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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Could The Aramco IPO Kill OPEC?

The global oil market could be entering unchartered waters in the coming weeks. After the US shale revolution, which threatened OPEC’s hold on and the stability of the market, a new danger is lurking around the corner.

The Aramco IPO, the largest IPO in history, will not only impact OPEC but will also have repercussions for the Kingdom, Crown Prince Mohammed bin Salman, and the entire GCC region.

Most analysts have pointed out that there are some major issues with the company’s financials, its valuation and possible returns for the Kingdom. International banks are presenting their own IPO valuations, indicating a wide range of price targets, leaving a lot of room for speculation. At the same time, Aramco’s IPO prospectus indicates some threats which seem not to have been included in most analyses, such as the impact of flattening oil demand growth, potential legal repercussions if listed on Western stock exchanges and the potential lack of interest from US and European institutional investors.

And the financials are just one thing analysts are reviewing. Legal risks, including the 9/11 bill, the attitude of the U.S. congress, and the NOPEC bill could pose a major threat to the future of Aramco.
The possibility of investing in an oil company that could be sued for so-called terrorism or violent actions taken by third parties may be new but oil companies have always been targets of legal cases. Related: The Bullish Surprise In OPEC's Latest Report

In the recent past, we have seen several court cases and class action lawsuits against companies such as Shell, ENI, Total and BP. And, when listed, Aramco will be more of a “normal” company than it has ever been. Saudi Arabia is taking a risk that is not yet quantifiable but which presents a ‘clear and present danger’.

Aramco could also be facing the same scrutiny that other IOCs are currently facing from global warming activists. If climate cases are filed in the US, or some European countries, Aramco could find itself in trouble. Multi-billion-dollar claims should be expected as activists will see the world’s biggest oil company as a symbol against which their cause can rally.

The success of the Aramco IPO, driven by Asian and non-Western institutional investors, sovereign wealth funds and even IOCs, has another non-environmental problem as well. As the main actor within OPEC, Aramco will have to act differently when addressing the market if it wants to be a real listed oil company. Shareholders, even from countries that are really inclined to address global warming issues, will still want to see rising profits and a steady dividend. In this increasingly difficult environment, Aramco will have to deliver to both the Saudi state and its new investors. 

Acting as a normal oil giant will require a serious change in attitude, management and goals. Even though the company is not officially directly owned or linked to the Saudi government, the company has always been an instrument of the Kingdom’s geopolitical and economic strategy. Aramco’s production and investments have always been clearly linked to the future of Saudi Arabia and the geopolitical stakeholders it represents. Related: Aramco’s Breakeven Costs Are The Lowest In The World

A stock market listed Aramco would have to break with this strategy, putting the company on a collision course with OPEC’s agenda. Shareholders will not be very happy if Aramco’s production volumes are determined by the oil cartel’s members. On the other hand, if Aramco decides not to comply with OPEC, it will render the cartel powerless. At present Saudi officials are vehemently denying that OPEC is being threatened, so shareholders and potential investors should be aware of this major issue before investing in the company.

While the risks are high, some positive things should be noted too. The Aramco IPO has already led to some unexpected positive changes in the GCC region. One could argue that thanks to the IPO circus, Iran, Saudi Arabia and the UAE, are not yet at war. Riyadh and Abu Dhabi have understood that risking a war would have not only have meant a bloody conflict, but also the end to most of the region’s economic and social diversification plans. Oil and money now seem to have prevented an all-out war with Iran. Next to this, Saudi Arabia’s ill-fated adventure in Yemen seems to be entering its final phase. More and more rumors show that the involved parties are negotiating a deal that could end the Saudi-UAE confrontation with the Houthis. At the same time, the anti-Qatar Arab coalition (Saudi Arabia, Bahrain, UAE and Egypt) have openly shown willingness to remove some of the sanctions they imposed on Qatar. Opening up may come with its risks, but there may also be some more unintended positive consequences.

By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on November 15 2019 said:
    Read my lips Dr Widdershoven. The International IPO of Saudi Aramco will never see the light of day now or ever because of persistent question marks about the actual size of Saudi proven crude oil reserves and the risk of litigation relating to 9/11. The IPO is dead and buried.

    And contrary to what you are saying, even a successful launch of IPO wouldn’t kill OPEC. It will remain an influential organization whether Saudi Arabia stays a member or not. Moreover, Saudi Arabia draws a lot of political and economic influence from being the de facto leader of OPEC. It enables it to punch far above its weight in the global oil market and in international affairs.

    If NOPEC ever becomes a law and the United States tries to sue any OPEC under the NOPEC Act, OPEC members collectively could retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also nationalize American interests in their oil industries and discard the petrodollar and adopt the petro-yuan instead.

    OPEC is not a cartel and has never been one since its founding 59 years ago in Baghdad. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.

    The United States has so far broken the rules of the World Trade Organization (WTO) by imposing sanctions on virtually everybody, walked away from United Nations-recognized Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, the United States has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims. One who lives in a glass house shouldn’t throw stones.

    And contrary to claims by the author, what he describes as the IPO circus has had nothing to do with the fact that no war between Iran on the one hand and Saudi Arabia and UAE on the other erupted. The naked fact is that Saudi Arabia is no match militarily to Iran and without military support from the United States it wouldn’t embark on a war on its own. That is why Saudi Arabia was very disappointed when the United States rushed to accuse Iran for the attacks on Saudi oil infrastructure but failed to retaliate against it. As a result, Saudi Arabia may have reached the conclusion that the United States has been using Iran as a threat to blackmail the Saudis for money. Saudi Arabia is reported to be working now on ending the war in Yemen and seeking some form of a rapprochement with Iran.

    Saudi Crown Prince Mohammed bin Salman could still go ahead with the implementation of his cherished Saudi Vision 2030 without the IPO. Ending the war in Yemen and phasing out the financial subsidies for gasoline, diesel, water and electricity altogether along with the money he got from his anti-corruption drive at the Ritz-Carlton shakedown in 2017 and the saving from the fees the banks are charging for the handling of the IPO could easily add to more than $270 bn thus obviating the need for the IPO.

    Even without the IPO, Saudi Arabia will always be a magnet for global investments by virtue of its great oil wealth and the fact that it is the world’s only real swing producer.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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