Only $60 Oil Can Save the Aramco IPO

By Zainab Calcuttawala, an American journalist based in Morocco. She creports on international trade, human rights issues and more. Originally published at OilPrice

The OPEC deal is in crisis. All oil price gains derived from the 1.2 million-barrel cut’s initial announcement and implementation have been wiped out, and No. 1 OPEC producer Saudi Arabia’s attempt to draw down American inventories has fallen flat, due in part to insubordination from the No. 2 producer, Iraq, along with upticks in production from Nigeria, Libya, and U.S. shale.

The KSA had a clear opportunity to drastically change the direction of oil prices last month, when the Organization of Petroleum Exporting Countries (OPEC) met in Vienna to discuss the duration and scope of the output cut extension. Though Riyadh agreed to continue the deal three months longer than analysts expected (the new deal ends in March 2018, as opposed to December 2017 as many expected), the bloc leader did not heed recommendations to deepen the cuts, keeping production at 32.5 million bpd.

In addition, Nigeria and Libya got a pass that allows them to produce as much as they can for the next nine months, despite the African duo’s booming recovery worth hundreds of thousands of barrels.

In April and May, Saudi Arabia cut exports despite the fact that the OPEC deal does not limit export volumes. But new ClipperData says that June numbers could reveal a reversal in that downward trend, as KSA appears ready to ship more oil.

The royal family – especially newly crowned heir to the throne Mohammed bin Salman – needs oil prices near $60 for Saudi Aramco’s 2018 IPO to generate the income it needs. At the time of this article’s writing, Brent was trading up at $47.78.

One month after OPEC’s failure to toughen production quotas, the bloc remains uncertain about deeper cuts. Reuters reported on Tuesday that the monitoring committee for the deal, plus Saudi Arabia and Russia, would officially discuss the deal’s progress next at the end of July. That’s an extra two months of market standstill.

The IPO isn’t moving along as quickly as originally planned. Riyadh’s financial planners are behind in preparing Aramco and world markets for what is expected to be the largest IPO in history. The team was supposed to reach a decision on a foreign bourse for the listing by the end of Ramadan, but Eid-ul-Fitr passed days ago, and the victor has yet to be named—just murmurs that Bin Salman is at odds with top planners who prefer London over New York.

And while the Saudis may not be deliberately procrastinating on the listing, holding out for higher oil prices, the current low oil prices certainly aren’t rushing things along.

Realistically, no stock exchange other than New York or London had a fair chance at winning the Aramco listing. The United Kingdom had presented plans to bend its listing rules to accommodate the state oil company on more favorable terms, but British fund managers find the obvious kowtowing to Saudi oil wealth to be obscene. New York would connect Riyadh to the steepest pool of international funds, but an ongoing class action lawsuit against Saudi Arabia pursuant to the controversial Justice Against State Sponsors of Terrorism Act could expose Aramco and its liquid assets to litigation.

And there’s no doubt that Riyadh desperately needs the liquid. The $100-$400 billion it hopes to raise from the IPO is earmarked for a much-needed economic overhaul, bringing Saudi Arabia into the 21st century—without the oil dependency—by 2030. The KSA has the most to lose if investors do not get excited to buy small pieces of 5 percent of its most valuable company.

With some claiming that peak oil is expected to hit around 2030, Aramco shareholders would have just 12 years to profit from their investment before it loses most of its value—or even all of its value. And that’s assuming the Aramco listing goes live early next year, as promised. Riyadh has yet to pick a venue, and the rest of the planning process has been shrouded in secrecy. Who knows how close they are to finalizing a valuation or determining exactly what assets will be included in the IPO-version of Aramco?

A wrong decision on any of the above factors could be the straw that breaks the camel’s back for investors and hedge fund managers who have taken their most bearish position on oil futures markets since the price crash in 2014. As the world’s largest oil exporter, its tick tock on the clock for Saudi Arabia to make a big change in oil market fundamentals, and doing “whatever it takes” as Saudi Arabia has vowed to do, may be much more important—and much more painful—that it had imagined.

