May 3, 2021 [S&P Global] – Dubai— Saudi Arabia is intent on monetizing its oil and gas assets to speed up economic reforms, but analysts say the kingdom’s fraught security situation could give international investors pause, and the sales may be driven more by geopolitical imperatives
Saudi Crown Prince Mohammed bin Salman’s revelation in a rare televised interview late April 27 that state oil giant Aramco was in talks with an unnamed energy company to sell a 1% stake has highlighted the urgency with which he is pursuing his ambitious but so far largely unrealized Vision 2030 program.
Its projects aim to wean the country off its reliance on oil revenues but will require massive injections of cash, a major chunk of which is to be raised by asset sales that could impact how Aramco operates.
Besides the potential 1% sale — which many observers expect will likely go to key oil customer China — Prince Mohammed, known by his initials MBS, said the government was in discussions with other companies to purchase pieces of Aramco.
Aramco is reportedly close to selling a stake in its gas pipelines and has said it is reviewing its portfolio for other divestment opportunities.
A tie-up with a Chinese company would further cement burgeoning relations between the countries at a time when the US has become a less reliable commercial and political partner and Western firms are shying away from fossil fuel investments.
“There is a shifting of the geopolitical stance [in] the shaping of relations with China, talks with Iran and intra-GCC [Gulf Cooperation Council] competition,” said Rachna Uppal, director of research at Azure Strategy, a UK-based geopolitical consultancy. “MBS is seeing himself more as a leader now. He’s made it very clear he will do whatever it takes to draw in both east and west towards that development.”
Saudi Arabia is the top crude supplier to China, delivering 1.87 million b/d in the first quarter, according to Chinese customs data. That amounts to roughly one-third of the kingdom’s total crude exports in the period.
Aramco also has investments in Chinese refineries and petrochemical facilities, as well as joint ventures in Japan, South Korea and India, as Asia figures to continue driving global oil demand growth.
China, which has gradually built its presence in the Middle East, is likely looking for more than just a commercial tie-in, however, said Robin Mills, CEO of Qamar Energy, a Dubai-based consultancy. A 1% stake would cost about $19 billion, based on Aramco’s current valuation.
“Saudi upstream is the real crown jewels, but it could be dangled to prospective partners,” said Robin Mills, CEO of Qamar Energy, a Dubai-based consultancy. “Otherwise, what would the Chinese get out of the deal? It’s a fairly substantial amount of money. China has plenty of choice of oil suppliers at the moment and Saudi already supply, so does the stake sale really make any difference?”
Investor risks
To attract other investors, however, analysts say Saudi Arabia must improve its security situation.
Its oil infrastructure has frequently been targeted by Yemen’s Iran-backed Houthi rebels. While most attacks are intercepted, a September 2019 missile assault on Aramco’s Abqaiq processing plant and Khurais oil field temporarily knocked out 5.7 million b/d of production – roughly 5% of global demand – throwing the market into disarray.
Other strikes have hit the critical East-West Pipeline and a tank farm in Ras Tanura, Aramco’s largest crude export terminal.
“This will be spooking a lot of potential investors and needs to be addressed in parallel with all of the other initiatives that are being announced to attract investors,” Uppal said. “A lot of these companies will have to assess their risk appetite, which may be limited by the almost daily attacks.”
Governance issues may also be a concern.
In listing 1.5% of its shares on the domestic Saudi stock exchange in late 2019, Aramco committed to a $75 billion annual dividend. With oil prices crashing due to the pandemic in 2020, the company has been forced to cut capex spending and delay expansion projects to keep the dividend funded.
That could limit future growth, while at the same time MBS has directed Aramco and petrochemical firm SABIC to back a $1.3 trillion private sector investment plan for non-oil projects.
Market competition
Underpinning MBS’ plans are his confidence that Saudi oil will remain in favor, even as the world seeks to transition away from fossil fuels.
Aramco has long touted its low production costs and relatively low carbon intensity in upstream operations as competitive advantages in a potentially shrinking oil market once demand peaks.
In his interview, MBS claimed that output from major oil producers such as Russia and the US will precipitously decline in the coming years, allowing Saudi Arabia to pump more crude to offset the supply shortfalls.
“The US, for example, will not be an oil-producing country in 10 years,” MBS said, forecasting that American production would shrink five-fold to about 2 million b/d in that span.
Russia, meanwhile, will see its production drop to 1 million b/d in about 20 years, from 11 million b/d today, he said. It was unclear where the crown prince derived his figures from.
Platts Analytics forecasts that US crude production will rise to 13.8 million b/d in 2030, while Russia will average about 10 million b/d, the same as Saudi Arabia.
Whatever the data, the urgency with which MBS is talking up Aramco stake sales is a sign that he is speeding up long-discussed reforms as he readies to inherit the throne from his elderly father, King Salman bin Abdulaziz.
“Aramco is likely to stay a key revenue earner for Saudi Arabi for the foreseeable future, [but] there are new economic realities, and the crown prince … needs to start making his mark on the region,” Uppal said. “Aramco is not an untouchable crown jewel now. It is up for grabs.”
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