Will Saudi Arabia survive

Saudi Aramco: Saudi Arabia will be even more dependent on the markets


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The world's biggest stock market debut is a disappointment. Saudi Aramco, the world's largest oil company, will list its shares in Riyadh this Wednesday. And the numbers are impressive. The company expects to raise around $ 29 billion from investors. This is over the 25 billion that the Chinese online group Alibaba received five years ago when it went public in New York. Aramco is expected to have a market value of $ 1.7 trillion. The Saudi newcomer to the stock exchange immediately overtook Apple and Microsoft, the most valuable companies to date, at $ 1.19 and $ 1.16 trillion, respectively.

Aramco, better known as the Arabian American Oil Company until it was nationalized in 1970, owns Ghawar, the world's largest oil field, which according to the prospectus provides around half of Saudi oil production. Another 48 billion barrels are said to be in the ground there. And the Saudis can boast of yet another record: Aramco is by far the most profitable company in the world. In 2018, the company generated a profit of $ 111 billion - as much as the profit of Apple, Google and Exxon combined in the same period. The turnover of 355 billion dollars corresponds to the total military expenditure of all 28 EU members, it calculated Wall Street Journal.

In view of all these superlatives, however, the man who launched the IPO three years ago had expected more: Mohammed bin Salman, or MBS for short. When the Saudi crown prince and de facto ruler of the absolutist Gulf monarchy came up with the idea in 2016, the sale of just five percent of Aramco should bring in a fairytale $ 100 billion. This would have valued the entire group at two trillion dollars - more than any company before.

Wall Street bankers confirmed the prince in his expectations. They were already dreaming of the deal of the century where they would collect hundreds of millions of dollars in fees. Institutions - including JP Morgan Chase, the largest US bank, the British HSBC and the Swiss Credit Suisse - were even willing to ignore human rights violations in the UK. But major western investors, to whom the bankers tried to sell the shares, were far less enthusiastic. In the end, MBS found itself forced to significantly cut back plans for the debut. Instead of five percent from Aramco, it is now only 1.5 percent. The group has kept a back door open: in 2020 further shares could be offered on an international stock exchange.

Incalculable tensions, low oil prices

It is questionable whether just waiting will be enough to overcome the skepticism of large investors. With the growing impact of climate change, asset managers are starting to worry about the long-term future of fossil fuel investments. An increasing switch to electric cars could reduce the demand for oil. But Ayham Kamel, an analyst at the Eurasia Group consultant, does not consider this to be the main reason for the reluctance. "Climate change was just another negative factor in investor calculations." Geopolitical risk was a much bigger concern.

The drone attack by Yemeni rebels in September on Churais, the country's second largest oil field, which the American government suspects of Saudi Arabia's arch-rival Iran, showed how vulnerable Aramco is to the tensions in the region. The attack paralyzed around five percent of world oil production in one fell swoop. But the gruesome murder of journalist Jamal Kashoggi in October last year by Saudi agents also arouses concerns among Western pension funds, insurance companies and investment funds. In addition, interference by the royal family in Aramco's business cannot be ruled out. A few months ago, MBS surprisingly replaced Khalid al-Falih, the long-standing energy minister, who was also well known and excellently networked in the West, and appointed his half-brother Abdulaziz bin Salman instead. Al-Falih also had to leave as chairman of the board of directors of Aramco. Jasir al-Rumayyan, previously the head of the Saudi State Fund and a confidante of the Crown Prince, is now in charge there.

But the main reason for investors' skepticism is the persistently low oil price. The price of Brent North Sea oil - which is considered the global benchmark - has been bobbing at $ 60 a barrel since a temporary high of $ 75 in April. Even the failure after the attack on Churais did not increase it sustainably. This is ensured above all by the US oil producers, who have made the USA the largest oil producer ahead of Saudi Arabia and Russia with the help of the controversial extraction method fracking. Thanks to the frackers, US production has increased to over 13 million barrels a day since 2012. The US has become a net exporter of petroleum again - the last time it was more than seven decades ago. The rise of the USA to become an energy superpower has broken the power of OPEC. After the deep economic crisis triggered by the embargo of the oil-producing countries in the 1970s, the cartel of oil producers was able to practically dictate the price of the important raw material to the buyer countries. This was done by setting the production volume by the members. Saudi Arabia, as the largest OPEC producer, was the de facto pacemaker.