Sale of the century?

Sale of the century?

“THE amounts of oil are incredible, and I have to rub my eyes frequently and say like the farmer: ‘There ain’t no such beast.’” So wrote an American oilman in the Persian Gulf a few years after the discovery in 1938 of a gusher of oil from Saudi Arabia’s Well Number Seven, 4,727 feet (1,440 metres) below the desert floor.

You could say the same today about Saudi Aramco, the state-owned firm that for decades has had exclusive control of Saudi Arabia’s oil and is the world’s biggest, most coveted and secretive oil company. On January 4th the kingdom’s deputy crown prince, Muhammad bin Salman, told The Economist that Saudi Arabia was considering the possibility of floating shares in the company, adding that personally he was “enthusiastic” about the idea.

It was a stunning revelation. Officials say options under preliminary consideration range from listing some of Aramco’s petrochemical and other “downstream” firms, to selling shares in the parent company, which includes the core business of producing crude. The staggered nationalisation of the Arabian American Oil Company (Aramco), made up of four big American firms, in the 1970s was emblematic of a wave of “resource nationalism” that has helped define the industry (see chart 1).


Aramco is worth, officials say, “trillions of dollars”, making it easily the world’s biggest company. It says it has hydrocarbon reserves of 261 billion barrels, more than ten times those of ExxonMobil, the largest private oil firm, which is worth $323 billion. It pumps more oil than the whole of America, about 10.2m barrels a day (b/d), giving it unparalleled sway over prices. If just a sliver of its shares were placed on the Saudi stock exchange, which currently has a total market value of about $400 billion, they could greatly increase its size.

Prince Muhammad says a listing would not only help the stockmarket, which opened to foreigners last year. It would also make Aramco more transparent and “counter corruption, if any”. A final decision has yet to be taken. Yet the prince has held two recent meetings with senior Saudi officials to discuss a possible Aramco listing and diplomats say investors are being sounded out. The talk is of at first floating only a small portion of the company in Riyadh, perhaps 5%. In time that could rise—though not by enough to jeopardise the kingdom’s control of decision-making.

The aim would be to foster greater shareholder involvement in Saudi Arabia; a senior official said there was no intention of surrendering control of Aramco or its oil resources to foreign firms. But it is part of a frenzy of reforms proposed by the prince that his government is rushing to keep pace with. “Everything is on the table. We are willing to consider options we were not willing to get our heads around in the past,” an official says.


For many investors, a listing of Aramco, however partial, would be a prize even at today’s low oil prices. Its “upstream” business is mouth-watering. Rystad Energy, a Norwegian consultancy, says no other country except Kuwait can produce oil at a lower break even cost (see chart 2).

By the standards of national oil monopolies, analysts say that Aramco is well run. In the 1940s and 1950s, when the American consortium recruited young Saudis, it was an “unlikely union of Bedouin Arabs and Texas oil men, a traditional Islamic autocracy allied with modern American capitalism”, writes Daniel Yergin in “The Prize”. Under American ownership, it built towns with schools, wiped out malaria and cholera, and helped farmers become entrepreneurs, officials recall, explaining why it was popular with Saudis.

It was a different story in Iran and elsewhere, where citizens grew sick of the colonial-era concessions taken by British and French firms, and a wave of nationalisation began. The Saudis, having declared their first 25% stake in Aramco in 1973 “indissoluble, like a Catholic marriage”, were unable to resist the tide. Full nationalisation of Aramco came in 1980. But an American business ethic survived. Just over a decade ago Matthew Simmons, an American banker, argued that Saudi wells were past their prime and that production would soon peak. Yet Aramco has increased output by more than 1m b/d in the past five years, reaching record highs. “They’ve proven their resilience,” says Chris DeLucia of IHS, a consultancy.

Questions surround the company, though. Mr DeLucia says 87% of its output is oil; it needs to develop more gas to satisfy the country’s needs for cleaner, cheaper power. Some argue that its reserves, which have barely budged since the late 1980s, are overstated. Internal documents about them are “phenomenally closely guarded secrets” says a local observer.

The company does not report its revenues. Its fleet of eight jets, including four Boeing 737s, and a string of football stadiums suggest that it is not run on purely commercial lines. It is the government’s project manager of choice even for non-oil developments, and runs a hospital system for 360,000 people. A listing would require it to become more transparent.

But even with greater disclosure, minority shareholders may play second fiddle. The company is integral to the social fabric of Saudi Arabia and the survival of the ruling Al Saud dynasty, providing up to nine-tenths of government revenues. Cuts in its output have been a foreign-policy lever through which OPEC, the producers’ cartel, has often sought to rescue oil prices.

Investors in Russia’s Gazprom, another national champion, have watched in frustration as the company has been used as an arm of the Russian foreign ministry. Elsewhere, selling stakes in national oil companies has had mixed results.

