Forget The Hype, Aramco Shares May Be Valued At Zero Next Year
This week will see the onset of full trading activity in the shares of Saudi Arabia’s flagship oil company, Aramco. Through a combination of wooing local retail investors via preferential loans, threatening wealthy Saudis with the sort of treatment they had during their imprisonment in the Ritz Carlton in 2017, and inveigling the two principal credit ratings agencies to toe the exact Saudi line on the ‘lack of significance’ of the ‘Houthi’ attacks on Abqaiq and Khurais, the Saudis have finally been able to sell off a part of Aramco. It may be nearly three years late, only around one third of the original amount intended, have no foreign listing, and be priced to value the entire company at much less than the US$2 trillion that Crown Prince Mohammad bin Salman (MbS) had staked his reputation on but it is done.
The shares are to be finally priced at the top end of the initial range, at SAR 32 (US$8), according to Saudi sources. The problem with this is that within the coming year Aramco shares could well be valued at US$0.
The reason for this is not connected to the fact that Aramco does not actually own any of the sites from which it extracts oil and gas – not a single field, not a single well. It is not connected to the fact that it is used as a conduit to fund the latest harebrained social or vanity projects that are nothing to do with its core business – including developing a USS5 billion ship repair and creating the King Abdullah University of Science and Technology. And nor is it connected to the mathematically impossible assertion by the Saudis that its oil reserves have remained at basically the same level for the last 30 or more years despite Saudi pumping an average of nearly three billion barrels of oil every year from 1973 to the end of 2017 – totalling 132 billion barrels – with no new significant oil finds being made during that period. It is not even connected to the multiple class-action lawsuits that Saudi Arabia is facing from the families of the ‘9-11’ terrorist attacks for its part in them (15 of the 19 hijackers were Saudi nationals) nor to MbS personally giving the order to murder journalist Jamal Khashoggi, according to the CIA, among many others. These, though, were key reasons why no listing for Aramco took place in the U.S., and indeed the U.K.
The actual killer blow for Aramco is on the cards from the renewed impetus to finally get U.S. President Donald Trump to sign the ‘No Oil Producing and Exporting Cartels’ (NOPEC) Bill, as examined in depth in my new book on the oil markets. This Bill has a broad mandate, making it illegal to artificially cap oil (and gas) production or to set prices. Clearly, fixing (and later heavily influencing) oil pricing is the very reason why OPEC was established in 1960, Saudi Arabia has been its de facto leader ever since, and Aramco is the prime vehicle through which Saudi Arabia’s production and pricing strategies (and those of OPEC) are implemented. Nobody from the Saudi side seemed to have twigged to the fact that there was a major legal issue in this context from both the U.S. and U.K. perspective as both have anti-trust (or anti-monopoly) regulations with real practical bite.
With Aramco being the key instrument used to manage the oil market by the Saudis, even though it is not directly involved in making the policy, the anti-trust legislation of the U.S. and U.K. can point to Aramco as being collusive in price-fixing through adjusting output to manage oil prices. Conversely, once the Bill is enacted, if Aramco did abide by the anti-trust regulations then Saudi would have to give up its role at the head of OPEC, which clearly it would not wish to do. In addition to all of this, the NOPEC Bill immediately removes all sovereign immunity that presently exists in U.S. courts for OPEC as a group and for its individual member states – including, Saudi Arabia. According to legal sources in Washington familiar with the legislation and spoken to by OilPrice.com last week, this would open up Saudi’s US$1 trillion or so of assets in the U.S. to be seized in lawsuits. It would also mean that trading in Aramco’s products – including oil and gas – would be subject to the anti-trust legislation, meaning the prohibition of sales in US dollars (oil, of course, is priced in US dollars), and would also mean the eventual break-up of Aramco into much smaller constituent companies that are not capable of influencing the oil price, if the Saudis could offer up no other way of complying with the anti-trust laws.
Up until just earlier this year, the bill was progressing at a pace through the U.S. system and has come very close indeed to being passed into law before. A version of the NOPEC bill that managed to pass both houses of Congress (the House of Representatives and the Senate) in 2007 was shelved after President George W. Bush said he would veto the legislation. Trump’s view on the NOPEC bill has turned 180 degrees in recent months, however, according to Washington-based sources close to the Presidential Administration. Initially, Trump was happy to go along with the long-established relationship between the U.S. and Saudi, bolstered during his time by big arms deals to Saudi and Saudi’s role as the key alternative to Iran’s power in the Middle East. Trump’s generally supportive view of continuing this relationship endured even after the U.S. Senate voted last November to cut off U.S. support for Saudi Arabia’s war in Yemen. It also endured the bipartisan consensus across both U.S. congressional houses that condemned the murder of Saudi journalist Jamal Khashoggi after he entered the Consulate General of Saudi Arabia in Istanbul and never came out. Trump’s response to this was that Saudi Crown Prince Mohammad Bin Salman Al Saud: “Vehemently denies having ordered the assassination of Khashoggi.” This was despite the US’s own CIA concluding the opposite, as mentioned.
The turning point for Trump is in line with his broad-based mantra of ‘America First’ and came initially when Saudi joined forces with Russia in the form of OPEC+ to effect joint oil production cuts that – in the first few instances – were relatively effective in pushing oil process up, at one stage through the key US$80 per barrel (pb) level. Trump’s negativity over Saudi Arabia has worsened further in recent months, according to the Washington-based sources, as it is becoming increasingly clear that Saudi’s ability to influence the global oil price is not what it once was and, at the same time, Saudi appears to be drawing closer to Russia (Russia’s President Vladimir Putin received the full state visit trappings during his last visit to Riyadh in October). To become effective, the most recent U.S. Senate resolution on the NOPEC Bill must be passed by the Senate that commenced its sitting in January, and by the House of Representatives, which passed its own version of the resolution in February, before it goes to Trump.
Bewilderingly for those with a functioning memory, the Saudi reaction to the NOPEC threat is that – if it is passed – then the Saudis and OPEC will destroy the U.S. shale oil industry. It specifically stated that if the NOPEC bill became law then OPEC would split into its individual country constituents and each would boost production to their maximum levels. This would be done with the explicit aim of pushing oil prices down to below the US$30 per barrel psychological support level. This message was initially conveyed to the U.S. via its ally the UAE and has subsequently been reiterated both by it and by other U.S.-friendly OPEC members. Presumably once they had stopped laughing in the White House, the reaction would have been fairly sanguine, based on the previous attempt by the Saudis and OPEC to do exactly the same thing in exactly the same way from 2014 to 2016.
During those two years alone, OPEC member states lost at least a collective US$450 billion in oil revenues from the lower price environment, according to the IEA. They are still dealing with trying to fill in holes in their foreign exchange reserves and budgets accrued as oil prices were pushed down from over US$100 pb of WTI to below US$30 pb. Saudi Arabia itself moved from a budget surplus to a then-record high deficit in 2015 of US$98 billion and spent around US$250 billion of its foreign exchange reserves over that period that even senior Saudis have said are lost forever. Facing sizeable budget deficits every year until 2023 at the earliest, even by the most optimistic projections, Saudi’s need for a Brent oil price of over US$84/85 pb this year – the budget breakeven level – appears almost existential in nature. So bad is its current situation that it recalls the comment in October 2016 from the country’s deputy economic minister, Mohamed Al Tuwaijri, that: “If we [Saudi Arabia] don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.”
Mon, 12/09/2019 – 09:18