From the Barrel: Saudi Aramco, the listing of the century
CAPE TOWN – For the producing oil fraternity and its supporting economic ecosystem, 2019 ended on a high note typified by high oil prices and, to the pundits’ delight, the eventual realization of the much vaunted public listing of Saudi Aramco.
And it is the latter event that this article wishes to address in depth and in that breath, contends that it portends the kind of long term consequences which may alter the face of oil politics as defined by OPEC and inadvertently lend a severe hue into the kaleidoscope of very tense Middle Eastern politics.
There is no gainsaying that this IPO claims its apex status from the US$2 Trillion valuation attained within the first twenty four hours of listing, earning the epithet of ‘The Listing of the Century’, as most first things are wont to do. Until of course like in the Alibaba.com example, it is shoved from the top spot by another unicorn yet unknown. So big was the IPO both in effect and extent, everything it touched benefited immensely.
At the price of 35.2 Riyals per share, the listing raised US$$25.6 Billion from only 1.5 percent of the conglomerate’s stock, it catapulted the Tadawul bourse in Riyadh onto 10th place in the world, raised the TASI Index by 0.8 percent and shall be staple quotation at the MSCI and FTSE indices starting from January, 2020. Very significant consequences indeed! This makes Aramco 566.667 percent larger than Exxon, the world’s largest privately owned company currently valued US$300 Billion.
Reasons for Listing
It is fair comment that Saudi Aramco is an envy of its peers and an oil investors’ dream to ever list. It commands an impressive balance sheet that yielded a profit margin of US$111.1 Billion in 2018, which is twice than what Apple garners, or thrice that of its nearest competitor, Exxon. This confirms its status as the most profitable company in the world.
This accomplishment is bolstered by two of the industry’s most enviable metrics. The first is the Return On Average Capital Employed, ‘ROACE’ for short. The second is ‘Lift’ which represents the cost of bringing the oil out of the ground on to the surface. As for the first metric, on average, oil companies have a ROACE of 15 percent. Aramco has a staggering 41.1 percent. In the case of Lift, the average industry Lift is US$30.00. Aramco for its part, cruises in at US$9.00!
There are a few preeminent compelling factors that steered the Kingdom toward the inclination of an IPO. Some reasons are publicly canvassed and tend to enjoy pride of place in policy literature and gilded haunts of latter day spinmeisters. It is however the less stated, strenuously contested yet fairly reasoned ones which command premium attention. Starting with the former, the Crown Prince through the facility of a program styled ‘Vision 2030’, has sought to address the dwindling revenues from the oil assets against the ever growing expenditure calls of the Kingdom. As at the end of 2019, the Budget Deficit stood at US$50B.
Intrinsic in its ambitious plans are the Vision’s elements that require significant investment injection which the current revenue streams are incapable of addressing. 60 percent of the Kingdom’s current revenues derive from the oil sector. Invariably therefore, certain adjustments had to be made. First, the Kingdom’s royalty earned from the oil giant, is now indexed against Brent crude oil pricing in order to eliminate the average US$ 5.00 price differential to Saudi Light. Second, from US$40-US$70 per barrel price range, the royalty payable shall be 15 percent.
Above US$70 but below US$100 per barrel price range, the royalty payabe shall be an increased rate of 45 percent from 2020 onwards. Hovering at above US$100 per barrel price range, a whopping 50 percent royalty rate is payable. All this mining of revenues as royalties requires two quintessential pillars. The one is stability in production, and the other is the minimization, if not complete elimination of risks accentuated in large measure by regional tension and a protracted war with the Houthis, a significant drain on the ever diminishing Royal budget . Enter Iran.
Tension in the Middle East
With the advent of the Trump administration, the clouds of dark depression have been ominously gathering over the Persian Gulf horizon, with specific focus on Iran as the U.S number one enemy. Whether by empirical deduction of incontrovertible fact or owing to some puerile frivolity to distract attention from congressional investigations, the intensity of rising conflict in the peninsula has brooked no distinction from either of the excuses.
The underflowing currents have finally converged in the estuary of the Yemeni conflict, whose full blown expression and disastrous human toll, has been dubbed the Sunni-Shia proxy war. Its convulsions and paroxysms of gory violence led to the 15th September, 2019 drone attacks on the Saudi’s Abqaiq refinery, the world’s biggest oil installation and the Khurais mega oil well.
