Is The Saudi Aramco IPO Oil’s Last Stand?

As published on Forbes.com 

In an interview with The Economist on January 4, 2016, Saudi Crown Prince Muhammad bin Salman announced that state-owned Saudi Aramco was considering an initial public offering. Oil was at $36.76 per barrel and would hit $26.21 on February 11, a low not seen since the late 1990s. Shale and oil sands producers were cutting both production and drilling. Prices did not rebound above $50 until OPEC agreed to cuts in November 2016.

In other words, the Aramco IPO news came from a time of uncertainty, not confidence. The U.S. shale producers had usurped Saudi Arabia as the ‘swing’ player in an oil market suspended between the good old times and a slow surrender to renewables. Yet, just two-and-half years later, we forget the context in which the Aramco IPO emerged.

The Aramco IPO is not a comeback. It is oil’s last stand, an attempt to maximize the value of assets that have poor prospects in a carbon-zero future.

Pumping Up Stock

Today, with oil hovering in the $70s, Aramco can portray its IPO as a sign of strength, not fear. And with plans to sell off five percent of a company worth an estimated $2 trillion, the IPO could be the biggest in history – when it finally happens.

Although Saudi leadership intended to decide on the IPO months after The Economist interview, the wait continues. Aramco chairman and Saudi Arabia’s oil minister, Khalid Al-Falih, says Aramco has postponed the IPO to sometime in 2019, waiting for “market readiness.”

A delicate waiting game it is. On the one hand, the Saudis need oil at about $75 to maximize the value of Aramco. On the other hand, if oil goes north of $100, everyone in the marginal oil regions, including the Canadian oil sands, can ramp up drilling. Most likely, $100 oil would result in longer-term capacity with a price-dampening effect – 2016 all over again.

Saudi Arabia learned its lesson. Instead, it is manipulating the global oil supply to raise prices artificially, just not too high. The Saudis understand what I’ve shared in previous articles on the energy transition: that a world of abundant, cheap energy, driven by solar, wind, shale oil and gas, portends a future of sustained low prices. The Saudis must max out what they have, while they can.

A Green Kingdom

Unfortunately, Aramco’s market manipulation has led oil enthusiasts to think the good times are back. They’re selectively ignoring Saudi Arabia’s own energy transition.

In January 2018, Saudi’s renewable energy head Turki Mohammed Al Shehri announced plans to source 10% of energy from renewables by 2023. The lowest bids for this project came from a French-UAE consortium at USD 1.79 cents/kWh – the lowest bid ever made for solar – yet Saudi Arabia chose a more expensive local provider to support the growth of native solar.

That was just the beginning of Saudi Arabia’s renewable plans. During Saudi Crown Prince Muhammad bin Salman’s ‘charm’ tour of the U.S. in March, he revealed plans to generate 200 gigawatts of solar energy by 2030 – a $200 billion project that would be the world’s largest solar installation.

The Saudis are not acting like a country that has staked its future on fossil fuels. On the contrary, Saudi Arabia is preparing for the day where its oil reserves cannot guarantee economic security, political influence and American protection.

Well Played

The Saudi Crown Prince has played up the Aramco IPO, convincing oil fans that hydrocarbons have a second wind. Meanwhile, the Crown Prince has committed his country to energy transition at a scale seen nowhere else in the world, besides maybe in China.

Saudi Arabia is not being hypocritical. Rather, it’s playing the energy transition beautifully. Strategically, Saudi should maximize the value of its oil reserves. It should develop a homegrown solar industry that can tap the Kingdom’s abundant sunlight and employ restless youth. And, Aramco should be trying to charm U.S. investors who, doubting climate science or leveraging ignorance about cleantech, will cash in on the IPO.

Saudi Arabia began its IPO campaign from a place of weakness but now stands in a place of strength. Observers, take note: in a decade or two at most, cleantech, not oil tech, will be the more prized source of innovation in the Kingdom.

As former Saudi oil minister Sheik Ahmed Zaki Yamani is purported to have said, “The Stone Age came to an end not because we had lack of stones, and the oil age will come to an end not because we have lack of oil.” Saudi Arabia will have abundant reserves left over when the oil age ends.