Saudi Aramco Gets Some Bad News From Norway
Big news from Saudi Arabia is something one tends to fear these days. Big news from Norway is something one tends not to expect at all.
Thursday's announcement that Norway's $1 trillion sovereign wealth fund is proposing to sell about $35 billion worth of oil and gas equities is big on several levels, though -- not least for Saudi Arabia.
Norway is long oil and gas by definition. Last year, it produced just under 3.9 million barrels of oil equivalent of the fuels, powering a fifth of its economy. Statoil ASA, its national oil company, is worth $66 billion, and the government and state pension fund -- separate from the much larger sovereign wealth fund -- own 70 percent of it. So you almost wonder why Oslo keeps any of its trillion-dollar stash in oil stocks in the first place. On that level, it's just sensible to reduce Norway's exposure to oil and gas.
But this is so much more than a story about Norwegian actuaries managing sovereign risk (one struggles to imagine a more soporific concept). The key sentence in the fund manager's letter to the Norwegian Ministray of Finance was this:
We conclude that the vulnerability of government wealth to a permanent drop in oil and gas prices will be reduced if the fund is not invested in oil and gas stocks.
"Permanent drop in oil and gas prices" is not a phrase you throw around lightly in Oslo -- nor, it should be said, in Riyadh, either.
The obvious analogy here is the planned IPO of Saudi Arabian Oil Co., or Saudi Aramco. Just like the Norwegians, Saudi Arabia's de facto leader, Prince Mohammed bin Salman, wants to reduce his country's dependence on oil. The problem he faces is that Saudi Arabia should have moved in this direction decades ago, like the Norwegians did. Also, while Norway rubs up against Russia in the far north, its neighborhood consists mostly of countries like Sweden and Finland -- not Iran, Iraq and Yemen.
Riyadh doesn't talk about permanent drops in oil prices, but its decision to even float the idea of lifting the tent-flap on Aramco says it all. Norway's latest proposal serves to merely confirm that the idea of oil demand peaking within the prince's lifetime, perhaps within a decade or two, is no longer outlandish.
It is potentially unhelpful to Saudi Arabia in one other important respect: that Aramco IPO.
The prince has talked of Aramco being valued at $2 trillion, with a float of 5 percent netting $100 billion for Saudi Arabia's depleted coffers. This is wholly unrealistic; but even at $1 trillion, that's a $50 billion IPO for which the government's bankers have to find buyers.
Those buyers will need very deep pockets -- and one potential buyer, with the deepest pockets of all, just said it probably won't be interested in buying exposure to a big oil company.
Norway's news raises an interesting question about who will step up to buy what could be the world's biggest IPO ever. The other sovereign wealth funds in Saudi Arabia's neighborhood may decide to chip in as a gesture of goodwill (Qatar could go either way, I suppose). But if they draw any lesson from those actuaries in Oslo, then the Gulf funds should also be diversifying away from oil.
Besides sovereign wealth funds, there are, of course, other large pools of capital, such as the giant pension funds in places like the Netherlands, Canada and the U.S. But they aren't necessarily going to be big buyers of any Aramco stock either. Some, such as the California Public Employees' Retirement System, have already pressed successfully for major oil companies to start reporting on the business risk posed by climate change. Hundreds of pension funds have signed onto the Principles for Responsible Investment, a network pushing asset managers to factor in environmental and social issues, including climate change, when they buy and sell.
As was rumored earlier last month, therefore, Aramco may look toward other pools of capital, especially in China. There is certainly a lot of money there and, with China representing one of the few big growth markets for oil, a certain symbiosis.
Yet, as I wrote here, China knows that, as demand for oil declines in much of the developed world, ever more of Aramco's barrels must flow east anyway. So the idea it will buy a big slug of Aramco at anything more than a discounted price -- without some sort of sweetener in terms of a low-priced oil supply contract anyway -- is a stretch. Like those sensible Norwegians, Beijing's planners can see where the oil market is headed.
To contact the editor responsible for this story:
Mark Gongloff at firstname.lastname@example.org