Fossil Fuel Divestment - Saudis Want Out

Not sure I agree that Aramco is "probably the world's most valuable company". I think it's a bit late for that.

ecarfan said:

Not sure I agree that Aramco is "probably the world's most valuable company". I think it's a bit late for that.

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XOM is worth $322B, making it the third most-valuable publicly traded company in the world, after Google and Apple, each worth about 2x XOM. Conservatively, Aramco is worth 5x XOM, considering the scale of reserves Aramco controls and the incredibly low cost of lifting those reserves. So, yes, I agree with the Economist that Aramco is probably the world's most valuable company. What other candidate would you propose?

The biggest recent news in the world of energy has been the announcement out of Saudi Arabia that the kingdom is contemplating floating to the public Aramco.

First, the immensity of that organization, plus its immediate effects within its business sector of Energy Producers, staggers the imagination and beggars all comparisons.

For those of you who aren't familiar, Aramco owns all Saudi oil production, refining and marketing. If you're interested in learning details, it's best to go to more complete references but I'll write a few below.

* Aramco's oil reserves are something like 260 billion barrels - far greater than the combined reserves of Exxon, Chevron, Rosneft and Petrochina. Greater than every US producer combined. Its oil fields also are the lowest cost to produce on the planet.

* Its refining capacity is about 4.1mm bpd - twice Petrochina's, thrice Rosneft's, two-thirds that of Exxon's - but I didn't look into how much of Exxon's capacity is under its control versus that fraction that it owns (the latter is of course a lower number).

* Its yearly revenue is around $360 billion.

* A first estimate of its market capitalization is $2.5 trillion. That would make it four times as large as current champ, Apple.

Okay, so numbingly immense numbers all around. What does it mean?

My take on this is that the Saudis are conceding exactly what the alternative energy crowd - to which most on this forum belong - has been expostulating. The assets of Aramco are likely to become stranded - unusable - and the means to convert them into usable wealth will not be to develop and sell them over time, but rather to monetize them now. Selling shares would give the House of Saud some fraction of that $2.5 trillion (it's doubtful they would release 100% of the shares). Jam today rather than perhaps jam tomorrow.

Further support for this thesis is the timing. As we all know, crude prices are presently about $100/bbl less than they were at their recent peak and at the lowest in twelve years. Absolutely not the time to sell off....unless one's long-term view is similar to the stranded-assets thesis.

beeeerock said:

My thinking was that the Saudi producers had pushed the price down in an attempt to damage or kill the costly competitors... oil sands, shale etc. That they'd prefer to sell as much oil as possible at lower rates than less at higher rates. However, the wording of the article suggests they are also victims... if that's the case, who is calling the shots?

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I believe that the way Saudi Arabia sees the situation - they can sell all the oil they can pump at the current lower price (and I expect, even lower prices - I see oil going to $20 because the drivers leading to increasing oversupply aren't changing fast enough to end oversupply) OR they can sell less oil at a low price in an attempt to prop up the price of oil for everybody else that produces oil. And as a bonus, looking 10 to 30 years down the road when alternatives to burning oil become an increasing % of the energy mix, and the demand for oil is such that it's clear that there is a whole pile of oil that is going to stay in the ground (or at least, be extracted over centuries instead of years), then they will have made a short term decision to decrease their revenue / income in exchange for a long term consequence that decreases their revenue / income.

More succinctly, even in this low price environment, Saudi Arabia is pursuing a course of action they believe maximizes both short and long term revenue. The pricing environment is such that there isn't as much money flowing as a result so they'll have to deal with the consequences of lower revenue, but the more/less oil pumped has already been dialed to maximize revenue.


For "who is calling the shots", I'd say that the cartel has "lost control" to something like Adam Smith's invisible hand. A bunch of market actors, each acting in their self-interest, has realized that it's pump it or lose it time.

I'd think there would be some issues with liquidity and sovereign risk if it were listed on the Riyadh exchange and some serious risk of anti-trust prosecutions if it were listed on any of the US or European exchanges.

I think we need to take a closer look at the US role (and non opec group) in production. Everyone seems to blame the Saudi's, given demand has remained consistent over the years (consistent normal growth) and the US has increased production significantly in 2013/2014. Which is what we are now seeing the effects of in my opinion. They (the US & non opec) cashed in while the oil prices were doing well and now we are all paying for it.

