SAUDI ARAMCO
The biggest oil company has a good story to tell—if it can disentangle its image from that of the kingdom
Sep 21st 2017 Economist
If Saudi Aramco is a state within a state in Saudi Arabia, then the blandly named Oil Supply Planning and Scheduling (OSPAS) is its deep state. To enter it, you pass tight security at Aramco’s suburban-style headquarters in Dhahran, in the east of the kingdom. The transition is eye-opening. Suddenly, English is the common tongue even among Saudi “Aramcons”, as its workers are known. Female employees, their faces uncovered, lead meetings of male colleagues. The crisp banter is common to engineers everywhere. A toilet break is called a “pressure-relief” exercise.
Deep within, OSPAS is even further removed from the kingdom outside. The few executives with clearance to enter call it the “nerve centre” of the world’s largest oil company. Using 100,000 sensors and data points on wells, pipelines, plants and terminals, it directs every drop of oil and cubic foot of gas that comes out of the kingdom (10% of the world’s oil supply), monitors it on giant screens as it heads to ports and power stations, and tracks oil tankers as they load. Well managers in the desert outback wait daily for OSPAS to tell them what to do. “It’s not just pretty graphics,” an executive says, purring appreciatively over the 70-metre web of data flashing on the wall.
Because Aramco has all its “upstream” oil-and-gas operations in one country, it says it can justify investing big sums—and a lot of computer capacity—on such technology, because it helps cut costs. “ExxonMobil operates in 40-plus countries. It just can’t do that,” the executive adds, before apologising lest he appear to bad-mouth a client and partner, one of Aramco’s American founding former shareholders.
Such comparisons will become more pertinent as Aramco opens itself up for an initial public offering (IPO). Until recently it was just as cloistered from outside scrutiny as the kingdom itself, giving it more of a mystique than a good reputation. This week it invited The Economist for a visit. It only partially lifted its veil; its finances remain off-limits to everyone except the government, its only shareholder. Affable executives dodge almost every attempt to wheedle out useful ways of comparing the firm with its listed peers (it has no peers, they dissemble).
But despite the hermeticism, Aramco has a good tale to tell. Even as its rivals have retrenched owing to low prices, it has stuck to long-term plans, investing heavily in technology, training and the future of oil. Its long-term approach may help explain one mystery. For decades, Saudi Arabia’s declared oil reserves have confounded the industry; since 1989 they have remained suspiciously constant at around 260bn barrels—a dozen times those of Aramco’s nearest listed rival. As if to rub it in, Aramco says the kingdom has a whopping 400bn further barrels of resources that could one day become reserves.
These reserves are under audit ahead of the IPO, and executives are loth to discuss the process. However, they argue that whereas other companies have to go far to find new reserves, Aramco can keep them constant simply by better stewardship of its existing fields. Amin Nasser, the chief executive, says the company’s recovery rates—the share of oil recouped from what is available in a field—average about 50%, but rise as high as 70%, compared with a global average of about 33%. It does this by maintaining the pressure of its wells over the long term through gas re-injection and other means. Raising recovery rates on average to 70% would add 80bn barrels to reserves, an executive says. That is four times ExxonMobil’s latest total.
Unlike big listed companies, which scrapped growth plans when the price of oil slumped in 2014-16, Aramco has also been able to keep on investing because of its low costs, Mr Nasser says. Increasing natural-gas output is now the main focus, but it has also raised oil production in some areas. This is visible at the vast Shaybah field in Saudi Arabia’s blisteringly hot Empty Quarter, where Aramco last year upped oil output by 250,000 barrels a day (b/d) to 1m b/d, inaugurated a facility to process natural-gas liquids and laid 650km of new pipelines across a mountain range of red sand dunes. (Aramco also set out to repopulate the surrounding desert with oryx, gazelle and ostrich hunted almost to extinction. They are now reproducing, although the first ostrich eggs to fertilise sadly cooked in the heat.)
Its second focus is technology. Whereas some of its peers admit that they squandered the chance to invest in big data during the oil boom before 2014, Aramco has no such regrets. Last year it inaugurated its home-grown “TeraPowers” technology, which uses 1trn pixel-like computational cells to simulate the flow of hydrocarbons through 500m years of geological time, enabling it to model oilfields in granular detail. From Dhahran it can remotely direct drilling of horizontal wells in Shaybah, steering a drill-bit through miles of rock to within a few feet of its target. (Royal Dutch Shell recently boasted of using similar remote-drilling technology in Argentina.) To train young employees in understanding the subsurface, Aramco has a 3D virtual-reality “cave” in Dhahran, which shows the filigree of wells 1,500 metres below the surface of Shaybah, as if from a submarine.
