Saudi Aramco is looking for deals that will boost investor confidence in the world’s largest oil company. These deals could include asset sales or supply agreements, according to a Reuters report that quoted Aramco chief executive Amin Nasser. Life was easy for the Saudi giant until recently. It pumped oil, sold it on international markets, and used the revenues to fund much of the Saudi economy.
Now, things are quite different.
While Aramco’s top priority is still its biggest shareholder - the Saudi government - global trends are pushing it towards diversification.
The asset sale plan mirrors that of UAE neighbor Adnoc, which has been selling minority stakes in its energy assets to monetize them while it still can. Now that oil prices have recovered from the pandemic lows, it is the best time for this. Yet, Adnoc has been divesting assets for four years and has so far generated some $30 billion in proceeds in that period. The latest divestment plan is a listing of the Emirati company’s drilling business. The proceeds will reportedly be used for clean energy projects.
Aramco is in a very similar position to Adnoc, so it is no wonder that it has taken a page out of its new playbook. Both state-owned companies have found themselves in unchartered territory with the energy transition push, which has shaken the very foundations of their existence. Like all other oil producers, both must find a way to survive in a world where oil demand is expected to be much lower.
The obvious way is to expand into low-carbon energy projects, just like Big Oil is doing. And this seems to be the path Adnoc and Aramco have chosen. Earlier this week, after the release of Aramco’s second-quarter and first-half results, chief executive Amin Nasser said the company was looking into new deals to unlock capital.
Related: Biden Administration Takes Aim At ‘Soaring’ Gasoline Prices While he didn’t detail these deals, Reuters recalls an earlier report based on unnamed source information that said Aramco planned to sell a stake in its gas pipeline business in a scheme identical to the one it used to divest a minority interest in its oil pipeline business. That deal, with a consortium led by EIG Global Energy Partners, was worth $12.4 billion.
Another possible field for dealmaking is hydrogen. At the financial results release call with analysts, Nasser said, “We are looking to capture a big percentage of that market, we have an advantage,” echoing remarks made by Aramco’s chief technology officer earlier this year.
“We see a real market forming,” Ahmad Al Khowaiter told CNBC in late June. “This is an opportunity for us to supply a new market, a growing market, and a sustainable market, because it is a decarbonized energy product.”
The executive also said that the hydrogen market was at an inflection point, with technologies for the use of the gas becoming mature and commercially available.
“We have the lowest-emission hydrocarbons,” Al Khowaiter also said at the time. “We have an ability to capture CO2 and therefore supply hydrogen reliably at reasonable cost, without the CO2.”
This month, Aramco said it had signed a preliminary agreement with the German government for joint work in the hydrogen area, which, based on comments made by Nasser, will take the form of Saudi hydrogen supply to Germany.
These plans sound like a no-brainer, but questions remain. For instance, would this shift to hydrogen and possibly other low-carbon products be able to generate the same level of revenues as Aramco’s core business? This question is vital because the Saudi major has been working hard to make ends meet - meaning distribute the dividends it has promised to distribute - amid the pandemic, the oil demand slump, and now the renewable push. It has even turned to borrowing to do this.
Of course, it will be quite a while yet before Aramco is forced to choose between oil and low-carbon energy if the choice is ever presented to it. What the company appears to be doing now is greening up its CV while monetizing its energy assets in a favorable price environment.
Related: Japan’s Overambitious LNG Targets Could Transform The Industry
The whole Gulf is doing this precisely because the price environment is favorable. Big Oil is doing it, too, and for the same reasons. But it has already been called on what some may see as a greenwashing bluff.
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None other than BlackRock’s Larry Fink last month noted that “divesting, whether done independently or mandated by a court, might move an individual company closer to net zero, but it does nothing to move the world closer to net zero.”
To be fair, however, it is neither Big Oil’s nor Aramco’s or Adnoc’s job to work to reduce global oil demand. This is the job of governments and maybe finance titans such as BlackRock. Oil companies have learned to go with the flow and adjust as it carries them into new territories, whether they are pubic supermajors or state-owned giants such as Aramco.
By Irina Slav for Oilprice.com
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The second factor is to act as the pivot for the diversification of the Saudi economy. And the third factor is to continue to invest in production capacity expansion to ensure that it remains the top exporter of oil to the world well into the future.
To ensure free cash flow, Saudi Aramco could sell some of its assets that don’t impact on its oil production and exports and use the money to reduce its outstanding debts. This could prove to be a better alternative to borrowing.
Despite diversification, oil will continue to be the backbone of the Saudi economy and the economies of the Gulf Cooperation Council (GCC) well into the future if not forever.
However, the diversification and relatively high crude oil prices go hand in hand. High prices generate bigger oil export revenues from which investment in the non-oil sector will be provided.
Even when diversification does take place, it will be focused on replacing oil and natural gas in electricity generation and water desalination with solar and nuclear energy so as to release the oil and gas used in these utilities for export. The bulk of produced natural gas should be used to expand the petrochemical industry so as to enhance its exports. Moreover, a large chunk of crude could be exported as refined products to add value to these countries’ exports.
Any excess oil revenue should go into sovereign funds for investment worldwide in reliable and successful companies and entities around the world.
The Saudis shouldn’t waste their money on hydrogen. Whether green, blue or grey, hydrogen is a non-starter. It is more expensive to produce than natural gas. It needs far more energy to produce than it will eventually provide. Moreover, Qatar could supply Saudi Arabia with cheap gas for the diversification of its economy.
Last but not least, Saudi Arabia should work on the premise that the global economy will continue to run on oil and gas throughout the 21st century and probably far beyond. There won’t be an alternative as versatile and practicable as oil in the next 100 years. Saudi Arabia should aim to produce the last molecule of oil as Prince Abdulaziz bin Salman, the Saudi energy minister said recently.
The most effective way to combat climate change is to reduce emissions from oil and gas not their use.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London