--:-- Sean Rameswaram: Pop quiz. What's the most profitable company in the whole wide world? Are you thinking Apple? One of the biggest stories, if not the biggest story in the world right now. Maybe Google? Announce plans to go public, finally, in what could be the largest IPO ever. They don't even come close. Think less tech, more Saudi oil. Saudi Arabia's crown jewel in the world's largest oil-producing firm is now set to go public after several delays. Think Aramco. Aramco. Aramco. Saudi Aramco. Aramco. Saudi Aramco. Aramco is ostensibly the national oil company of Saudi Arabia, but it's much more than just a national oil company. It doesn't just pump oil out of the ground in Saudi Arabia, but it has vast assets all around the globe for refining and petrochemicals and distribution.
--:-- Sean Rameswaram: Dr. Ellen R. Wald wrote the book on Aramco. It's called Saudi Inc. And she's been really popular lately because on Saturday, Saudi Aramco finally released details about its IPO. Aramco is scheduled to go public for the first time. They're going to do an IPO, an initial public offering. And then the intention is to float it on the Saudi stock market, which is called Tadawal, on December 11th. We reached Ellen in Bahrain and asked her to explain why this IPO is such a big deal.
--:-- Sean Rameswaram: There are a bunch of reasons why it's important. The first is that this is the largest, most profitable company in the entire world. So it's really going to set major records in terms of an IPO. Now, the other reason why this is a very important subject for people to understand is that it's also the largest oil company in the world. It sits atop one-fifth of the globe's petroleum reserves and pumps more crude than the top four publicly traded oil companies combined. The Saudis say Aramco is worth more than $2 trillion. But we don't know for sure because its profits have been shrouded in secrecy. And a lot of the things that we use every day, plastic, the energy that we use to drive our cars, in some way, it's very likely that it in some respect touches this company.
--:-- Sean Rameswaram: For example, in the United States, Aramco owns the largest refinery in the entire country. And it also owns Shell gasoline stations in the southeastern United States. So many Americans may be buying oil that is or gasoline that is made by Aramco and they don't even know it. So tell me how this company gets started.
--:-- Ellen R. Wald: There lies a primeval desert, a mass of drifting sand and sun-baked earth, one-third the size of the United States. A place of ancient glory. Back in the 1930s, Saudi Arabia was a very poor country. Its king, Abdulaziz Ibn Saud, had just recently consolidated his control over the entire peninsula. And he really had no money, so to speak. And at the same time, there was an oil company, an American oil company, called Standard Oil of California. They're today known as Chevron. And they were producing oil in Bahrain.
--:-- Ellen R. Wald: In the early 1930s, an American oil company obtained a concession on Bahrain Island. 25 miles out on the Persian Gulf. The venture was successful, and occasionally there was speculation as to whether even greater opportunities might lie across the green waters of the Gulf in Saudi Arabia. At the time, there was a geologist working in Bahrain by the name of Fred Davies, and he was sitting on this hill, which is the tallest point in Bahrain, and he looked across the Gulf, and he looked at Saudi Arabia, and he saw similar geologic formations to the ones that he had seen in Bahrain that had oil underneath them.
--:-- Ellen R. Wald: And they saw the low rise along the coast that could mean oil or could mean nothing at all. And he thought that maybe there was a lot of untapped oil in Saudi Arabia. Now, previously, the British had gone looking for oil in Saudi Arabia and had said, there's nothing there. But this geologist was convinced of this. They debated and debated and finally recommended that the risk be taken. But whether these unknown sands would justify the outlay of millions of dollars was still a decision that had to be made by the company directors in San Francisco, 11,000 miles away.
--:-- Ellen R. Wald: And after some time, he managed to convince the management to go and negotiate with the king of Saudi Arabia for an oil concession, which is basically just a contract that gives the oil company the exclusive right to look for oil in Saudi Arabia. And they would pay the king a certain amount of money every year. And then they'd pay him royalties based on any oil that was produced and sold. It took a while of searching for them to find oil in commercial quantities but in 1938 they started to produce oil
--:-- Ellen R. Wald: And then, at the mom, it happened. Oil in commercial quantities had been brought in after three long, discouraging years. This was the goal toward which they had striven. This was the victory that faith and sweat had bought. It was enough that it was worth it to produce commercially and then to sell it. It was not until later, maybe the 50s or the 60s, when they discovered some of the absolutely massive oil fields. Gahwar, for example, is the largest conventional oil field in the entire world. And it's located in Saudi Arabia. It's, I think, what's called a supergiant oil field.
--:-- Ellen R. Wald: And the process of discovering oil was ongoing. Once they found enough to start producing, they just kept looking for more. And they even found more oil fields. In the 1960s, in fact, was when they discovered the oil field that's today known as Sheba. It wasn't until much later in the 1990s when the production costs came down and the Saudis created that field that is an incredibly productive field for them.
--:-- Sean Rameswaram: So how does this relationship between Saudi Arabia and these titans of the oil industry develop over time? At first, the relationship was somewhat contentious, but mostly they kind of left each other alone. The king had this basic rule that the Americans would live in Dahrn, where the oil business was. They would live there, and they would work there, and they were not to be disturbed. And they basically set up an American town there. It looks essentially like a suburb of California, and it still does today.