Third, as Saudi Arabia’s most attractive employer, Aramco has less difficulty than its Western peers in attracting millennial recruits (born between around 1980 and 1996) who are turning away from the oil and gas industry. It has kept up spending on international scholarships during the slump. It plans to raise the share of women in the workforce from 25% to 40%. Its chief engineer and head of human resources are both female. Saudi labour laws still apply, however: female Aramcons may not stay overnight at an oilfield.
Aramcons pride themselves on a Westernised culture handed down from their American forefathers before nationalisation in 1980. This makes them confident they can handle the listing. “From the way [Aramco] was built, from the beginning I would say it was ready for an IPO,” Mr Nasser says. The main change, he adds, will be issuing quarterly results.
But that underplays the challenges ahead. For one thing, Aramco is not master of its destiny. The future of the IPO, such as the decision on where and when to list, is in the hands of the government shareholder, represented by Muhammad bin Salman, the crown prince. Domestic political tension and external frictions with Qatar risk delaying the IPO until 2019—and further muddying the waters.
The potential valuation is also contentious. MBS, as the crown prince is known, has said he believes Aramco is worth $2trn, though many analysts think that is over-ambitious. To improve its chances, the kingdom is leaning toward a listing on the New York Stock Exchange rather than in London, because America has deeper pools of capital. However, that would expose Aramco to legal risks it would prefer to avoid. In order to bring in Chinese investors, the kingdom is also considering issuing some shares in Hong Kong.
However strong Aramco may be upstream, its lower-margin refining and petrochemicals divisions will drag down the valuation. Aramco has some intriguing plans to mitigate this, hoping in the next few years to build a plant with new technology to turn crude oil directly into petrochemicals—in essence, leap-frogging refineries. But this is untested.
In sum, the IPO is more for the kingdom’s benefit than Aramco’s. It could have drawbacks—exposing the firm to investors with short time horizons or to activists hostile to fossil fuels. But the Aramcons appear determined to make the most of it. Executives argue that oil’s future is bright, even if electric cars and cleaner fuels emerge. Low costs mean there is no danger Saudi oil will become a “sunset industry”, says Mohammed al-Qahtani, head of its upstream division. A listing will make Aramco “the envy of the rest of the world”.
The World’s Biggest IPO
Saudi Aramco cannot be seen in isolation from the kingdom it funds
June 24th 2017 Economist
The proposed sale of 5% of Saudi Aramco is not just likely to be the biggest initial public offering (IPO) of all time. “It’s like Gibraltar selling the rock,” as one expert on Saudi Arabia’s oil policy puts it. The world’s biggest oil company keeps the House of Saud in power, bankrolled 60% of the national budget last year, and is a paragon of efficiency in an economy otherwise mired in bureaucracy.
The elevation on June 21st of Muhammad bin Salman, the 31-year-old architect of the IPO, to crown prince is likely to add more momentum to a sale planned for the second half of 2018. The news will further sideline domestic critics of the IPO, some of whom wonder whether it would be better to borrow the money than sell the family silver. But the success of the IPO is not guaranteed. The tendency of MBS, as the prince is known, to micromanage the listing runs counter to the spirit of openness and liberalisation that he says he wants for Saudi Arabia. That could backfire on the IPO itself. The more he interferes, the less keen investors will be to buy shares.
Aramco’s role underpinning the Saudi economy is an even bigger challenge in valuing this IPO than the firm’s immense size. On the one hand, advisers say, its low costs and lean workforce make it comparable to blue-chip oil supermajors such as ExxonMobil and Royal Dutch Shell. On the other, the risks of political interference mean that it is likely to suffer from the stigma associated with being a national oil company (NOC). Many NOCs, such as PetroChina and Brazil’s Petrobras, have come to market amid the sort of fanfare that Aramco is generating. In a decade, they have destroyed more than $500bn-worth of value compared with their private peers.
As an oil company, the selling-points for Aramco are strong (provided the oil price is high enough). It has a concession for 12 times more oil and gas than ExxonMobil and 27 times more than Shell. Its production levels are several times higher. It has fewer employees, higher debt-adjusted cashflow per barrel, and decent margins in its refining and petrochemicals businesses as well as upstream. By the time it lists, its advisers hope it will have a board structure similar to that of the supermajors, and will be comparable on a number of parameters, including dividend projections, that will enable investors to value it accordingly. “The day this company goes public, it will look like one of the top blue-chip oil companies,” one says.
The trouble is, MBS has already stated what he thinks the valuation should be, and at $2trn, it is punchy enough to make even a Silicon Valley boss look bashful. To achieve it, a 5% sliver would be worth $100bn—four times the biggest IPO to date, that of China’s Alibaba, an e-commerce firm, in 2014.
