The flotation of Aramco seems to be going backwards, and the chances of it happening in either the UK or US seem to be diminishing. There is more than one reason: but Arnold Schwarzenegger is one of them.
Why Arnold Schwarzenegger is a reason Aramco float may not happen in the west
The Terminator on oil
Arnie is famous for saying “I’ll be back,” although my favourite quote from him in a movie has far too many expletives for me to use in a polite column such as this.
But it seems he is now a reason why the Aramco float may not happen in the US, and to a lesser extent the UK.
Oh yes, his comments are also a reason to be cautious on all oil companies.
It boils down to climate change. The evidence to support the hypothesis that this is happening is becoming increasingly persuasive. The jury is out on how serious it will be, but I can’t get rid of a nagging fear that it may turn out to be worse than standard models suggest. Frankly, as the most intelligent species on this planet - allegedly - we humans have a duty of care, one we don’t seem to be living up to.
But now, the former governor of California, wants to sue oil companies for climate change. He said: “The oil companies knew from 1959 on, they did their own study that there would be global warming happening because of fossil fuels, and on top of it that it would be risky for people’s lives, that it would kill.”
It’s a tricky one this. Should oil companies be fined for climate change? It is not dissimilar to the argument that tobacco firms should be made to pay the full cost of the health damaging effects of tobacco. Personally, I think they got off lightly.
Both the oil and tobacco companies fully understood the dangers of their products, it is even possible they deliberately covered up these findings and tried to confuse the debate.
And the Saudis are worried.
It is a bigger fear related to the US. Let’s face it, the US is not shy in imposing sanctions on non-US firms - litigation is a major risk of trading in the US. I am not sure if it amounts to deliberate or unconscious protectionism - but protectionism is what it is.
Aramco is the Saudi oil industry - if/when it is floated, it will probably be the largest company in the world - although if it delays too long, it may be a close call. Amazon, Alphabet or Apple may well win the race to become the first trillion dollar business, whether Aramco is worth more than these companies depends on how much it is valued at when the flotation occurs and what happens in tech land.
Talk is that even if the initial float occurs in Saudi Arabia, it won’t be until 2019. The Saudis are hoping for a two trillion valuation, some estimates suggest it may only fetch $1.4 trillion. If that smaller estimate proves right, and the flotation occurs in the latter half of next year, I would not be at all surprised if it was not the world’s largest company.
Another factor at play is the oil price. A recent study by the International Energy Agency suggested that over the next two years or so, thanks in part to US shale gas, oil supply will grow faster than demand, keeping a lid on the oil price. But post 2020, maybe 2022, things will change. They suggest that investment in oil fell off a cliff after the oil price crashed, and that consequently supply growth will be insufficient to keep pace with demand growth by the beginning of the next decade. All else being equal, that is when the oil price will shoot up.
The Saudis are planning to float Aramco because they want to use the money to create greater diversity in the economy - to fund Neom, for example the new tech city in the desert that Saudi’s Crown Prince Mohammad bin Salman wants to build.
The initial plan though is to float just five per cent of Aramco. I suspect that once floated more shares will be released onto the market and it will be many years before the release of shares is over. So actually, if the oil price is likely to peak sometime between 2022 and say 2025, then next year may be a good time for the IPO.
Of course, the Saudis know that in the longer run the renewables revolution poses a threat to the pre-eminence of oil. They want to get as much money in as possible before the big shift away from oil happens. The risk is that this shift will come sooner rather than later.
Or you could see it this way, when it comes to its reliance on oil, Saudi wants to say, as Arnie did once: “Hasta la vista, baby.”
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.