Home Analysis The Long Term Context of Aramco's IPO

The Long Term Context of Aramco’s IPO

Stockholm (Ekonamik) – During September, commodity markets were dominated by the attack on Aramco’s refineries in Abqaiq and Khurais. Houthi rebels from Yemen claimed responsibility for the attack, which they said had been carried through drones although this is doubtful. Saudi Arabia has been fighting a proxy war with Iran in Yemen since 2015.

In 2018, Aramco was the largest oil-producing in the world and Saudi Arabia is the second-largest oil-producing country (after the USA), responsible for producing 12 million barrels of oil per day, equivalent to 10% of the world’s total output. The Abqaiq facility had a daily processing capacity of 7 million barrels. The attack was said to have halved Aramco’s production capacity, implying a temporary 5% decrease in global oil supply. The effect on the price of the commodity was obvious.

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Source: FRED

According to the most recent updates, Aramco has recovered from the attacks and production is back online, which explains the decrease in the price of oil. However, the future still remains somewhat uncertain.

The Geopolitical Context

It seems likely that the attack was carried out by Iran as it is rather implausible that the Houthi rebels would have the resources, expertise and infrastructure necessary to operate that many drones at such a distance. In any case, that detail does not matter. Fundamentally, there is no question that this event was the latest development in the cold war that Iran and Saudi Arabia have been engaged in since the mid-2010s.

The conflict is one of the many balls Mohamed bin Salman (MbS) is trying to juggle in his efforts to assert Saudi Arabia’s authority and guarantee the kingdom’s country future. At the core of the kingdom’s strategy is a concern that climate change will continue to cause the global energy industry to shift towards ever greener options, leaving it stranded with poorly-performing assets.

To guarantee its future and internal stability, Saudi Arabia has sought to project strength abroad and modernise its economy.

Investing in the Future

MbS has sought to reform the country’s economy and society to become more appealing to international investors, experts and while the conflict is perhaps best understood as an effort not just to project force for its own sake, but also to deter foreign disruption into the kingdom’s internal affairs following the US-led collapse of Iraq.

Funding this strategy has been more problematic. It has required the consolidation of the country’s assets into the hands of the state, personified by the Crown Prince himself. This was the reason 2019 started with the arrests of so many of the country’s richest men and why the crown prince is obsessed with a high valuation for the IPO of 5% of Aramco. Such efforts were only possible by MbS’s own efforts to consolidate his hold on power and public offices. He is the crown prince, heir to the throne, and the defence minister.

What now?

If the war was meant to deter foreign interference, the recent attacks may suggest it has backfired. Indeed, a similar conclusion may be reached regarding the other fronts. The Yemeni war is stuck in a quagmire and has become widely unpopular worldwide.

The Crown Prince seems to understand this. A direct conflict with Iran is not practical. No one has the resources or the interest to commit manpower on the ground. Better to run a proxy war of attrition, hope the other side makes a mistake and that the continued US pressure bears its fruit.

That being said, time is of the essence. The urgency of the IPO is patent in the crown prince’s impatience. As Dan Lindström, CEO at Stockholm-based asset manager Proxy P Management said in his interview with Eugene Guzun, “it is almost impossible for Aramco to be as valuable in the future as they are now, adjusted for the oil price.” There are things the company can do, but the future does not look as prosperous as the past according to the CEO. “It can start to take big chunks of other industries, but they are not going to catch 5% of the world’s entire energy production in the future, and renewable energy production margins will not be anywhere close to the margins provided by oil for Aramco,” says Lindström.

MbS might just have to accept a lower price than the one implied by the US$2 trillion valuation he so desires. Some cash might be better than none and oil isn’t getting any more popular.

Image by GLady from Pixabay


Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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