Aramco ticks all the red boxes

Saudi Aramco, the giant state-owned oil company, is now listed since 11/12  on  the Riyadh’s Tadawul Exchange. With only 1.5% up for sale, the IPO raised a jaw-dropping $25.6bn and qualifies as the biggest IPO ever (beating Alibaba’s record). Aramco was then valued at $1.7tn (way ahead of Apple or Microsoft).

Crown Prince Mohammed bin Salman eventually recorded a point, three years after kick-starting talks of a much-awaited listing. He will use this as the proof that he is moving forward with his reforms agenda, including his “Vision 2030” plan that aims at opening the economy and limiting the country's reliance on oil. 

Nevertheless, the atmosphere around the realisation of the IPO was in sharp contrast with the initial financial markets’ excitement, when western bankers and investors considered the deal as the opportunity of a lifetime. It happened with a very limited participation from foreign institutions. Riyadh relied instead on domestic banks and Gulf investors to finalise this IPO. Whether western finance jumped out (because of disagreements on valuation and other risks) or was cut of the deal (because Saudi wanted a quick win) is unclear. The truth remains, however, that the result is way lower than what the Saudis initially ambitioned: selling a 5% stake at $10 a share, raising $100bn at a $2tn IPO valuation.

Western investors with some degree of an ESG mandate will be hard pressed to find a possible worst investment: from reporting disclosure to human rights to environmentally harmful core activities, Aramco ticks all the red boxes.

Saudi Aramco's business model is based on continuous carbon dioxide spewing in the atmosphere, when the drive is to cut on carbon to limit global warming to 1.5°C (a relative “safe” upper limit for global warning and the unsustainable goal of the Paris COP 21). The company is the world’s top crude exporter with proved liquid reserves “five-times larger than those of the Five Major IOCs” (according to Saudi Aramco’s IPO website). 

This elephant listing happens at the wrong moment. The EU declared a “climate emergency” and targets net zero greenhouse gas emissions by 2050. This background clearly looks negative for the Oil sector. The UN-backed Principles for Responsible Investment (PRI) warned that “carbon-intensive firms are likely to lose 43% of their value. And the 10 biggest firms in oil and gas could lose 31% of their current value”, hit by upcoming climate policies.

Alongside sheer economics, governance risks are huge for a company that provides 87% of Riyad’s revenues. This implies that Aramco will not escape any of the (geo)political issues that Saudi Arabia experiences. For instance, Aramco’s facilities have already been targeted by drone attacks, leading the country to temporarily shut down a large part of its oil output. All of this has cooled down the risk-taking dispositions of Western investors.

Global green agenda diverging, carbon capitalism still kicking, smooth transition priced

Saudi Aramco’s IPO may have received a frosty welcome from Western investors but plenty of capital has nonetheless been committed: the book was more than five times oversubscribed and shares jumped by 10% on the first trading day (pushing the company’s valuation to $1.88tn and later beyond $2tn). 

This illustrates the lasting gap between awareness and actions in favour of climate, particularly in Europe, and the carbon addiction reality of the global economy. As scientists warn about global warming, fossil fuels and money have not yet diverged. 

Two lessons can be inferred

The first is that investors are for now validating the idea that to diversify an economy, big cash machine fossil fuel companies are best placed. Subsidising sustainable activities through their polluting ones is acceptable. Investors, who almost by definition tend to always see the bright side, are therefore keen to praise Integrated Oils’ commitment to renewables and low-carbon technology investing. The risk is then that by focusing too much on their investment flows, investors forget their stock of carbon-intensive capital that may soon come under regulatory fire, at least in Europe.

The second lesson concerns the difficulty to find a common agenda in the fight against global warming, highlighting tensions to reconcile each country economy's idiosyncrasies with the degree of collaboration needed. Even in finance, where the borders are easy to cross, in the case of Aramco, western money was replaced by domestic money, disconnected capital flows and thus further complicating a possible alignment.

The real test will come from Aramco’s potential index inclusion or a dual listing in another country, pushing global investors and households into unlikely exposure twists. If Saudi Aramco cannot reach this step, then its valuation looks unstainable, in what may well be the biggest artificial market ever created. 

Silver linings

In the fight against global warning, it is depressing that the now world’s largest IPO is that of Saudi Aramco. It, however, reflects a certain economic reality, where fossil fuels remain a key source of wealth. For the whole sector, it is too soon to say whether Aramco’s IPO further disqualifies the industry or will instead offer a way to shine for other integrated oils which are transitioning toward greener activities, while adopting better reporting practices. 

When reporting CO2 emissions, scope 3 (emissions linked to their product life cycle) is particularly key for integrated oils, i.e. they imply that closing the business is the best route. A recent survey by The Guardian on the biggest polluters, found that “90% of the emissions […] was from use of their products such as petrol, jet fuel, natural gas and thermal coal. And one-tenth came from extracting, refining and delivering the finished fuels”. It also revealed the leading polluting role of Aramco, “which has produced 4.38% of the global emission total” since 1965: the biggest polluter of the modern era.

This is all the paradox for Aramco’s IPO, whose Saudi energy minister Abdulaziz bin Salman wants it to be “nothing different than a typical international oil company” (IOC), keen to remind that its company has “one of the lowest carbon footprints per unit of hydrocarbons produced”. This will score high on metrics focusing on scope 1 and 2 emissions (i.e. oil production is less carbon intensive than refining). Yet, it is insufficient as the environmental problem with oil lies in the refined product (i.e. scope 3 emissions).

Aramco is also lagging behind on less tangible environmental measures that IOCs implemented in the last two years, imposed by green activists turned into shareholders. By leaving oil lobbies due to misalignment on climate policy or tying executive bonuses on progresses made on the energy transition, European oil companies are at least showing signs of improvement. There are few indications that Aramco will follow them in that regard. If ESG alignment is becoming the new normal for IOC, Aramco will find it hard to deliver on its ambition to be “nothing different”.

Amongst the AlphaValue Integrated Oil sector, we compiled data about companies’ emission performances that we then used against the capital they employ in a dynamic way to assign a scoring and monitor improvements. Aramco makes them very green indeed.

(1) Environmental Externalities (Carbon, Water, Waste) set against Capital Employed, 1-Worst/10-Best