Shareholder rights untested in case of Aramco IPO
Global oil demand may peak within the next 20 years, according to an assessment included in the prospectus for Saudi Aramco’s initial public offering, suggesting views are slowly changing in the kingdom where officials long dismissed the notion as overblown.
Rather than providing its own assessment, Aramco used a forecast from industry consultant IHS Markit Ltd. that forecasts oil demand to peak around 2035. Under that scenario, demand growth for crude and other oil liquids will be “leveling off” at that time. In an accompanying chart, the Saudi oil giant showed global oil demand lower in 2045 than in 2040.
The prospectus, published late on Saturday, gives unprecedented insight into Aramco’s financial performance, strategy and business risks as the the world’s largest oil producer prepares for a share sale in early December. It didn’t include how many shares the government plans to sell or the target price range, however. That’s expected to follow on Nov. 17.
While Aramco didn’t explicitly endorse the forecast, its inclusion in the 658-page document will bring it the attention of investors worldwide. The company’s directors believe that the data provided by the industry consultant are “reliable.”
A second demand scenario in the prospectus assumes a faster transition away from fossil fuels that leads to peak oil demand occurring in the late 2020s.
Aramco acknowledged in the document that climate change policies “may reduce global demand for hydrocarbons and propel a shift to lower carbon-intensity fossil fuels such as gas or alternative energy sources.” Social pressure to reduce pollution and carbon emissions already “has led to a variety of actions that aim to reduce the use of fossil fuels,” it said.
As recently as February, Aramco Chief Executive Officer Amin Nasser dismissed concerns about the rise of alternatives to oil as “not based on logic and facts” and said they arose “mostly in response to pressure and hype.” A year earlier at an industry event in Houston, he said he was “not losing any sleep over ‘peak oil demand’.” Khalid Al-Falih, the country’s petroleum minister until two months ago, was equally dismissive, saying in 2017 that talk about peak demand among energy executives, analysts and activists was “misguided.”
The forecasts also stretch much further into the future than those Aramco provided in the prospectus for its April bond sale. Just over six months ago, the company was only giving investors a view of oil markets up until 2030, while now it’s providing an outlook all the way until 2050. Back in April, Aramco gave no indication that a peak in oil demand was on the horizon.
European majors like Royal Dutch Shell Plc and Total SA have already stated concerns about oil demand peaking. Still, Aramco can take some solace in the fact that as one of the lowest-cost producers, its market share may rise as demand slips. Even in a bearish case for oil, with demand peaking in the late 2020s, Saudi Arabia’s market share could rise from around 15% to 20% by 2050, according to the prospectus.
According to one estimate, the nation’s reserves could sustain output in the coming decades as the company improves field recovery factors. Aramco will be able to continue pumping as much as 11 million barrels a day of crude and condensate into the 2030s and possibly go as as high as 13 million barrels a day in the 2040s, analysts Sanford C. Bernstein wrote in a report Monday.
Aramco published the prospectus on Saturday as it pushes ahead with what could be the biggest-ever share sale. One thing absent from the document was any suggestion of what valuation Aramco is aiming for. Saudi Crown Prince Mohammed bin Salman has said Aramco should be valued at $2 trillion, but bankers who have tried to value the company have suggested it may be worth anywhere from $1.1 trillion to $2.5 trillion. Investors will start bidding to buy shares in the oil company starting on Nov. 17.
--With assistance from Sharon Cho and Ramsey Al-Rikabi.