Aramco’s New Stock Offering Looks Doomed From The Start

By Simon Watkins

More shares in flagship oil and gas company, Saudi Aramco (Aramco), may be released for sale to the public if conditions are right, said the Governor of Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF) last week. This idea was later confirmed by Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman (MbS). Given how badly the first initial public offering (IPO) was received by international investors in the run-up to its eventual listing on 11 December 2019 and the draconian lengths that Saudi Arabia’s various authorities had to go to sell even the 1.5 per cent stake (cut down from the initially mooted minimum 5 per cent stake) finally offered, it might reasonably be conjectured that the conditions will not be right for a very long time. If the views of new U.S. President, Joe Biden, were factored into the conditions equation then the offering would probably never occur. Taking into account the tenuous grasp on reality that apparently exists at the centre of the Saudi Arabian regime, though, such an offering may well take place this year.

In terms of a reality check, the Aramco offering came to be regarded as so toxic on so many levels by so many investor communities in so many countries during the lead up to the final decision being made by the Saudis on which major international stock exchanges it would be offered on that it wound up being offered on absolutely none of them. Some of the more technical concerns of international investors about Aramco were to do with the operational deficiencies of the company itself. For a start it was made clear by then-Aramco chief executive officer, Amin Nasser, that Aramco did not actually own any of its oil and gas ‘concessions’ or the wells from which it produced all of its oil and gas and did not make the decisions as to how much oil and gas it produced at any given time. Nasser then stated that after the IPO the wells “will still be owned by the government . . . this is the same as before, and there are no changes to that” and added that Aramco’s oil and gas production decisions were sovereign matters that would remain with the government. In practical terms this meant that if and when Saudi Arabia decided that it was going to try again to destroy the shale oil industry as it did in 2014-2016 – and yet again only three months after the IPO – by crashing the oil price through over-producing then Aramco shareholders would see huge losses both in dividend payout terms and in the value of the shares. In order to quell the fear over dividend losses, the Saudis were forced into guaranteeing a minimum dividend payout that has since then effectively crippled all new Aramco projects.

Then there was the matter of Aramco’s actual level of crude oil reserves and its spare capacity. In the case of the reserves, scepticism had been growing about Saudi’s stated numbers for some time before the 2019 Aramco IPO. According to Saudi Arabia, at the beginning of 1989, it had proven oil reserves of 170 billion barrels but only a year later, and without the discovery of any major new oil fields, the official reserves estimate somehow grew by 51.2 per cent, to 257 billion barrels. Shortly thereafter, it increased again to 266 billion+ barrels, and then increased again in 2017 to 268.5 billion barrels. This overall increase from 170 billion barrels in 1990 to 268.5 billion barrels in 2017 occurred whilst it had made absolutely no major new oil field finds and was drilling an average of 8.163 million barrels per day. In other words, Saudi stated that its oil reserves had actually gone up – by 98.5 billion barrels – during a period when it had drilled at least 80.43 billion barrels and had made no new oil field finds.

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This scepticism from international investors fed into further scepticism over Saudi Arabia’s much-vaunted (by itself) spare capacity. The EIA defines spare capacity as production that can be brought online within 30 days and sustained for at least 90 days. Saudi Arabia had stated for decades that it had a spare capacity of between 2.0-2.5 million bpd. This implied – given the widely-accepted (but also wrong, as highlighted above) belief that Saudi had pumped an average of around 10 million bpd for many years – that it had the capability to ramp up its production to about 12.5 million bpd in the event of unexpected disruptions elsewhere. However, even as the 2014-2016 Oil Price War dragged on the Kingdom could on average produce no more than just about 10 million bpd. The same pattern was evident in the 2020 Oil Price War but the discrepancy between what Saudi claimed was its spare capacity and what it could actually produce became so obvious that senior Saudi officials attempted to obfuscate this spare capacity lie by semantic trickery, talking of ‘supply to the market’ rather than of ‘output’ or ‘production’. The ‘supply to the market’ (sometimes referred to even more misleadingly as ‘capacity’) when used by the Saudis actually meant the utilisation of crude oil supplies held in storage at any given time in the Kingdom. It also meant the supplies that could be withheld from contracts and re-directed into those stored supplies. Conversely, ‘production’ and ‘output’ is the oil that actually comes out of the ground through drilling and production at the wellheads and is sold on with no undue delays in storage facilities.

All of this scepticism was compounded by even more negative publicity connected to Saudi Arabia’s alleged role as a funding source in international terrorism. On 28 September 2017 the U.S. Congress overrode former President Barack Obama’s veto of the ‘Justice Against Sponsors of Terrorism Act’, making it possible for the families of victims of the ‘9/11’ terrorist attacks on the U.S. to sue the government of Saudi Arabia. Within weeks of this, there were seven major lawsuits in federal courts alleging Saudi government support and funding for the ‘9/11’ terrorist attacks on the U.S. Although Saudi Arabia has denied longstanding suspicions of involvement in the attack, 15 of the 19 hijackers were Saudi nationals. Before this, in 2010 various news media – including the BBC – reported documents made available on Wikileaks showing a leaked classified memo from then-U.S. Secretary of State, Hilary Clinton, in which she warned that donors in Saudi Arabia were: “The most significant source of funding to Sunni terrorist groups worldwide.” She added that these Sunni groups included al-Qaeda, the Taliban, and Lashkar-e-Taiba. Added to this general unsavoury picture was the murder of dissident Saudi journalist, Jamal Khashoggi, in August 2018 that even the CIA concluded was personally ordered by Saudi Arabia’s Crown Prince Mohammed bin Salman.

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These two factors were sufficient to cause New York and London investors to avoid becoming associated with the initial Aramco IPO, over and above wider negative publicity connected to the Saudi-led war in Yemen, the cosying up of Saudi to Russia in the OPEC+ grouping, Lebanese President Michel Aoun’s allegation in 2017 that then-Prime Minister Saad al Hariri had been kidnapped by the Saudis and forced to resign. This meant that in order to sell even the 1.5 percent stake in Aramco offered on 11 December 2019, Saudi banks were ‘encouraged’ to offer to lend money to retail customers at a 2-to-1 ratio for every riyal they would invest in Saudi Aramco (compared to average leverage ratio limit for loans of 1-to-1). Additionally, the IPO’s international adviser banks were there to take up any slack in the offering left after the sovereign wealth funds of neighbouring states were equally ‘encouraged’ to participate on the offering, as were various senior Saudis fearful of a re-run of their treatment in the Ritz Carlton in 2017.

This backdrop – and the launching of a second oil price war by the Saudis against the U.S. shale oil sector in less than five years – was so toxic that even the generally pro-MbS former U.S. President Donald Trump telephoned the Saudi prince on 2 April 2020 and told him that unless OPEC started cutting oil production – and effectively end the oil price war – then Trump would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from Saudi Arabia, so ending a foundation-stone agreement between the U.S. and Saudi that had been in place since 1945. The new U.S. President, Joe Biden, though, has no such fondness for MbS or indeed for Saudi Arabia as a whole, and this, combined with the ongoing view of senior Democrats and Republicans that ‘we’re not going to put up with any more crap from the Saudis’ means that in order to sell any Aramco shares on a truly international basis, MbS and Saudi Arabia will have to tread very lightly for many months beforehand.

By Simon Watkins for Oilprice.com

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