The Aramco Valuation Will Soon Be Revealed

This week in oil markets has been all about the pervasive trade war between China and the US that has dogged oil prices for the better part of the year, resulting in demand growth forecasts from multiple sources and analysts repeatedly being adjusted downward. There was some rare bullish news coming out of trade war discussions this week, with claims that both sides had agreed to relax tariffs and would sign something soon to that effect. But late in the week sentiment seemed to shift, with some traders skeptical that any deal will be signed in the short term. This same story has been playing out for months on end, and no trading lesson is ever learned.  

All eyes this weekend will be on news related to the Aramco IPO listing on the Tadawul, with Saturday hopefully bringing the prospectus for the IPO and a final resolution for the question on everyone’s mind: What will the final valuation for Aramco be?

Brazil’s Oil Auction Flop 

Brazil had a tough week. The two auctions planned for this week, the Transfer of Rights (TOR) auction on Wednesday and the pre-salt auction on Thursday, were huge disappointments. The result? Several of the world’s most mouthwatering oil prospects have been taken off the market - a development that will send shockwaves through the global oil industry.

Wednesday’s TOR auction was supposed to bring in $50 billion—$25 billion for Brazil, and $25ish billion to Brazil’s state-run oil company, Petrobras, in exchange for the exploration work it had already done in some of the blocks being offered. But the TOR saw only state-run Petrobras and a Petrobras consortium - 90% of which was held by Petrobras - win any of the TOR blocks. 

Total licensing fees from the auction were a moderate $17 billion, but that number is deceptively positive - roughly 90% of this will come from state-run Petrobras. But Brazil needed those funds to support their budget. And with no one other than the Petrobras-led consortium picking up blocks, Brazil’s efforts to use the auction to de-nationalize its oil industry will now be impossible. 

The reason for foreign oil companies’ cold shoulder was twofold. One, the four blocks up for grabs were pricey. Deepwater exploration is costly, and ExxonMobil, the potential bidder with likely the deepest pockets, sees better (cheaper) opportunities elsewhere, such as in nearby Guyana. Two, the terms of the TOR auction was complicated and required winning bidders to work out a deal with Petrobras for compensation due. Turns out no one was interested. And without this windfall that Petrobras was likely expecting from the other blocks, we suspect the state-run oil company will find itself overextended. Again. This is a sharp deviation from its fairly recent plan to dump assets, cut costs, and reduce debt.  

Then came Thursday’s auction, which was for pre-salt blocks. Again, the only winning bidder was a Petrobras consortium (80% Petrobras, 20% CNODC), which submitted the minimum bid of $1.2 billion. 

For Brazil, this means there will be no energy reform on the foreseeable horizon. Despite the requisite rosey outlook provided by Brazil in the wake of the disappointing auction results, it is a major setback for Brazil. Petrobras will continue to dominate Brazil’s energy industry, and Brazil will have to rethink its longer-term strategy for courting foreign oil players. 

What Happens When Central Banks Looks At Green Interest Rates?

The U.S. central bank has so far resisted the cue from others to consider a “green interest rate” that would tie economic growth to climate change. But today, the San Francisco Fed is considering just that in the first formal discussions - just days after Trump announced a US withdrawal from the Paris Climate Accord within a year. 

US Fed Reserve Chairman Jerome Powell, a figure much maligned by Trump, is keen to figure out how the climate affects the economy, and to what extent the central bank should be adjusting its policies based on this. 

At issue are questions about the effectiveness of renewable energy subsidies and carbon taxes, and - more broadly - how climate change affects GDP. For now, it’s simple recognition that the climate poses changes to economic growth. 

The New York Fed already estimates that the US economy has seen more than $500 billion in direct losses in five years due to the climate. 

This is the first non-partisan, and non-political attempt to take a look at the potential impact of climate change, from major storms to raging wildfires, and how it all affects the economy and everyone’s predictions of economic growth. Money is the only thing that’s going to get everyone on board here, so investors should be ready: The climate change debate is about to turn into a monetary policy debate, which means it’s going to cease being a purely social debate. For longer-term thinkers, put it this way: Climate change just became real, and that will mean changes on the energy scene, one way or another.