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  1. Clive

    Not sufficiently familiar with the US (or other markets) to get the data, but in the UK electric vehicle sales are growing more-or-less exponentially (e.g. May sales for “Alternative Fuel Vehicles” (AFV) were 4.4% of the total compared with 2.8% a year ago for the same month); AFVs include hybrids which also have a gasoline engine but even these achieve 70-150 mpg (British gallons) as well as all-electric plug-ins but hybrids still reduce gasoline consumption and plug-in hybrids or all-electric vehicles make a net energy source shift.

    Ten years ago, sales were in the hundreds per year. The trend is inescapable.

    Of course, the UK market is, erm, markedly different from the US for passenger cars. Journeys are much shorter on average — a hundred mile drive is considered quite a stretch. In the US, bigger distances mean longer ranges are needed and less city driving blunts hybrid powertrain advantage. Gas prices are hugely cheaper as there is little / no taxation. But realistic 200 mile range all-electric vehicles will be mainstream mass market products in 5 years or less. This will put a big hole in oil consumption.

    Okay, there’s always industrial and transportation demand for oil. But there’s no convincing evidence growth in that segment will offset declines in passenger car use.

    The word on the street in the commercial banks in the City (of London) is that Aramco is going to be a tough sell and will have to be priced at the lower end of projected valuations. And the fees will be eye-watering. Even Saudi princes get price gouged by the big banks. The waivers for the LSE rules to allow the listing are pretty stinky, too.

    1. PlutoniumKun

      Yes, I think we’re hitting a tipping point in electric vehicles. There is a wave of new cheap batteries from china about to hit the market.. On the completely unscientific basis of what I read in car buying forums (I was thinking of buying a car a few weeks ago, changed my mind, I like being carless), EV’s now seem to be an acceptable option for non-greenies, simply because of super cheap running costs. The problem for the oil industry is less likely to be a direct drop in oil demand, more that changing vehicle preferences will lead to a need to completely revamp the worlds main refinery complexes – and the market may decide that this just isn’t profitable.

      The thought does occur to me though that the Saudi’s belligerence over Qatar may be in part due to a desire to stoke up tension and raise oil prices. I’m surprised at how sanguine the markets are over that conflict – to me it looks extremely dangerous – the Saudi’s have given themselves no easy way to step back, and the Qataris seem determined to stand up to them.

      1. Procopius

        I think the markets are taking into account the huge American operations center at al-Udeid Air Force Base. There are a total of 10,000 troops in Qatar. We were supposed to pull the remaining troops out of Arabia because of objections from religious Muslim (see Omar bin Laden’s manifesto). Did we? I’ve also seen comments that the American military much prefers working with Qataris in Syria. They’re reliable and easy to get along with. The Saudis very much are not. Trump may have been charmed by the Royal Family, but those who have to deal with the common people feel differently. I have a cousin who has worked for an American contractor in Saudi for over 30 years and he hates Saudis. It’s extraordinary. Of course he hates a lot of groups, but he has said the money is just too good for him to let his personal comfort keep him from working there. He just stays isolated. Certainly Mattis and Tillerson have been struggling to get KSA and the emirates to back off, which probably reassures the markets.

    2. PlutoniumKun

      I should point out on this issue, that even a huge drop in oil use will not impact on the demand for Saudi oil. The Saudi’s produce about 12-15% of the worlds daily production – but they are by some distance the lowest cost and highest quality producer (i.e Saudi oil is light and sweet, just as most refiners like it). So even if demand were to collapse by 80% tomorrow, the Saudi’s would still be able to sell all 10-11 million barrel per day of their production by undercutting everyone else. It would still be highly profitable even at $20 per barrel. The problem of course for SA is that the profits would be too low to allow them to keep the country running in the lavish way they’ve been doing so, and thats curtains for the House of Saudi.

      1. Judith

        If the IPO is a success, Mohammed bin Salman will consider he has carte blanche to continue his frightening irrational behavior. And if the IPO is a failure, he will be so angry he will continue his frightening irrational behavior. Until…

    3. Synoia

      An obstacle to electric vehicles in the UK is large scale street parking.

