Day 6

What the Saudi Aramco IPO could mean for the future of the oil industry

This week, Saudi Arabian oil giant Aramco announced that it will start selling shares publicly in December. Energy analyst Ellen Wald tells us why Aramco's IPO is so significant — and what it signals about where the industry is headed.

Saudi Arabian oil giant Aramco will sell shares publicly for the first time in December

Saudi Crown Prince Mohammed bin Salman has said he wants a $2 trillion valuation for Aramco, seeking to raise billions of dollars in the IPO to diversify the Saudi economy away from oil by investing in non-energy industries. (Amr Abil/The Associated Press)

As oil giant Aramco prepares to go public, energy analyst Ellen Wald says it signals that the country's royal family sees a future where oil is no longer king.

The company, owned by the Saudi Arabian government, began an initial public offering (IPO) Sunday on Riyadh's Tadawul stock exchange.

"They have the greatest oil resources in the world, but it's not going to last forever," Wald, the author of Saudi, Inc.: The Arabian Kingdom's Pursuit of Profit and Power, told Day 6 host Brent Bambury.

"Their idea is to take the money from this sale and use that money to make investments in other sectors with the idea that in the long run, those investments will produce returns for the government."

Wald explained why the move is proving controversial in financial markets around the world.

Here's part of that conversation.

Here in North America, there is investor anxiety around climate change and the impact that it will have on the viability of the fossil fuel industry going forward.

So do you expect that Aramco's IPO will tell us something about the global appetite right now for investment in fossil fuel projects, or is it going to be something else entirely?

One could definitely read that into Aramco's IPO to some extent, because we do know that some potential investors that were interested in investing in the IPO have decided not to.

[That's] precisely due to the fact that either they don't make investments in fossil fuel companies anymore, because that's not an avenue of investment that they want to support mostly due to climate change, and also ... [that] they don't necessarily believe that fossil fuels are the future of energy. 

Another component is also the Saudi government itself, and fears that the Saudi government may make decisions about the company that could negatively impact its profitability. So it's hard to necessarily know why people might choose not to invest in it.

Workers fix the damage in Aramco's oil separator at processing facility after the previous week's attack in Abqaiq, near Dammam in the Kingdom's Eastern Province. (Amr Nabil/The Associated Press)

Aramco, as you said, has been privately held by the Saudi royal family. But now when it becomes a public company, should we expect that there'll be a level of transparency now that wasn't available to people before?

There's definitely going to have to be more transparency. 

The Saudi royal family and Aramco as a company were notoriously opaque — to the extent that people really wondered how much oil did this country and this company even have? 

They were very, very close-lipped ... about how much oil was in their reserves. And in fact, in the early 2000s, there was a book written which questioned the Saudi's entire statements about their oil reserves and said, you know, the Saudis are lying about this, and they really have a lot less oil than they're letting on.

With climate change taking up such a big portion of political activism today, I would not be surprised to see people really reacting very strongly to this.- Ellen Wald, author

That has been proven to be not true, but it still had a big impact on the mindset of people who are interested in oil and gas companies. And a lot of people are very circumspect about the Saudis. 

So what's interesting is when Aramco reveals the IPO prospectus, people are interested to see what this prospectus is going to show and just how open they're going to be about their finances and the oil reserves and how they spend their money.

It's only two per cent of the company's valuation, but is there any reason for human rights activists to believe that investors might be able to leverage their shares to force the royal family to improve human rights in the kingdom? 

I don't think there's any possibility of that happening at all. Particularly because the way that this company is structured, investors will really have absolutely no say over how the company acts. 

So it's highly unlikely that this will change the Saudi royal family's behaviour towards its citizens at all.

That's an important point for investors to consider because people should be aware that if a financial institution that they are engaged in invests in this IPO, that the money is going to support the kingdom of Saudi Arabia and whatever decisions that kingdom makes — and they're not going to have any say over it. 

Do you think that'll be pressure put on the financial institutions, like [Royal Bank of Canada] here in Canada, because of environmental or human rights concerns when they invest in Aramco?

Absolutely, on both respects. 

There are a lot of banks that are involved in this IPO because it's so large and there's so much money involved. They need to have a lot of banks involved, and yes, RBC is one of those banks that is involved in the IPO. 

In the political climate today, with climate change taking up such a big portion of political activism today, I would not be surprised to see people really reacting very strongly to this. 

People are reacting to companies like Exxon and Chevron and Total and these other big oil companies. Well, Aramco is even that much larger than these companies and pumps that much more oil.

Yasir al-Rumayyan, chair of Saudi Aramco, speaks during a news conference in the eastern Saudi Arabian region of Dhahran on Sunday. Saudi Aramco has confirmed it plans to list on the Riyadh stock exchange. (AFP via Getty Images)

Aramco is going public. Why is this happening right now?

That's a really good question. And it's not something that the CEO or the chairman really answered fully. 

I believe that this is happening right now because there is political pressure on the shareholder, or the Saudi government, to deliver this for its citizens. 

[It's] also because they want the money to make investments in other areas, and until they IPO Aramco, they can't monetize those shares.

This Q&A has been edited for length and clarity. To hear the full interview, download our podcast or click Listen above.