In two years’ time, when hurricanes and heatwaves have made the reality of climate change still more vivid, the children — teenage and younger — of today’s investors and investment bankers will be asking their parents: “what have you done about climate change?”
Who wants to have to answer: “Well, we helped put $30bn into Saudi Aramco”?
The number might be less than that, or several times more, but in the next month, investors face a choice. They can participate in what could be seen as the greatest capital markets deal of all time — or not participate.
The listing in Riyadh of Saudi Arabia’s national oil producer — the world’s largest and most profitable corporation — is, as GlobalCapital argued last week, devoid of any real corporate finance purpose.
Aramco is not raising capital in the deal; the 3% or 5% stake likely to be sold will do little to change governance or strategy at the company; the Saudi government will still call all the shots.
The state will obtain money with the deal, but at a cost — as became clear on Sunday when the flotation was formally launched. In a unique move, the government has guaranteed the dividends to external investors for five years, by promising to sacrifice its own dividends to top up those of minority shareholders.
The guarantee may not be called on, but even without it, the state is giving away a lot of cashflow for its capital.
Investors will gain a guaranteed yield of between 3.75% and 7.5%, depending on where in the range of $1tr to $2tr Aramco is valued in the IPO.
Bankers working on the deal are understandably reluctant to forecast more precisely than that where investors will congregate on value.
This may be one reason why Crown Prince Mohammad bin Salman is reportedly so anxious to win a $2tr price tag — it would make the funding cheaper, compared with bonds.
In January the Kingdom borrowed $7.5bn with 10 and 31 year debt at 4.5% and 5.3% yields.
A means of communication
However, the IPO’s real purpose is not financial, but symbolic. It is meant to prove the Kingdom is changing, modernising, opening up to the outside world and becoming connected with it.
For investors, there is heavy symbolism, too — though they are less likely to shout about it.
Buying into this IPO sends two signals. It means giving money to the Saudi state. This is the regime whose human rights abuses it is most fashionable in the West to decry, even if many other powerful states that businesses deal with, including Russia and China, are in the same bracket.
It also means putting customers’ money into a machine for producing oil and gas — the substances rendering our planet uninhabitable.
Last year, Aramco pumped out an eighth of the world’s oil. These 4.2bn barrels, if burnt, would release about 1.8bn tonnes of CO2 into the atmosphere, something like 5% of global carbon emissions.
A great equity story? Not one to tell your grandchildren.
Reasons to invest
Young idealists, and older ones too, can be naïve, simplistic and unfair. There could be good reasons for investing in and supporting Aramco’s IPO.
First, the Kingdom’s main purpose is a good one, and is likely to have benign effects. Encouraging Saudi Arabia to join the global community, to become more of a normal country, should strengthen the reformist elements in the country, which, for all his faults, the crown prince is selectively encouraging. Opening Aramco’s capital to private investors, domestic and foreign, is one of the most concrete steps yet taken to internationalise the country.
Second, the world’s use of oil and gas is for the moment a reality. Owning a stake in that production, it can be argued, is the responsible thing to do for saving customers who need a return.
Third, becoming a shareholder could enable the investor to support and influence Aramco’s transition towards a cleaner business model. The company does not deny climate change; it says it believes in “contributing to the climate challenge” by reducing its carbon intensity and researching new technologies.
Fourth, Aramco can claim to be one of the most carbon-efficient oil producers, due to the Kingdom’s straightforward geology and dry conditions. The upstream carbon intensity of Aramco’s production in 2018 was 10.2kg of CO2 equivalent a barrel, about half the global average.
Do all these add up to a case for buying the IPO? Absolutely not.
The political argument in favour of Aramco is the strongest. Saudi Arabia needs carrots as well as sticks.
But one has to ask: what is the point of all the millions spent on environmental, social and governance scoring systems, when the autocratic government of a country that came ninth from bottom of 144 countries in the Global Gender Gap Report 2018 still counts as investable?
When it comes to the environment, the case against the IPO is overwhelming.
Aramco is a clean oil producer — but that is a bit like being a tidy vandal. It may emit perhaps 10kg of CO2 less in extracting the oil than the average US producer, but compared with the 400kg that will be emitted when the oil is burnt, that is a drop in the barrel.
Aramco has the financial clout to be a big investor in sunrise technologies that are not commercial, like carbon capture, use and storage. But it has not chosen to do this yet.
Its pro-climate R&D focuses largely on developing more efficient fuels and engines. It does have a product that combines waste CO2 with other hydrocarbons into solid polypropylene materials. But this does not amount to large scale carbon sequestration.
Above all, investing in Saudi Aramco is betting on the future health of the oil industry. That is not a safe bet.
It may be canny in purely selfish terms — the world’s response to climate change has been apathetic so far, and unfortunately, there seems little prospect of a sudden acceleration that would substantially cut demand for oil. In any case, Aramco is the oil market’s fortress — the lowest cost producer should be the last one standing.
But continuing to inject money into the oil industry is a tragic mistake for the world, which ultimately will damage all investment portfolios, indiscriminately.
Global warming is happening fast already, with carbon dioxide in the atmosphere at 407 parts per million (already more than 10% higher since some teenagers were born, in 2000). Even if all emissions ceased tomorrow, that carbon would remain in the air for decades or centuries. Severe global warming is already locked in — but we can try to make it less bad.
Weaning the economy off fossil fuels as fast as possible is vital. Governments in Europe are now aiming for carbon neutrality in 2050. Experts believe that means the energy industry must be clean by 2040, since there are other, harder emissions to eradicate.
These trajectories are far too optimistic, but even they give us about 20 years to get to no oil.
Companies like Shell and Total, the oil industry’s goodies, are developing plans to tackle the transition. They seem sincere, but much more radical action is needed. Governments ought to take the lead, scheduling a managed phase-out of hydrocarbon energy.
Until they do, investors know what they need to do: get out of oil. It doesn’t need to happen overnight, but there must be a plan, that starts now.
Even with such a view, one could justify buying Aramco shares as a cheaper or safer alternative to switch into, out of Exxon Mobil or BP.
But, just as the root of this IPO is a message from Saudi Arabia to the world, investors must also send a message.
Silently shunning the IPO, or turning it down on price grounds, is not enough. Investors should publicly — and ideally, through a group such as the $35tr Climate Action 100+ initiative — declare that they will not buy Aramco shares at any price.
This message will be understood very clearly in the palaces of Saudi Arabia, and the boardrooms of oil majors worldwide. Those who dwell there need to hear it, for their own good.
The message should say: “There are too many oil shares in savers’ hands already. Enough is enough. Oil is a dying industry, and we are moving towards the exit.”