      Street parking provide a mechanism for large scale rent extraction by the owners of the “charging meters.”

      Unlike the US where one can (mostly) plug the car into the house electric supply.

  2. uncle tungsten

    My prediction is that a this IPO will be a debacle. The transformation to new energy is on and it’s consequences will be extraordinary. I will be sad if wrong but the risk on this IPO is extreme.

    1. PlutoniumKun

      I would have thought the biggest risk to the IPO is not a shift away from oil – plenty of people are still buying gas guzzlers – but the political risks. Aramco would still remain firmly in the control of the House of Saud. Buying into it is as much a bet on long term political stability and rational policy in Saudi Arabia over the medium to long term as it is on oil prices. Personally, I would consider that a high risk bet.

      1. Troutwaxer

        Maybe they’re selling it to suckers while there’s still a market. The House of Saud can invest in other things.

  3. divadab

    ” peak oil is expected to hit around 2030, Aramco shareholders would have just 12 years to profit from their investment before it loses most of its value”

    Completely backwards. Peak oil means more profits as prices rise due to lessening supply. Consider the $160 bbl of 2007 a small preview of the kind of shock that will happen – I wouldn’t be surprised if oil hit $250 bbl within this timeframe.

    It doesn’t make Aramco a good investment, however.

    1. a different chris

      Yeah, if you are talking about peak oil supply, but peak oil demand has suddenly sprung into view. I believe that’s what he’s talking about.

    2. johnnygl

      Disagree, the amount of demand destruction that took place during that price spike was massive. There are still lots of easy efficiency boosts that western society doesn’t bother doing (consumers, businesses, or govts). Another price spike like that would stir people into action, resulting in another price crash within a couple of years, just as we saw in 2008-9. Oil industry doesn’t want to sign its own death warrant any sooner than it must.

  4. Clive

    I read it that the author was referring to peak oil demand rather than production. Peak oil production may well coincide with that time, but it could also be that production will, for a short time, increase as oil producers flood the market with superfluous production to make up for declining sales (producers keep producing in the hope of maintaining income despite lower unit prices) but that situation won’t last long as high cost producers exit the market (e.g. through bankruptcy causing supply to then fall as excess production capacity gets decommissioned).

    There’s no evidence whatsoever that there’s not enough oil supply capacity to meet any reasonably foreseeable demand. While the supply/demand curve may tighten a bit and thus force prices moderately higher for a short while (the point the author was suggesting in her piece) this will only hasten moves away from oil as an energy source as higher-cost alternatives get the price differential narrowed as a result. And that’s before you get to the higher cost alternatives becoming cheaper.

    1. divadab

      The concept of peak oil as laid out by M. King Hubbert relates to peak SUPPLY. Despite Clive’s unsubstantiated assertion that there is “no evidence whatsoever there’s not enough oil capacity to meet reasonably foreseeable demand” it is clear that:
      a) oil companies’ official reserves are lower than their peak;
      b) the cost of extraction is getting higher as a proportion of revenues – there are no more cheap pools of oil undiscovered – what’s left is tar sands, deep water resource, and other expensive oil;
      c) oil is the heart of the globalized economy – and global use continues to increase. Yes there was demand destruction in the richest parts of the empire of oil – these economies have the luxury of spending on replacement infrastructure. But overall demand is rising.

      The jury is out whether global chaos will result from $250 Bbl. oil or the climatic effects of burning 200 million years’ worth of sequestered carbon into the atmosphere to support human gluttony, greed, vanity, waste, and unsustainable population growth. Most likely both. But the author’s 12 year time span is laughably wrong, as are her conclusions about oil company profitability in a world with restricted peak supply and continuous demand growth.

        1. Amit Chokshi

          Divadab is correct. Norwegian based universities and oil producers and service providers have all stated at varying times and prices that the annual global depletion rate is about 8pct so you need another Saudia Arabia find each year.

          Oil has very steep supply / demand curves which is what leads to the price vol.

          Overall, the large cheap field funds are the ones going away so the cost of extraction will rise.

          You are also correct Clive and I believe since 2005 all of the incremental demand in oil was from China, all developed countries have been reducing oil usage.