According to an analysis by Sanford C. Bernstein, a research firm, at $2trn its value per barrel of oil equivalent coming out of the ground would be about 60% higher than that of its blue-chip peers. A valuation at or below $1.5trn would be closer to the mark, but risks disappointing the new crown prince. “He may have to make a choice between selling cheap and pulling the plug on the process. Either case would be a loss of face,” says Steffen Hertog of the London School of Economics, a writer on the state and oil in Saudi Arabia.
To get closer to his target, the kingdom recently slashed tax rates on Aramco, from 85% to 50%. That brings them nearer to international norms for oil firms and will appeal to investors: lower taxes mean the company can pay out higher dividends.
The country also has a plan to wean its people off some of the world’s cheapest energy by 2020, which would bolster Aramco’s profits. According to Jim Krane, of Rice University’s Baker Institute for Public Policy, about a third of Aramco’s output is sold for domestic purposes, with power generation, for instance, enjoying discounted prices of under $6 a barrel—a “massive opportunity cost”.
But investors would be wise not to view issues like taxes and subsidies in isolation. Some analysts express worry that dividends are unstable, and that the kingdom would have to unwind the tax cuts on Aramco if the state needed the money. The introduction of more realistic pricing could also have political and social ramifications, since Saudis are some of the world’s biggest consumers of cheap energy.
Another worry for investors would be if MBS continues to use Aramco as a tool of global oil policy on behalf of OPEC, the producers’ cartel. The kingdom may believe that OPEC serves as a stabilising force in global oil markets, which benefits Aramco. But its latest attempts to play puppet-master with the oil market have been counter-productive. On June 21st (2017) global oil prices fell to their lowest level since August, despite an agreement by OPEC and non-OPEC producers to cut output until next March. As a result, Aramco is not only losing income, it is losing market share to rivals not bound by the cuts.
Last, as his global stature grows, the prince may be tempted to mix up geopolitics and commerce. Anecdotal evidence of this emerged during President Donald Trump’s visit to Riyadh in May. Even as Aramco was supposedly disentangling itself from the myriad noncore activities it carries out on behalf of the state, the firm was on extra-curricular duty. At breakneck pace, it built the Global Centre for Combating Extremist Ideology in Riyadh, where Mr Trump and MBS’s 81-year-old father, King Salman bin Abdel Aziz Al Saud, performed a weird inauguration ceremony involving a glowing globe. The reason for Aramco’s involvement: no other body in the kingdom could do it half as quickly.
Such strategic considerations may also be influencing the decision on whether to list the non-Saudi portion of the IPO in New York or London (a small slice will be listed on Tadawul, the local bourse). Aramco’s lawyers are more comfortable with a London Stock Exchange (LSE) listing, on the ground that it would spare the company the real risk of class-action lawsuits related, for instance, to the terror attacks of September 11th 2001, of litigation from tree-hugging attorneys-general, and of other claims on its assets that it might face on the New York Stock Exchange (NYSE).
But MBS is believed to be leaning more towards New York. This may be because of liquidity: listed companies on the NYSE have a combined market capitalisation of about $20trn, versus $4trn on the LSE. The NYSE also has more prestige; the big peers Aramco wants to be judged against are listed there. Yet he is also understood to have been under pressure from the White House for a New York listing, and is keen to cement ties with Mr Trump. If that were to sway the final consideration, investors might not thank him for it.
Many will shrug. The chance to buy shares in one of the world’s most resilient oil firms will be hard to resist. Moreover, sovereign-wealth funds may well be keen to become “anchor tenants” of the IPO, to deepen their own countries’ relationships with Aramco and the new crown prince.
But MBS’s leapfrog towards the throne will not silence the questions that still swirl. What will happen to the money raised? Will the listing plug a budget gap of 8% of GDP? Will it fund domestic industries such as mining, defence and tourism? Or will it become a “magic money tree”, promising all things to all people? The original goal of the IPO was to bring more transparency and stronger market forces to Saudi Arabia—creating a sort of Thatcherite oasis in the Arabian desert. If that is truly what MBS wants, he should learn to leave well alone.
SAUDI WOMEN
Some Saudi women are secretly deserting their country. Women are fed up with being treated like children
Mar 16th 2017 / Economist
Can Saudi Arabia keep its women? Last month’s appointment of women to head two big banks and Tadawul, the kingdom’s stock exchange, offers hope that the path to a fulfilling career is not completely blocked. But the restrictions of Saudi life remain so irksome that covertly, silently, many women are finding ways out.
On family trips abroad, some jump ship. Some, having been sent to Western universities at the government’s expense, postpone their return indefinitely. Others avail themselves of clandestine online services offering marriages of convenience to men willing to whisk them abroad. Iman, an administrator at a private hospital in Riyadh, has found a package deal for $4,000 offering an Australian honeymoon during which she plans to scarper.
