Saudi Aramco’s relative strength as the world’s biggest oil producer is an absolute distraction when it comes to establishing its worth. The Saudi oil giant’s initial public offering prospectus, published on Saturday, outlines how it is both much more profitable than sector peers like Exxon Mobil and Royal Dutch Shell, and more likely than them to remain afloat when the global oil industry hits the iceberg of peak demand. The problem is that such a collision is coming, and matters greatly to the company’s valuation.
The 658-page doorstop that Aramco presented to would-be investors lacks some short-term details like the size and price of its impending stock-market listing, but gives some eyecatching detail on the longer term. It assumes a 0.8% compound annual growth rate for global crude oil demand between 2018 and 2030, compared to the 0.5% for 2017 to 2030 cited in Aramco’s first international bond prospectus in April. But its two newly revealed post-2030 demand scenarios, using independent projections from consultant IHS Markit, are rather less bullish. One has global demand levelling off in 2035, while another sees it peak in the mid-2020s.
Aramco’s contention is that it can weather those scenarios. It says it can muster a 10% rate of return with oil prices well below $20 a barrel, compared with more than $60 today. That explains its 41% return on average capital employed in 2018, compared to 8% for its peers on average. On the basis that the most expensive oil production would be mothballed first, Aramco’s absolute production would still increase even if oil demand fell sharply by 2050, and its market share would jump to 20% from around 12% now.
The catch is oil prices. If demand really did start to tail off in the next decade, those might well fall. Politicians are not yet doing what’s needed to keep global warming below acceptable levels, but they may yet step up their efforts, faced with increasingly tangible signs of climate change. Even as the best placed of the oil producers, Aramco’s $75 billion annual dividend might then be harder to guarantee. Potential participants in its IPO should ponder not just how long they would want to stay on board, but whether they want to get on at all.