          The question becomes speed of alternatives which I think people have underestimated as well as ability of energy cos to morph and adapt and drive their own costs down.

          1. divadab

            @Clive – you are missing the point. That’s ok – I’ll make money and you won’t.

            @Amit – ultimately goods will be shipped overseas on solar/wind – powered ships (E.g. alternatives) but this level of replacement of petroleum energy is not even in the 30-year pipeline. Nothing beats the energy density of oil for motive force – and I suspect that when (not if) oil hits $250 a Bbl that there will be massive conversion of ships from oil to coal rather than sustainable options. Path of least resistance………have you ever seen it otherwise in human history?

            1. skippy


              Firstly “making money” [expectation] is not a sound methodology in reconciling complex systems.

              Secondly “popular science” based outcomes with attendant emotive human grandeur based outcomes is full of fought.

              disheveled…. tho I do understand the concept of – least resistance – can be an environmentally conditioned response for some…. when enough believe the dogma thingy….

            2. Clive

              I’ve already made my money, thanks. Mainly by looking at the fact-set available to determine historical trends combined with easIly observable tests, such as watching whether people do what they say they are going to do, to inform me if pertinent actors are telling the truth or not.

              For example, if I owned a lot of a finite commodity but had lied about how much of it I had (overstating the numbers) — and I suspected other participants had done the same — I would not be rushing to dump as much as I could of it into a slack market when prices were low. Rather, I’d be selling as little as I could now and wait for the inevitable supply crunch to push prices back up so I could sell what little I had remaining at super-high prices.

              Conversely, if I had loads of the stuff and knew everyone else did too, far more than I suspected I could ever sell because customers were looking for other alternatives, well, I might possibly see the upside of putting about stories about impending scarcity. There are, seemingly, no shorting of gullible people willing to believe and repeat unsubstantiated conspiracy theories — long after the point where if they were true, you’d think some corroborated evidence for them should have started to emerge.

              There’s always Black Swans and left-field events which can either wipe you out or make mint for you. But if you’re going to ignore the facts and rely on hope and luck, you might as well go and buy a lottery ticket.

              1. divadab

                @Clive – As always in divining the future, we shall see. You clearly believe the world is awash in low cost-of-extraction oil – I beg to differ. I see a future world of climate shocks, commodity shocks, massive migrations, famine, and war. The four horsemen are saddled up and chomping at the bit.

                Recent history shows what happens to commodity prices, esp. oil, when production is taken out at the margins – the US invasion of Iraq reduced Iraqi oil production by 80% and it did not recover to pre-invasion levels til 2011. And oil prices hit $160 Bbl in 2007-8, which were recessionary, while oil majors made the largest profits ever made in the history of the world. This will happen again – global chaos is not a black swan – it is baked into the mix.

                What people get wrong is the timing – this thing will unfold over centuries. Forecasting oil companies to be a losing proposition in 12 years is ludicrous. OIl is the basis of the economy, of the empire (the US military is the largest consumer of oil in the world), and of the globalized supply chain. I’m not saying this is a good thing – quite the contrary – but it is reality. Oil will not be pushed out of its central role without massive “adjustments” – which we hope will be implemented by people of good will and foresight and intelligence – but we know will be rather implemented by the four horsemen.

                1. Clive

                  Straw manning. I certainly did not say I saw the world awash in cheaply extracted oil. What I did say was that I saw a history of every peak in oil demand being lopped by available supply. I evidenced this with data earlier in the thread.

                  I also said I saw sufficient alternatives to oil for some, though not all, energy usage. These alternate sources are more expensive than oil in a $30-60 bbl price range but as soon as oil starts to drift above this range demand falls as the price differences reduce. It’s not like flipping a switch but again the data I cited verifies the cause / effect theory.

                  I further said that while I’m partial to a good conspiracy theory like everyone else, claims about vastly inflated misstatements of proven reserves do not have any supporting verifiable evidence but invited the submission of such corroborated information. I am still waiting for that, just as I am still waiting for something — anything — by way of data to support the notion we are, outside of the usual plague and pestilence end-of-the-world speculation, about to hit some kind of significant oil demand spike or oil supply crunch.

