Saudi Arabia’s young crown prince may be looking to the post-oil future, but state oil monopoly Aramco is setting itself up for another two decades of growing demand.
The much-touted Aramco IPO so coveted by Donald Trump has been cast to the wayside, making way for more elegant plans by the OPEC kingpin.
“All the research looking at crude oil shows there is no way we see peak oil demand until 2040,” said Peter Volkmar, a graduate fellow with Rice University’s Center for Energy Studies in Houston, Texas.
“Everyone in the developing world is reaching that level of income where they can buy private vehicles, and they’re doing it at a rate similar to the rate Americans did and developed countries did,” he said.
“If we’re moving to a world where car ownership in China is anything like America, oil demand is going to go through the roof.”
Volkmar, whose PhD focuses on the behavior of oligopolies in the crude oil and natural gas markets, says Riyadh is indeed looking to diversify its economy — but not away from oil.
Instead, he anticipates a drive to slash domestic consumption, thus freeing up the kingdom’s cheaply-extracted oil for lucrative export.
To spur that transition, Saudi Arabia is looking to wean local consumption away from oil and toward natural gas.
“When it comes to natural gas, over the next decade we will be roughly doubling our production to 23 billion standard cubic feet per day, and substantially increasing the percentage of natural gas in the Kingdom’s utilities fuel mix,” Saudi Arabia’s energy minister Khalid al-Falih told attendees at a February conference in Riyadh.
As it stands, just under 50% of Saudi Arabia’s power plants run on crude oil or diesel. Aramco could enforce a policy for all power plants to switch to natural gas, freeing up as much as a million barrels of oil per day for export, according to Volkmar’s estimates.
“Right now they’re burning crude to produce electricity,” said Volkmar. “If Saudi Arabia can stop consuming a million barrels a day, it would be like they produce 11 million barrels a day” rather than the estimated 10 million.
That would set up the kingdom for an even more vital role in the global oil economy — cementing its role as a swing producer capable of comfortably stepping in should another heavyweight producer go offline.
In its bid to raise its competitiveness, Aramco is also eyeing the kingdom’s petrochemicals giant: SABIC.
A public company, SABIC is 70% owned by the Public Investment Fund (PIF) — the vehicle for Crown Prince Mohammed bin Salman’s vision to transform the kingdom’s economy.
A Gulf-based economist speaking on condition of anonymity told Asia Times there were consistent rumors that an Aramco purchase of SABIC was in the works.
Bringing SABIC, with its expertise in petrochemicals products, in-house would also act as insurance against any surprise changes in oil global consumption in the years to come.
“Even if we stop using gasoline in our cars, demand for jet fuel and petrochemicals isn’t going away. Combining Aramco and SABIC provides a technical competitive advantage in creating those types of advanced refined products,” said Volkmar.
Coupled with recent PIF investments in electric car companies Tesla and Lucid, Saudi Arabia is setting itself up for all possibilities in transportation technology, still based on petroleum.
IPO delayed, not dead
This strategy would not preclude an eventual Aramco IPO, which Saudi officials say will happen when the market is ripe, and not before.
For now, the kingdom appears content to borrow, which the PIF did Monday with an $11 billion dollar loan.
A report provided to Asia Times by a Gulf source — ‘Expected Losses of Government Treasury due to the IPO of Saudi Aramco’ — argues the kingdom is better off borrowing in general.
The gain to be made from selling off 5% of Aramco’s shares makes little sense on its own, compared to the relative cost of borrowing, the assessment argued. But it warned that this may not be the whole picture.
The initial public offering is likely the tip of the iceberg — a gateway to privatization.
The report, dating back to when oil was $50 per barrel, says that the more interest the government shows in selling shares of Aramco, the more likely Riyadh does not see a future for oil and gas.
By this reasoning, the delay of the IPO suggests the kingdom is feeling more optimistic than ever about the future of its prized commodity.
Mohammed bin Salman is likely to bide his time and make another push for an even more lucrative IPO the future.
“MBS wants it,” said the Gulf-based economist, referring to the crown prince by his initials.
The crown prince needs half a trillion dollars to build his dream mega-city of NEOM, billed as a high-tech Red Sea business hub that would be Saudi Arabia’s answer to Dubai.
The vision would have to be built from scratch, requiring a major investment to get off the ground.
“The whole point of the IPO is to get the money now and guarantee your capital for the future,” said Volkmar. “If [the Saudis] feel good about where fossil fuels are for next 20-30 years, they can tighten up the bid by making sure that their natural gas and crude oil companies are working together.”
With the largest proven oil reserves in the world and a production cost of only $5 per barrel, the kingdom will continue to capitalize on persistent global demand. “When people talk about a post-oil future, Saudi Arabia is still selling oil because it’s a low-cost producer,” said Volkmar.
The heir to the throne may indeed be holding off on the Aramco IPO for when the market is ripe. For now, his kingdom is banking on black gold.