Business Maverick


An explainer: Saudi Aramco, soon to be the world’s most profitable listed company

Workers seen at a construction site during a press tour in the desert at Khurais oil field, about 160 km from Riyadh, Kingdom of Saudi Arabia, 23 June 2008. EPA/ALI HAIDER

There are hundreds of initial public offerings around the world every year, but the listing of Saudi Arabia’s state oil company, Saudi Aramco, is unique. For a start, it’s mega, perhaps $2-trillion. And behind the listing is a backstory so bizarre, the listing itself only wears a kind of cloak of normality, and given the wild listings of 2019, that is saying something.

To understand why the kingdom of Saudi Arabia (one of the most Old-Testament countries on Earth) is listing its state-owned oil company Aramco (an act of hyper-modernity if ever there was one) you just need to look at two photographs.

This is it.

(Image: supplied)

The photo on the left is a street scene of the Easter Parade down Fifth Avenue in New York City in 1900, as is the picture on the right, taken in 1913. The picture on the left includes a single car, the rest are horse-drawn carriages. The picture on the right shows one horse, the rest are cars.

It’s a truism of the modern world that technological change is overestimated in the short term and underestimated in the long term. But this was not a “long-term” thing; in 13 years, transport in New York, one of the great cities of the world, was utterly transformed.

What most people probably don’t know about those years was how few of the cars had petrol-powered combustion engines. In the early days, electric engines, steam engines and petrol engines competed for dominance.

At the first New York “automobile” show in 1900, the most popular cars were electric, followed by steam, then cars powered by alcohol. One early critic complained the petrol engine was, “noxious, noisy, unreliable, and elephantine. It vibrates so violently as to loosen one’s dentures. The automobile industry will surely burgeon in America, but this motor will not be a factor.” They were dubbed “cantankerous combustion”.

But, as it happens, horses also had their problems. About 450,000 tons of horse manure, 21 million gallons of urine, and 15,000 horse carcasses were removed from the city’s streets each year.

In much the same way people today complain about the lack of chargers for electric cars, people then complained about the lack of petrol stations. And yet, in just over a decade, the internal combustion engine won. Petrol was cheap because it was a by-product of making kerosene used for lighting, which was going electric at the time. The sheer power of the combustion engine outperformed its competitors.

And look at us now. About 70 million cars are sold every year around the world, a short head less than double the number sold in 2000. As global prosperity explodes, so too have car sales. Around 97% of those cars use petrol. The transportation sector uses about 30% the power consumed in most developed nations, and about two-thirds of the transportation sector is power by gasoline or diesel.

Which brings us back to the desert nation that produces around 12 million barrels of oil a day. That is four barrels per Saudi citizen, per day. Saudi Aramco (the Aramco is an abbreviation for the Arab-American Oil Company, which was in turn founded by the Califonia-Texas Arabian Oil Company, now know as Caltex) produces about 13% of the global oil supply, more than any other country – except one.

How much is that worth? Put it this way, now that Aramco is listing we have a glimpse of the numbers involved. The numbers substantially exceed the already gobsmacking ones guessed at by the industry a few years ago.

According to the listing documents, in 2018, the company produced a neat $111.1-billion profit. That means it’s the world’s most profitable company, making twice as much money as Apple, its nearest rival, but more incredibly, three times as much as its big oil competitors ExxonMobil and Royal Dutch Shell. Only a few years ago, they were considered roughly the same size.

Because of this extraordinary level of profitability, the Saudi government is hoping the implicit listing value is in the region of $2-trillion. Some estimates put the value lower, around $1.3-trillion, which would still make it the world’s largest company. The company hasn’t yet announced what proportion of its shares will be put on the market. That will happen in early December, and the company will list only on the Saudi Arabian stock exchange for the time being. Many stock markets around the world are bummed by that decision, but the conflict in the Middle East and the Jamal Khashoggi incident caused a change of plan.

It’s not only the total amount of profit that Aramco is generating that’s amazing but the rate of profitability. To put it another way, how much capital is being put to work to achieve this profit? The short answer is: not much. The oil industry uses a metric called ROACE, or return on average capital employed. Most oil companies come in at around 15%. We now know that Saudi Aramco comes in at 41.1%

The reason is because of another oil industry metric, called “lift “, or the cost of bringing the oil out of the ground on to the surface. The average “lift” in Saudi Arabia is minuscule, the total cost of production is about $9/barrel. So, when oil is trading at roughly $60/barrel, you make a nice little packet. The cost of production of most industry players is closer to $30/barrel.

This all sounds like heaven on Earth, and yet, the result for the citizens of Saudi Arabia has not been freedom and happiness but a kind of grotesque deformity that would make a Picasso portrait look normal. The riches are there for all to see. But what other country still chops off the hands of thieves? In what other country is the rape victim prosecuted for “leading young men astray”? Women are permitted to drive, but few do.

Aramco’s numbers tell us what is at stake: not only riches beyond human comprehension but also the entire system of the state, a strange kingdom with a line of succession that is not clear.

The numbers also tell us a lot about why Saudi Arabia is such an intensely repressive state, and why its government agents seemingly have no compunction about sawing up even mild opponents in a Turkish embassy.

Yet, to say Saudi Arabia is a repressive state is arguably something of a misnomer because as far as we can see, Saudi citizens have willingly donned velvet chains, opting to endure enormous wealth with few freedoms, a process abetted by an intense religiosity.

In the old days in South Africa, analysts used to talk about the apartheid state’s dilemma as “riding the tiger”. The big problem with riding the tiger is what happens when you get off. The result is that those riding the tiger try to find all kinds of reasons to stay on the tiger, even as they realise they can’t do so forever. They are caught in a web of their own making.

Saudi Arabia is in that state, trying to find ways of dismounting the tiger without getting eaten. The extremes it’s prepared to go to in order to preserve the status quo are only hinted at by its infiltration of Twitter (which is enormously popular in Saudi Arabia – anything to get away from the constrained state press).

That brings us back to the picture of the streets of New York in 1900.

The Saudi oilfields have enormous reserves, but they are not infinite. The company estimates its lifespan at 50-years. Well, these numbers are fudgy; they are the known reserves. But, as it stands, we are talking about a single lifespan.

Supply isn’t the only problem: consumption is also questionable. Electric cars are a kind of fly-swatty problem for the car industry at the moment. They constitute barely 3% of global production. But for the oil industry, they are a much more existential issue.

The world is tired of being held hostage by the petroleum producers, churning out a product that is eating steadily away at global environmental health. What happens if New York streets are all filled with Teslas in a decade?

Already, the last industry cartel, Opec, is in an odd position. Normally, cartels try to keep the price of their commodity up. But Opec, and particularly the Saudi industry, has in the past aggressively tried to keep the price down to prevent alternative power systems from emerging. And it’s not working.

The US, once a major consumer of oil, is now a major exporter, thanks to shale fracking. But if electric cars make 60% of global oil production redundant, then all of a sudden, the Saudi princes and the extended royal family could find themselves face to face with a tiger. BM


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