                  While I do enjoy storytelling, if we’re to sit here and relay fascinating theories and ripping yarns instead of rational analysis and evidence-based discussion, I’ll need to pop up into the attic to get my childhood Famous Five and Secret Seven storybooks.

                  1. Divadab

                    @clive – I don’t doubt one of yr theses: just as a mine is a hole in the ground with a liar standing on top, oil companies, cartels, and governments may not be sources of reliable information.

                    However, we are discussing the author’s assertion that aramco is on a 12-yr short stick because of peak oil. This is imho a fundamental misunderstanding of peak oil SUPPLY and the effect of this on oil prices and by extension oilco future profits . I think both will go up in the medium to long term tho there may be short-term softening as desperate countries pump and dump for short-term funds. Peak oil concepts still apply in the long run.

                    In order for your energy substitution to take place on any scale away from fossil fuels, coal also needs to get more expensive or else it will get substituted for expensive oil – not sustainable wind or solar.

                    Finally, the world and human society will certainly not continue on a stable path (has it ever?)- sorry to offend your paradigm but if we are to understand and deal with a future unstable world we need to consider situations other than that predicted by extending 50 yrs of stable data into the future.

                    Consider the 2 million plus climate refugees from Syria in Germany- this is just a taste of what is to come. This is reality, not exactly boys own annual stuff.

  5. Carolinian

    And if Peak Demand has already happened? See the electric vehicle discussion above.

      1. divadab

        See my comment above. Peak demand may have happened in advanced economies but global demand continues to rise.

    1. Clive

      Why? Even if it were to happen, we’ve already done ground assaults on Iraq, trashed Libya — and continue air strikes on the former — and destabilised the whole region via Afghanistan and goading Iran. Not to mention the sanctions on Iran as well. Then there’s proxy wars in Yemen. KSA’s handbags-at-dawn with Qatar is a latecomer to the party but another bit of sand in the works. We’re running out of places to mess up.

      Syria couldn’t be more ruined so I’m not sure what more ruination will add by way of detrimental effects.

  6. Lune

    Macroeconomically speaking this IPO will do nothing for Saudi Arabia. It’s been reported that the Saudis plan to invest the proceeds in a sovereign wealth fund. But for that to be beneficial, the returns from a global wealth fund would have to be higher than the expected returns of keeping the money in Aramco. But why would investors pay such a premium for Aramco?

    Most likely, Aramco will end up priced to yield a return equivalent to other oil stocks,which means transferring money from aramco to buy a global basket won’t really improve Saudi finances (and will be worse when the enormous fees are deducted).

    That’s the best case scenario. Realistically, aramco will be priced below the private oil majors to discount political risks like re-nationalization or the Saudis making decisions based on politics rather than maximizing shareholder return.

    Which means the long term impact of this IPO on Saudi financial health will likely be neutral to a mild net negative. Plus there’s always the possibility that the Saudi rulers blow their one-time windfall on billion dollar palaces and useless wars, sort of like how they’ve used their oil wealth thus far…

  7. Jim Haygood

    [A New York listing] would connect Riyadh to the steepest pool of international funds, but an ongoing class action lawsuit against Saudi Arabia pursuant to the controversial Justice Against State Sponsors of Terrorism Act could expose Aramco and its liquid assets to litigation.

    Politicization has its costs. London, I believe, would be a more agreeable domicile for Aramco than the schizophrenic, mercurial USA. We’re nuts … don’t mess wif us.

    Crude oil — the commodity everyone loves to hate — is over forty-five dollah today … up for the 7th day in a row. Chart:

    With everybody picking on it, it’s prolly a buy. Black gold, Texas tea …

  8. James

    Internal Saudi demand has been rising and production has been flat – for some time now. It would be interesting to see a graph of KSA oil exports (as opposed to production). The population in the oil producing areas are overwhelmingly Shia and I don’t think that even the Sunni citizens much like their corrupt and cruel regime. I think that the IPO is a way for the Saudi royal dictators to cash out and prepare to flee to London, Shah style. What better way to keep oppressing your people after you are overthrown than by selling out the nations wealth shortly before you are deposed?

