The initial public offering (IPO) of the most profitable company in the world is not going as planned. Saudi Aramco, Saudi Arabia’s state-run oil giant, has run into a number of potential risks as it prepares for its long-awaited IPO later this year. While the IPO is still expected to be the largest in history, terrorism threats, the impact of climate change, and uncertainty related to crude oil demand have created serious new risks for Saudi Aramco and its potential investors.
Saudi Arabia’s Crown Prince, Mohammed bin Salman, has long dreamed of reorienting the nation’s economy through the Saudi Aramco IPO. His vision has been oriented around diversifying Saudi Arabia’s economy, advancing new technologies, and encouraging the development of public/private partnerships (Childs, 2019). By allowing Saudi citizens to invest in Saudi Aramco, the country would be able to raise billions of dollars to fund new initiatives to diversify the country’s economy away from just oil production. However, as the IPO deadline approaches, energy analysts are starting to feel the investment risks.
Terrorism has long been a primary risk to Saudi Aramco. As a result of recent Iranian drone attacks to the critical Abqaiq and Khurais facilities, Saudi Aramco had to cut oil production by over 50%, while it took weeks to restore capacity (Sheetz, 2019). Even though crude oil production levels have been fully restored, the damage to investor confidence has already been done. Moreover, since the majority of Saudi Aramco’s oil infrastructure relies heavily on a cross-country pipeline system, this makes the company vulnerable to future terrorist attacks.
Climate change is another obvious risk to Saudi Aramco. Existing and future climate change concerns have manifested in changes to public sentiment, laws and regulations, international agreements, and government policies. These changes and concerns may impact the future demand for fossil fuels and hydrocarbon-based products. A global desire to shift away from fossil fuels has made investors feel less confident about the future of Saudi Aramco’s profits.
As transportation technologies continue to change, the demand for traditional gas- and diesel-powered vehicles is predicted to decline, which would add pressure to Saudi Aramco’s projected profits. The push for the electrification of transportation systems and technological developments related to ridesharing could reduce the global demand for crude oil. Similar to changing transportation technologies, the movement away from plastics toward more environmentally friendly materials is expected to drive down oil production.
Valuation in Question
In addition to concerns related to terrorism, climate change, and changing technologies reducing the demand for oil, general investor sentiment for Saudi Aramco’s projected two trillion valuation just hasn’t been there. While Crown Prince Mohammed bin Salman originally wanted to raise $100 billion by selling five percent of Saudi Aramco’s two trillion valuation, the IPO is now only expected to generate about $25 billion at a total valuation of less than $1.7 trillion (Childs, 2019).
Even though concerns have been mounting, plenty of Saudi Arabia’s wealthy Gulf neighbors have still echoed plans to invest in the Saudi Aramco IPO. Saudi Arabian officials have confirmed that both Kuwait and Abu Dhabi plan to contribute significantly to the IPO. The Abu Dhabi Investment Authority (ADIA) will be investing at least one billion, while the Kuwait Investment Authority (KIA) has yet to reveal the size of its projected investment (Gamal, 2019).
Childs, M. (2019). “What’s Wrong with the Saudi Aramco IPO?” NPR: https://www.npr.org/sections/money/2019/11/26/782779128/whats-wrong-with-the-saudi-aramco-ipo
Gamal, R. (2019). “Gulf state investors step in to help Aramco hit IPO target: sources.” Reuters: https://www.reuters.com/article/us-saudi-aramco-ipo-adia/gulf-state-investors-step-in-to-help-aramco-hit-ipo-target-sources-idUSKBN1Y10TG
Sheetz, M. (2019). “Terrorism, climate change and dependence on Asia — Saudi Aramco faces these risks as it prepares IPO.” CNBC: https://www.cnbc.com/2019/11/10/saudi-aramco-risks-before-ipo-including-impact-of-climate-change.html