Like it or not, Saudi Aramco’s IPO is no ordinary sale
To start, I have to admit that I was a non-believer in the initial public offering of Saudi Aramco.
For years there have been many questions. Why would any government share such wealth with the world when it could retain all the profit for itself?
Then came the issue of risk, an unavoidable factor in listing Aramco on an international stock exchange and opening its books to external auditors.
Last but not least, many have wondered what would the government do with all the money raised from the IPO?
Putting the funds into non-oil assets to diversify the economy sounds great, but how long will it take for this transformation to happen? And even this is a risky situation.
As time passed, however, I started to change my mind and became a believer in the IPO.
Steps have been taken to limit risk and the government is accepting a reasonable valuation. From the figures and statements released by the company, it appeared financially more sound than any other in the world.
Most importantly, the listing is domestic for now and the international sale is postponed until later. This means Saudis can enjoy holding the shares of the company that makes up a big part of their national pride and pass them on to the next generation.
But the way this has been portrayed in the international media is very different.
Moves that I consider risk-averse are being portrayed by others as a sign of defeat. And the local listing, which was part of the IPO plan from day one, is now being viewed as a failure to attract international investors.
While we can’t disagree that it is a challenge to get foreign investors to buy Saudi assets these days, that challenge makes focusing the initial phase of the IPO on local audiences a smart decision, not a sign of failure.
Reading the articles out there on Saudi Aramco’s IPO makes one wonder if this is a criticism of a key signal of the Kingdom opening to the world or is it just resentment? And if this is the case, then there must be a reason for this hostility.
There is a clear campaign against Saudi leadership and the ambitious Saudi Vision 2030 plan. I don’t need to go into the reasons behind this campaign, which is well known.
What concerns me here as a person who devoted a considerable part of his life writing about oil matters is seeing how objectivity is being lost in the international media and how coverage of Saudi Aramco is turning into a stand-off between journalists and the Saudi government or Aramco.
I tried to find a justification for all of this and I found one. For many years, the Saudi oil media scene was run by people who didn’t build good relations with the crowd. That’s obvious and I can’t think of a reporter who didn’t complain of having had a bad experience with a government or government-related PR professional.
However, personal issues should not obstruct the way reporters cover the largest IPO in history.
And when I read the way columnists in the international media are describing how the Saudi government defends the valuation of Aramco, I am disappointed. Many are forgetting that Aramco is a goose that lays golden eggs.
As a Saudi, I don’t want to see a company that has sole production rights over Saudi reserves, the largest in the world despite all other claims from other countries, being sold for a value that fails to reflect its real future value. So what’s the real value of Aramco?
The world will need more than 100 million barrels a day of crude in the coming few years and this number will stay there for a long time. Meeting this base demand requires huge investments that aren’t available easily and no one has access to resources to meet that demand except Saudi Aramco.
If anyone thinks that peak demand, which some are claiming will happen within 10 years, will mean the end of the oil age, they should reconsider.
There is no single source of energy that can meet future demand, and fossil fuel is still proven to be the fastest and most reliable in responding to swift incremental demand.
And we will still need 100 million barrels a day in the post-2030 era and no company is investing heavily today to prepare for that except Aramco.
The good news is that the International Energy Agency in its World Energy Outlook report this month predicts higher oil prices in 2030 so that would translate into higher oil income for Aramco in nominal terms and accordingly higher dividends for shareholders.
And for those who are hostile to Saudi Aramco because it is a fossil-fuel producer and are discouraging investors from putting money into it, how is this different to investing in US shale oil that will make “America great again.”
Aramco’s threat to the environment can’t be compared to the shale oil and gas industry that is more polluting with its fracking methods.
The Economist had interesting figures it collected from Stanford University and Rystad Energy showing that Saudi Arabia is the lowest producer of carbon emission as a proportion of its overall oil production compared with all other big producers in the world, including Russia and the US, with half of the amount produced by these two.
Moreover, Saudi Aramco wants to double its gas production in a decade and this will displace much of the oil burned locally, contributing to a cleaner environment.
The company is looking at ways to reduce its carbon emission by re-injecting it back into reservoirs and it also has research centers scattered all over the world to help it produce better car engines and develop better technologies for the environment.
So, if the world is serious about seeing stable energy prices in the future, then supporting companies like Saudi Aramco is a solution.
Yet the motives are clear. Investors want to get their hands on best-in-class oil assets for lower prices knowing that the value of these assets are expected to grow in the future. Only a person who has no idea about oil would believe that shale oil production is a real match for Saudi oil production.
Shale production is a very costly endeavor and it will not stay for 52 years, as Aramco’s proven resources will, nor will it see cost reduction as everyone runs out of sweet spots for drilling.
For every dollar that shale oil business generates, it requires two dollars, as David Deckelbaum, an analyst at investment bank Cowen, was quoted in a recent article by NPR.
The Financial Times compared WeWork’s IPO to Aramco’s, highlighting that some analysts don’t understand the nature of the company or the business before discrediting it.
Aramco is not just a company. It’s a strategic investment and one of the few entities out there today to ensure that all people in the world can go and enjoy cheaper fuel at gas stations.
Oil is a strategic commodity that shapes our modern civilization and it will stay like this for years to come. For this, I defend the higher valuation of Saudi Aramco and, for other reasons, I proudly would like to hold its shares.
• Wael Mahdi is an independent energy commentator specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?”.