    1. James

      And obviously the domestically consumed oil output is sold at near cost. Good luck with telling the Saudi subjects that they are going to have to give up their subsidized oil.

  9. JimTan

    Don’t know how this will work out, but Saudi Arabia is already committing its future proceeds from an Aramco IPO. Most of these proceeds will apparently go to the Saudi Arabia’s Public Investment Fund. According to recent reporting:

    “Blackstone and Japan’s SoftBank are the first big winners in the race to secure the mountain of Saudi assets that is up for grabs. Shortly after the dinner, PIF announced it will commit $20 billion to Blackstone’s new $40 billion infrastructure fund, which is to be the biggest ever raised. It has pledged $45 billion to SoftBank’s Vision Fund, the world’s largest technology-investment pool.”

  10. JimL

    OPEC (Saudi Arabia) needs to maintain market share and the only way to do that is to reduce the contribution of the nontraditional oil suppliers (shale oil, tar sands, deep water). To do that they should do away with all quotas agreed upon within and outside of OPEC and watch the price of oil go below the breakeven point of the nontraditional suppliers ($40, $30 per barrel?) and stay there for an extended period (6mo, 1yr, 2yr?). Hopefully for them during this time they will not only bankrupt and dry up capital for nontraditional suppliers but also lull the OECD countries into becoming more profligate in their oil consumption (buy more F-150s, reduce the electric vehicle market and plans for mass transit).

    The risks for OPEC in pursuing this strategy are huge. The breakeven point for the Saudi society is estimated to be around $100 per barrel. They will need to reduce this while at the same time drawing down their sovereign wealth funds. Perhaps one way they can do this while not damaging their society too severely is to reduce the proportion of oil revenue that goes to the royal family. Another problem is the Aramco IPO which will need to be put on hold until prices rise again.

    The Saudis have no other good choices. They are in the battle for their existence as the proposed Aramco IPO, Vision 2030, the war in Yemen, and the spat with Qatar show. They need to reassert the power of the OPEC cartel. Many believe that we are past peak for traditional oil and that it is only nontraditional oil that is accounting for the increase in oil production. If reduced oil prices can keep the nontraditional producers out of the market long enough for total production to decline below consumption then in theory the price of oil can increase to support nontraditional while maintaining the large profit margins OPEC countries need to maintain their societies. What the Saudis do and how the rest of the world responds will be one of the most important events of our time.

  11. Viking1

    “With some claiming that peak oil is expected to hit around 2030, Aramco shareholders would have just 12 years to profit from their investment before it loses most of its value—or even all of its value.”

    Does that sentence even make sense? 2 events are being conflated, the world rate of new capacity being exceeded by decreases in old capacity, AKA “Peak Oil”, and the event of Aramco’s reserves getting exhausted to the point there is a significant dropoff in production.

    If Aramco’s reserves at current rate of production last beyond peak oil, then peak oil is a good thing for the shareholders.

    The author of this article would do better analyzing the risk of Aramco being nationalized again and the western world response to such an event.

  12. SubjectivObject

    Anybody know what are the current water cuts from relevant Saudi fields, or what the trend has been?
    Does the IPO prospectus cite that information?

  13. Michael Smitka

    With a young and growing population (and expanding royal households) Saudi Arabia needs revenue to keep all happy. Right now petroleum/gas are not providing that, hence sovereign debt issues in international markets. At the same time, cheap imports fueled by oil exports militate against growing manufacturing or other potential sources of foreign exchange.

    So what happens if they cut output 10%? Will prices go up 10%? No, supply/demand elasticities suggest otherwise. They are between a rock and a hard place (er, Iraq and …?).

    Still, can they get a big premium on Aramco? That would lie in the details of any IPO, including what their real extraction costs are (secondary recovery, pumping in water) and who ends up with which set of assets and whether there’s a selective shifting of operating costs and revenue. A premium based on frothy capital markets and opaque accounts and OPEC strategy misperceptions could more than offset low returns in global asset markets.

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