Prince Muhammad’s desire for reform fits a pattern that some consider reckless. Saudi Arabia has recently forced OPEC to maintain production despite oil falling from a peak of $120 a barrel to below $35. Its decision on January 3rd to suspend diplomatic relations with Iran, a fellow OPEC member, makes it harder for both to agree on production cuts, though Saudi officials are in any case adamant that they have no intention of rescuing prices.

Others believe Saudi Arabia’s strategy makes sense. They think it wants to protect its share of the global oil market by driving high-cost producers to the wall at a time when unconventional forms of oil, such as American shale, have had gushing success.

Another threat is alternative forms of energy, such as wind and solar, which may well challenge fossil fuels. Selling shares in Saudi Aramco could thus be intended to cash in before the “decarbonisation” of the economy starts to gain credibility. It would also fit with a trend that has started to transform the oil industry for the first time in half a century—denationalisation.

Paul Stevens of Chatham House, a British think-tank, says a cadre of well-educated technocrats from oil-producing nations are wondering whether their national oil companies are “ripping us off”, through corruption or inefficiency. Brazil’s corruption-plagued Petrobras proves that public markets are no guarantee of probity. But as in Mexico, which is opening up its oil industry for the first time since 1938, many want to impose market-based checks and balances, so that no company can operate as a state within a state. If that happens to Saudi Aramco, the biggest of them all, it will have global repercussions.


Sale of the century?

Getting Big Oil to Behave

Getting Big Oil to Behave.
A pilot project in Alberta’s oil sands—and not subpoenas of Exxon—could secure our future.

Getting Big Oil to Behave

A pilot project in Alberta’s oil sands—and not subpoenas of Exxon—could secure our future.

Big Oil is going through a rough patch. Prices are low and will remain so. President Obama killed the Keystone XL pipeline from Canada. And New York’s attorney general is probing whether ExxonMobil withheld scientific findings that confirmed decades ago that fossil-fuel consumption contributes to global warming. At this tumultuous moment, it’s worth pointing out where symbolism outweighs substance—and shed some light on an industry development that got eclipsed amid all the excitement.

Long an opponent of climate-friendly regulation, Exxon began to soften its line on the underlying science—and even embraced the need, at least in theory, to curb greenhouse gases—when Rex Tillerson succeeded Lee Raymond as chief executive officer in 2006. Nevertheless, the world’s largest energy company continued to funnel millions to climate-denying members of Congress, even after a 2007 pledge to cease contributing to those, in Exxon’s own words, “whose position on climate change could divert attention from the important discussion on how the world will secure energy.” On Nov. 4 it received a subpoena from Eric Schneiderman, New York’s AG. The prosecutor is seeking documents he suspects will show that Exxon deceived investors and the public about what it knew about climate change. (Exxon denies the allegations.) The prosecutor is also seeking a national stage for his climate stance. Schneiderman isn’t talking about the probe, but predictably, others are congratulating him. “I am so proud of New York Attorney General Eric Schneiderman, because he announced that he is going to investigate Exxon,” Democratic presidential candidate Hillary Clinton said at a campaign event in New Hampshire.
If he follows through on his subpoena, what Schneiderman likely will find is that Exxon executives and scientists historically made contradictory statements on human culpability for climate change—a far more mixed record than the systematic public stonewalling the tobacco industry conducted about the dangers of smoking. He’ll also find that while Exxon has joined organizations that questioned mainstream climate science, such as the defunct Global Climate Coalition, Royal Dutch Shell, BP, and others did, too. The latter corporations, however, came around to conceding reality sooner and more forcefully than Exxon.

Industry ambivalence on climate regulation stems from bald self-interest: Oil companies want to continue to sell their staple product (which, by the way, the world’s economies will continue to demand for the foreseeable future). Gradually, that self-interest has evolved toward a more enlightened version, as engineering- and science-based corporations have been forced to acknowledge the consensus that carbon dioxide and other greenhouse gas emissions have contributed to the earth’s atmosphere—and oceans, especially—heating up. That concession doesn’t mean oil producers agree with every proposed response to climate change, but they’re not fighting the basic facts anymore. Navigating toward profit now requires lining up with or against the politics that emerge from popular pressure to act on climate.

As for Keystone XL, Obama framed his decision to block TransCanada’s proposed 1,200-mile pipeline as a vital political signal. Debated in Congress over seven years, Keystone would have carried 800,000 barrels a day of carbon-heavy petroleum from Canada’s oil sands region to refineries along the U.S. Gulf Coast. “America is now a global leader when it comes to taking serious action to fight climate change,” he asserted at the White House on Nov. 6. “Approving this project would have undercut that leadership.”

