest of Aramco’s shares there is a long road ahead.

Questions remain about the future for domestic and international investors about the sustainability of Aramco and the oil dependent Saudi economy in general. Is the Aramco IPO a $2 trillion bubble waiting to burst? Some of the reasons for lack of investor confidence and outlook are regional instability, human rights record in Saudi Arabia, lack of transparency, future of fossil fuel market, the need for Saudi economy to diversify, …, the list goes on. Some of these reasons are discussed below:

Kashoggi murder: Global backlash on journalist Jamal Kashoggi’s murder on October 2018 in Saudi Consulate in Istanbul. CIA and many Western governments believe was ordered by Crown Prince Mohammed bin Salman (AKA MBS) personally. 

The murder of Kashoggi triggered Saudi Arabia’s biggest diplomatic crisis since the 9/11 attacks as world leaders and business executives sought to distance themselves from Riyadh. Recently documents were released to the lawyers representing families of 9/11 victims that implicate Saudi involvement in 9/11. A potential lawsuit by U.S. courts seizing Saudi assets is a real possibility in the future. This ought to make international investors more nervous. 

A verdict from a closed-door trial of Khashoggi’s murder was recently criticized by UN investigator as a “mockery” of justice.

The impact of Kashoggi’s slaying became apparent early when Saudi Arabia hosted The World Economic Forum, also referred to as “Davos in the Desert” in 2018. Presidents, prime ministers and business leaders boycotted the summit.

However, a year after the flagship investor meeting many leaders were back for the summit last October, including India’s Narendra Modi, Brazil’s Jair Bolsonaro, King Abdullah II of Jordan and four African leaders were among 6000 people from 30 countries.

The Public Investment Fund, Riyadh’s sovereign wealth fund is the organizer of the event. 

Tanker attacks: Attacks on tankers across Persian Gulf started again last summer endangering global energy security.

Aramco attack: Drone attacks of September 14 on world’s largest oil processing facilities in Abqaiq and Khurais, owned by Aramco. The attacks decimated Saudi oil output by some five million barrels per day cutting of some five percent of global oil supply. Although the Yemen’s Houthi rebels initially claimed responsibility and UN has questioned evidence against Iran involvement over the drone attacks, U.S. and Saudi Arabia have blamed Iran for the attack. Tehran has denied responsibility.

In September the rating agency Fitch downgraded Saudi Arabia’s credit rating to A from A+, citing rising geopolitical and military tensions in the Persian Gulf following attacks on Aramco’s oil facilities.

In an interview MBS said he hoped a military response could be avoided, fearing that war with Iran would "collapse the global economy".


Yemen war: In March 2015, then Saudi defense minister MBS launched what was meant to be a short and decisive bombing campaign in Yemen. Now with tens of thousands of civilians killed and global media backlash against the Saudi led coalition and with 14 million people at risk of starvation this war has been identified the worst humanitarian crisis of our times by the UN.

Vision 2030: The part-privatization of Aramco is the centerpiece of MBS’s “Vision 2030” program, a grand plan to modernize the Saudi economy, reduce its reliance on oil and open the way for foreign investment. The main pillar of the project is the privatization of Aramco.

Vision 2030’s flagship project is a vast, high tech business zone in northwestern Saudi Arabia called NEOM that will cost $500 billion.

Currently two-thirds of employed Saudis work for the state and under Vision 2030 it is supposed to go down to 20 percent.

With rampant poverty in Saudi Arabia today and austerity plans further alleviating the situation and with lack of interest from private sector there is very little confidence if this vision will materialize.

Despite some austerity measures the budget deficit is set to rise to $50bn in 2020 from $35bn in 2019.

Climate change: Global shift towards electric cars and worsening climate change effects could dampen the demand for oil in the future. As renewables get cheaper, it will become economical to retire existing coal and gas plants.

Shale oil: Having learned to wring oil from shale with fracking, the United States has vaulted to the top of the oil producer rankings, with 12.5 million barrels per day of output, double 2010 levels. Shale oil production exceeds 9 million bpd, from below one million bpd in 2010, making the United States an oil exporter for the first time in 40 years.

The shale boom is partly why conversations around energy have switched from peak supply to peak demand. Surging output comes alongside environmental concerns, meaning an oil glut is likelier than shortages. 

Aramco is the world’s first two trillion dollar company. Transparency is minimal regarding Saudi spare production capacity, the remaining unexplored reserves and their ownership, and production costs are to name just another few of the economic factors. Saudi human rights records remain dismal. When a journalist can be murdered inside a Saudi consulate abroad, possibilities of human rights abuse inside the country can just be imagined.

To make Aramco a viable investor option is going to be a struggle for Riyadh.

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