These attacks took out 5.7 million barrels per day of Saudi production capacity. According to OilPrice.com, ‘Saudi found itself, inadvertently, because it does not know anything about how oil markets work, buying oil barrels from the very people that it thought had attacked it in the first place-Iran.’ On the 28th of September of that year, Saudi Arabia agreed to a truce with the Houthi in four regions. Back to the listing, one of the two institutional investors during the listing is reported by inside sources to be the Kuwait Investment Authority. Enter Kuwait.
Conflict on the Neutral Zone
The Neutral or Divided Zone was created by the specific provisions of the Uqair Convention of 1922 and was finally ratified in 1970. The Zone is both historically and politically important because it is a hydrocarbon resource bearing border region between Saudi Arabia and Kuwait. It has a proven potential of approximately 600 000 barrels per day. This giant block called the Wafra on the Kuwaiti side and Khafji on the Saudi side, is operated by Chevron on both ends.
The bitter dispute over oil and gas exploitation in the Neutral Zone which has raged for over half a decade, has suddenly been resolved, and accordingly, an agreement finally executed. Whether the resolution resulted from the Kuwaiti investment in the IPO, which somewhat buttered the honchos of the Kingdom to political reticence, or perhaps benefited from the ubiquitous reach of American influence, is not certain. But it would surprise no-one if the latter triggered the former and ergo, the formality of both sovereigns’ acquiescence became inevitable. Enter the Americans.
The Geopolitical smogarsbord
It would not have been lost to the Americans that, their transactional zeal aside, dealing with the Saudis would inescapably had to factor OPEC and its constituent parts. If indeed it was lost, by dint of an astounding combination of arrogance and dereliction, something the Americans tend to do when dealing with the region, they must have learnt rather quickly that they needed a metaphorical Chinese wall, or in this case the Trumpian wall, to deal with their esteemed allies without involving the rest of the club members.
Uppermost in the Donald’s book of priorities or impulses, is the need to keep oil prices affordably low. But that’s a tall order for the Kingdom, if such feat must be accomplished within the constricting rules of the cartel, especially considering that in order for the Saudi’s to balance their books, they need an US$84.00 barrel. That means cutting off of production and raising prices, a really thin tight rope walking. In short, the Americans who have for the first time since 1973 become a net oil exporter, are bent on seeing Saudi Arabia out of OPEC. The entire network of the OPEC Brotherhood is fraught with politico-military complexities for American foreign policy.
Venezuela, the OPEC member with the largest oil reserves is under a broad reaching svengali of US sanctions. Iran with the third largest, is also under a comprehensive set of debilitating sanctions. Iraq, a Shia dominated territory presents uncertainties of an unfamiliar kind. If Iran leaves OPEC, it is uncertain how Iraq will comport itself in the new configuration.
Lybia, with Africa’s largest reserves, is wholly incapacitated by internecine violence and Nigeria for its part, has seen the diminution of its exports to the US from 35 million barrels per annum to the current measly 5.6 million. With the exception of Saudi Arabia, Kuwait and the UAE what, pray tell, is the utility of the cartel to the US? A listed Aramco that generates alternative revenues elsewhere other than from high oil prices, is more a long term American military stratagem than could be attributed to the singularity of genius of anyone elsewhere in the expanse dunes of the vast Kingdom.
Besides, for some time now, the US Congress has been trying to amend the anti-cartel Sherman Act of 1890 by a Bill promoted as NOPEC Act, whose main intent is to declare OPEC a cartel. This would allow the US courts to have jurisdiction over the OPEC member countries, its companies and executives, jointly or severally for conspiring to lower oil production in a bid to raise prices. Only in the era of Donald Trump does such an Act stand a chance of success, and when it does, Saudi Arabia would have left the cartel a long time ago.
Whilst the Maadi Pact signatories have plenty reasons to ruminate over the Aramco Listing and its potential consequences, they have more urgency to figure the pernicious effects of a Midas Trump. He may be reputed for loving things golden, but unlike the Greek legend, his touch on foreign institutions has a dangerous, destructive and long lasting crippling effect on the designs and policies of other global commons the world over.
Ambassador Bheki Gila is a Barrister-at-Law.