Saudi Aramco: Big Oil

THE OIL INDUSTRY HAS recently begun to appear at something of a crossroads. Many say a new chapter is beginning to unfold in its story, wherein there’s a falling demand as the world moves towards cleaner energy. There’s evidence for this. A stigma is now attached to oil, especially in the West, in a way it hasn’t been before. Electric engine technology is improving. And according to some estimates, oil production will creep upwards through the next decade, reaching around 95 million barrels per day (MBPD), and then it will plateau.

But if the first day of trading in Saudi Aramco’s IPO is anything to go by, the story of oil is still far from over. Saudi Aramco became the world’s most valuable listed company in history, rising to a market value of $1.9 trillion on just its first day of trading. It surged nearly $200 billion above the $1.7 trillion valuation set before its market debut. It had a bigger opening than China’s Alibaba (which raised $25 billion in 2014). It is more valuable than Apple and Facebook combined, twice the size of Amazon and Alphabet (Google’s parent company), and bigger than the next five listed oil companies put together. Despite the uncertainty around oil’s future, the company’s ties to the Saudi ruling family with its poor record on human rights abuses, and the troubles ailing the company in recent times (from the delayed IPO to a missile strike at one of its largest processing plants), more than 5 million investors purchased around 3 billion shares in now the world’s most valuable listed company.

It is remarkable when one considers just how humbly this company first started. In 1933, when the American company SoCal (Standard Oil of California) struck a deal with Saudi Arabia to establish CASOC (California-Arabian Standard Oil Company, Saudi Aramco’s former name). Everything from rigging machinery to everyday items for workers had to be exported from the US. Geologists lived in tents, and later mud huts, as they went about exploring the desert. Something of a global oil race was going on then. The British were concentrating on their existing wells in Iran and Iraq, while the US was taking something of a punt on Saudi Arabia.

For the next few years, CASOC appeared to be a big failure. Its wells threw up only water, or a minimal amount of oil. By 1936, a 50 per cent stake of the concession negotiated with the Saudi government was sold to Texaco (Texas Oil Co). A year later, according to media reports, SoCal had decided to pull out of the country. The chief geologist, who would later become celebrated, Max Steineke, argued with the management until it agreed to wait for another year to see the results at a seventh well under exploration. This well was soon, reportedly, producing 3,800 BPD. SoCal decided to stay back and Steineke went on to discover many more important oil sites. By 1980, Saudi Arabia, far from the remote outpost it was in the 1930s, bought out their American partners.

The current IPO is at the heart of Crown Prince Mohammed bin Salman’s ambitious plans at economic diversification away from oil. The Crown Prince claims he wants to use the IPO proceeds to fund initiatives under ‘Vision 2030’ through which he aims to modernise the Saudi economy by investing in new industries and multi-billion dollar projects.

Not everyone, however, is convinced with the high valuation. According to Bloomberg, when Wall Street bankers told the company that its aim of securing a $2 trillion IPO (as Mohammed bin Salman had announced nearly four years ago) was not possible, the company could have either settled for a valuation below $1.5 trillion and attracted foreign investors, or delayed the deal, perhaps forever. Instead, it opted for a third way: “…ignore foreign investors, and sell the Aramco shares at home. The government would pressure wealthy local families, many of whom had members locked up in Riyadh’s Ritz-Carlton in 2017, and bring in a few friends in the Middle East region, including funds controlled by the governments of the United Arab Emirates and Kuwait,” Bloomberg reported. “Even then, it had to compromise on the valuation, settling for $1.7 trillion.”

The company will no doubt cross $2 trillion shortly. And even if this valuation was somewhat stage-managed, it is still a reminder that for all our talk of dealing with climate change, the glimmer of black gold is far from over.

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