When he travels to Paris next month for the United Nations climate summit, the president will cite his nixing of Keystone, along with several other recent steps, to enhance his moral authority when pressuring fellow heads of state to agree to a global deal to limit greenhouse emissions. Reasons to view Obama’s pipeline gesture with skepticism include one the president himself conceded: Blocking Keystone won’t stop Canada from exporting oil to the U.S. or anywhere else, for other pipelines and rail routes already exist. Keystone “has become a symbol too often used as a campaign cudgel by both parties rather than a serious policy matter,” Obama said.

The thousands of jobs Keystone backers heralded mostly would have been in construction and ancillary fields such as food services; they’d have lasted for only the two years or so it would have taken to finish the pipeline. Permanent staffing, by contrast, would have been measured in the dozens. On the other hand, Keystone’s absence won’t arrest development of Canada’s unusually viscous form of petroleum, known as bitumen. Even at today’s relatively low price of about $50 a barrel, oil sands projects are “cash positive,” says Shell’s CEO, Ben van Beurden. (That may be true for existing mines, but if Keystone had been built and lowered transportation costs, oil sands operations likely would have expanded more swiftly.)

It would be terrific if Obama could help steer the Paris conference toward progress, but aspirational goals for carbon reduction—if even those can be agreed on—won’t have much real effect unless they’re accompanied by policies that help achieve the goals. The most significant such policies would impose a per-ton price on carbon emissions, via either cap-and-trade rules or direct taxes.

A price on carbon in the U.S. and around the world would unleash market forces to reduce emissions. Greenhouse-intensive energy sources such as coal would become less economical. And industry would have a dollars-and-cents incentive to experiment with technologies that could reduce the climate impact of continued use of fossil fuels.

Which brings us to carbon capture and sequestration—CCS for short—technology that’s been around for decades and involves pricey methods to reduce emissions from power plants and petroleum refineries. With inadvertent bad timing, Shell chose the same Friday morning Obama announced his Keystone death sentence, Nov. 6, to hold a gala valve-turning ceremony for a CCS project linked to the Athabasca oil sands operation in Alberta. A tangle of pipes, stacks, and scaffolding that a layman’s eye can’t distinguish from the rest of a vast refining facility, the Quest CCS initiative is designed to separate out and safely store underground more than 1 million tons of carbon dioxide annually. This is CO2 generated during the initial process of refining bitumen for transportation. One million tons is a significant amount—equal to the annual emissions of some 250,000 cars—but Quest demonstrates that CCS isn’t a panacea. The Shell project removes only one-third of the CO2 produced by the company’s bitumen upgrader; that means the other two-thirds, equivalent to what comes out of 500,000 cars a year, will still head skyward.

Limited though it may be, Quest shows that with the right incentives in place, CCS can happen. Alberta imposes an $11.25-a-ton carbon price, which Van Beurden says constitutes a helpful, if too gentle, kick in the pants to reduce emissions. More salient, the governments of Alberta and Canada provided $650 million in subsidies to get Quest built. The U.S. Department of Energy chipped in $500,000 more for safety monitoring of the carbon, buried a mile and a quarter underground.
Fifteen mostly new CCS projects, including Quest, now operate around the world, Van Beurden notes. The technology won’t take off, though, in the absence of either flat-out government subsidies or a system of carbon pricing at $60 to $80 a ton, which at present doesn’t seem likely. “We don’t make money out of sticking CO2 in the ground,” he says, “so the only way you can do it is to somehow create a price on emitting the carbon.”

Ponder that for a moment: The CEO of an oil multinational asking for government imposition of substantial levies so he’s forced to invest shareholder money in environmental protection. In a joint public statement in June, major European-based oil and gas companies BG Group (which Shell is acquiring), BP, Eni, Statoil, and Total joined with Shell to call for carbon pricing. Less forward-thinking American rivals such as Chevron and Exxon didn’t add their voices to the rallying cry.
Will New York’s investigation of Exxon nudge it to join the cause? Seems unlikely. Singling out Exxon for potential prosecution might cheer environmentalists, but it won’t move us toward a carbon price. It’s strange and too bad that while Shell was pointing the way toward real progress in chilly Alberta, so much attention was being devoted to posturing in New York and Washington.

Bloomberg Businessweek

Getting Big Oil to Behave

How The World’s Oil Markets Have Evolved

Crude oil is one of the most widely used and actively traded products in the world and accordingly the price of oil remains center stage as an important economic indicator for both present conditions, as well as expectations for the future.

How The World’s Oil Markets Have Evolved

Energy: Seize the day

The fall in the price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies.

The plunging price of oil, coupled with advances in clean energy and conservation, offers politicians around the world the chance to rationalise energy policy. They can get rid of billions of dollars of distorting subsidies, especially for dirty fuels, whilst shifting taxes towards carbon use. A cheaper, greener and more reliable energy future could be within reach.

Energy: Seize the day.

Pressure on Oil Megaprojects

Around the world, the giant oil companies of the United States and Europe are putting the brakes on a decade-long spending spree focused on finding and developing offshore oil fields in ever-tougher environments.

Pressure on Oil Megaprojects –


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