Propelling the flight is the kingdom’s wilaya, or guardianship, law. Although it has received less publicity than the world’s only sex-specific driving ban, it imposes harsher curbs on female mobility. To travel, work or study abroad, receive hospital treatment or an ID card, or even leave prison once a sentence is served, women need the consent of a male wali, or guardian. From birth to death, they are handed from one wali to the next—father, husband and, if both of those die, the nearest male relative. Sometimes that might be a teenage son or brother, because although boys are treated as adults from puberty, women are treated as minors all their lives.
Iman, a divorcee, is subject to the guardianship of her brother, who at 17 is barely half her age. He lets her work as a manager at a hospital, but pockets her earnings. She says she is kept like a chattel, while he spends her money on drugs and weekends in massage parlours in neighbouring Bahrain. Her ex-husband refuses to let her see their children. Her brother prevents her from completing her studies in Europe. If she protests, he threatens to beat her.
She tried going to court to have the guardianship transferred to a more sympathetic elder brother, but the judge dismissed the case, she says, while talking on his phone. Though she dressed demurely in a full veil, she suspects the judge objected to her presenting her own case. Social services offer poor refuge, since hostels for abused women resemble prisons where the windows are barred and visitors banned. When she hears other women say that their brothers don’t beat them, Iman assumes they are lying “because they are scared of social housing”.
Estimates of the number of “runaway girls”, to use the Saudi term, are imprecise, but, says Mansour al-Askar, a sociologist at Imam Muhammad ibn Saud University in Riyadh, the rate is rising. By his estimates, over a thousand flee the kingdom every year, while more escape Riyadh for Jeddah, the kingdom’s more liberal coastal metropolis.
Dissenting Saudi scholars insist that the guardianship laws stem not from Islam, but the Bedouin customs that still hold sway in much of Arabia’s hinterland. Khadija, the Prophet Muhammad’s first wife, was a merchant who sponsored her husband. His subsequent wives moved between Medina and Mecca without him. “Islam freed women from the wilaya,” says Hassan al-Maliki, a theologian in Riyadh who has sometimes been jailed for free-thinking. “A woman can choose whom she marries.” But the clerics who man the judiciary maintain that guardians protect the vulnerable and keep families and, by extension, society together. Last December the courts sentenced a man caught denouncing the wilaya on social media to a year in jail. Another Saudi study, at a university in Mecca, acknowledged that some runaways might be fleeing physical abuse, but said that most had been influenced by the “misuse of social media, copying other cultures and weak beliefs”.
Economists note that the guardianship system makes Saudi Arabia poorer. More than a quarter of the 150,000 students the kingdom sends abroad every year are women. Given that many defer their return or choose to remain in more liberal places like Dubai, much of the $5bn the government spends on their studies each year is going to waste. “Saudi Arabia is losing the battle to keep its talent,” says Najah al-Osaimi, a female Saudi academic who has settled in Britain.
Awkwardly for reformers, some of the most tenacious advocates of the wilaya are women, particularly in obscurantist southern provinces like Asir. Despite such beguiling hashtags as #StopEnslavingSaudiWomen and #IAmMyOwnGuardian, a social-media campaign to end the wilaya system attracted just 14,000 signatures.
Use them or lose them. Saudi Arabia’s leaders acknowledge the need to make the kingdom more women-friendly. Already, more women attend Saudi universities than men. And although some men still send their own photographs when they apply for jobs for their wives (and even attend their interviews), in 2012 the kingdom waived the need for women to have their guardians’ approval for four types of work, including clothes-shop assistants, chefs and amusement-park attendants.
In upmarket malls, women can be seen selling aftershave, boldly spraying samples onto male hands. Broadminded men can give their female wards five-year permits to move unaccompanied (though they get updates by text message whenever their charges travel abroad). Countrywide, the dress code has relaxed a bit. In big cities, women have added streaks of colour and patterns to the black abayas or cloaks that the state requires them to wear. Even in Burayda, the bastion of Saudi Arabia’s puritanical rite, women have cut slits for their eyes in veils that hitherto fully covered their faces, and let their abayas slip from their heads to their shoulders.
Nonetheless many women seethe with frustration. On social media, footage of women riding motorbikes has gone viral. So too has a female silhouette, whisky bottle in hand, dancing on her car roof. A female pop group, clad in black, sings songs of protest from dodgems, toy cars, skateboards, roller-skates and other wheeled vehicles that they can legally drive. Unless the system adapts, warns Mr al-Askar, the sociologist, it risks crumbling. Judges and the police should work together to strip oppressive men of their right to be walis, he says. But for Iman, the hospital manager, reform can’t come soon enough. An Australian honeymoon awaits.