Is it only the US? no i dont think so, we all play in the same sandbox and can all do something to help the situation.

here some data to support - Short-Term Energy Outlook - U.S. Energy Information Administration (EIA)

Robert, I respect the opinions of the reporters at The Economist, and I certainly have no expertise in economics or the oil business. I just wonder how the market will value Aramco given the many signs that the world is not only transitioning away from oil for transportation power (very slowly, obviously), the plummeting cost of renewable energy and batteries, the growing consensus that burning fossil fuels is environmental suicide and the very real possibility that more and more nations will implement some form of a carbon tax.
It seems to me that investing in Aramco stock would be a poor long term investment and a very risky short term investment.

I wonder if the fall in oil is geopolitical tactical move as well. Trying to hurt countries Saudi opposes? I don't know.

TheTalkingMule said:

There's a million factors converging in the next few years and essentially no answer but to cash out while still on top. A bold move, I'm VERY surprised that this is happening rather than holding on til the coffers run dry.

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I think it's a logical move on their part. Solar, battery, and EV costs are dropping faster than anyone thought they would, and curtailing carbon emissions is right around the corner once we have cost-efficient low carbon alternatives. In ten years, that company and those reserves could be worth a fraction of what they're worth even with oil at $40/bbl.

I almost want to say this is a response to the Bolt/gigafactory. In the late 90s, Chevy was their best friend by pushing big trucks/SUVs. Now that they're diversifying (Volt/Bolt), everyone needs to diversify to prevent another Toyota/Hybrid situation, and that's going to drive the costs of EVs/batteries down farther. My guess is that we'll see EVs at cost parity to ICEs in a decade+, and at that point the only advantage of an ICE is longer range/faster refueling.

The media is entirely owned by status quo. The viewpoints espoused in this short thread are nowhere to be found anywhere in the mainstream media, not even as a radical crazy idea that should be discussed and dismissed in two sentences. The rags I read on a daily basis in order the discern their true agendas... I guess it has been the case for all of history.

The best part is that all of the players and reporters (except for the kook aid blind and slow witted who are unfortunately found in every corner of the world at alarming rates) know the truth.

This move reeks of desperation, an act they would consider only if they have arrived at the conclusion that there is a high probability that a significant percentage of their reserves will NEVER be extracted and whatever will be produced may very well sell at price points below today.

The saddest part of all is that there is a voracious army of hucksters who will push this IPO to the entire investment world as an unprecedented opportunity of the highest quality. Hundreds of billions of dollars of bag holder's monies will finance this corrupt and evil government as it tries to stay relevant as it wreaks havoc on its people, the surrounding area and the world. Afterwards they will shrug and say 'who,could have imagined?'.

It speaks to the state of the world that I take this turn of affairs as a small sign of the potential to actually right the floundering ship that is our species.

@Ohmman, very perceptive post. Thank you.
And yes, the Saudis have seen the future and realize it is not favorable to their business model. Their Aramco IPO idea is a clear indication that they know their time of easy profits is ending.

ohmman said:

Something I've learned to do when reading all news is to figure out their narrative first, and then read the article in that context.

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The importance of having context cannot be overemphasized.
My one weird old trick to reading/watching/hearing news media, is remembering that I am not the customer and the news is not the product.
The advertisers are the customer in reality, and "my attention" is the product being sold.

Back on topic: "Batteries" is the new "Plastics" if whispering advice to Graduates these days.

ohmman said:

.... I'm not sure I'm of the belief that it'll lose all value or not rebound a bit, but I feel pretty confident that we've lived through its all-time highs.

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I see the "end-game" with oil as being a niche chemical used for centuries into the future in a variety of industries that don't involve burning the stuff for energy. Lubricants, plastics -- stuff we can make from the oil that is hard or impossible to make otherwise, but that amounts to single digit % demand relative to today and burning the stuff for energy release.


In other news - I've decided to take the Saudis "advice". Of the small number of companies I've owned shares in directly, I've divested from the one oil & gas sector company I had. It wasn't much of a position, and I still like the business model for natural gas pipeline MLPs, but I'm putting that money to work somewhere else (maybe help pay for Model X) and won't be returning to this sector at all.

I particularly like the aspect of natural gas MLP / pipeline companies that involves building well head connections that enable capture of natural gas at oil wells; that allows oil producers to avoid flaring or burning off the "waste" natural gas that is connected with collecting the oil. https://en.wikipedia.org/wiki/Gas_flare