--:-- Sean Rameswaram: In fact, the houses have the American electric plugs, and they had a golf course, swimming pools, tennis courts, even a movie theater. And it was like a little American oasis. And that was the relationship. However, things became more contentious when the Saudis, in particular, the finance minister for King Abdulaziz, his name was Abdullah Suleiman, realized that the Saudis could be making a lot more money than what they were currently making.
--:-- Sean Rameswaram: And he pushed very hard to renegotiate the relationship between the American company and the Saudi government. And they ended up, after many years and lots of negotiations, reaching what really was a landmark agreement for the Middle East at that time, which was a 50-50 profit-sharing deal, which later became the standard in the region.
--:-- Sean Rameswaram: And once the Saudis got more money from the oil industry, they started to develop their country much more and build a lot of the modern infrastructure that they had lacked. During World War II, Life magazine sent photographers to the kingdom, and they photographed with essentially a palace that the king lived in that was made of mud. They had almost no real roads. They had no train system. They had almost no ports. Hospitals, schools, restaurants, all of those things were essentially non-existent.
--:-- Sean Rameswaram: And it was the oil money that enabled Saudi Arabia to really start to build infrastructure and to expand and to modernize. What exactly is it that takes Saudi Aramco from an extremely profitable oil company to the most profitable company in the world? The really key year here is 1972. The United States could no longer pump more oil to meet rising demand.
--:-- Sean Rameswaram: So instead of being able to accommodate America's vast thirst for oil at the time, they had to import oil from elsewhere. And one of the big sources of that was Saudi Arabia. And Saudi Arabia was pumping and pumping more to meet that demand. All of those gas-guzzling cars, they were meeting that demand. And the Saudis took note of this.
--:-- Sean Rameswaram: And the oil minister at the time, his name was Zaki Amani, he and other producing countries in the Middle East were already united in the cartel organization we know today as OPEC. And they got together and they said, essentially, we know you're in a difficult position and we want to raise the price of oil because the price of oil is just too low.
--:-- Sean Rameswaram: And they negotiated with the representatives of big oil companies, including the American ones, and they could not reach an agreement. And they said, you know what, we can't reach an agreement, then we're going to unilaterally raise the price of oil. There was an announcement in Kuwait that prices for Arab oil were going up. A huge increase voted in an overnight meeting without even consulting Western buyers.
--:-- Sean Rameswaram: Then the ministers began what was to be an eight-hour meeting, resulting in their decision to reduce the flow of oil to America and other nations supporting Israel. And they did this in conjunction with the Arab War of 1973 along with an oil embargo And the effect was very immediate The price of oil skyrocketed and in fact caused a recession in the United States
--:-- Sean Rameswaram: People can no longer afford to run cars that do 12 miles to the gallon. Petrol stations can no longer afford to fill up cars whose tanks take 20 gallons. The monsters are dying of thirst. The energy crisis is killing them. But what it also did was oil companies made a lot more money from this including Aramco and including the Saudis.
--:-- Sean Rameswaram: And what did the Saudis do with all this cash? Well, they put it into their own palaces and into their own country, but they also used it to buy the company from the Americans. And then in 1988, the Saudis eventually renamed it Saudi Aramco. Which company manages today's largest petroleum reserves, but continues to seek out resources for the world of tomorrow? Which company produces its oil and gas in a single country, but supplies energy to the four corners of the globe? Which company? Saudi Aramco. Energy to the world.
--:-- Sean Rameswaram: Give me a sense of this company today. How has it changed from what it was in the 1970s to now? In the 1970s, Aramco was basically an oil pumping machine. They pumped oil out of the ground, and most of that was sold as crude oil to the four American companies that owned it. Now, it's much more like an international oil company like BP or Exxon or Royal Dutch Shell or Total, in that they pump oil, they have crude oil assets, but they also have a range of what we call downstream assets, which are refineries, petrochemical companies, and they have these in Saudi Arabia, but also all over the world.
--:-- Sean Rameswaram: So what's the relationship between this company and the Saudi Arabian monarchy right now? That's the question. It's much more difficult now than it was. Their first Saudi CEO at the time, a man named Ali al-Naimi, he negotiated with the king to keep Aramco separate from the Saudi government. So Aramco is the one that sells the oil and it makes the revenue and then it pays the government in taxes, in royalties and in dividends.
--:-- Sean Rameswaram: And so it's always been this kind of oasis separate from the government. They make their own decisions. Yes, they have a board of directors that is appointed by the government that kind of approves their plans. But essentially, they get to decide how much money they want to spend on capital expenditures, what kind of projects they want to do, and what their strategy is. And that's unique amongst national oil companies.
--:-- Sean Rameswaram: So Aramco is not quite a national oil company, but it's not a private oil company either. It's somewhere in between, and it has a high degree of independence. That is changing, though. And we've seen that change come about since the ascension of King Salman to the throne and also of his son, the young Crown Prince Mohammed bin Salman.
--:-- Sean Rameswaram: And they are taking a much more active role in the larger strategy of the company. So they're not trying to run it day to day, but they are saying things like, we want you to buy this petrochemical company or we want to go public. And this is how it's going to be. And that's been a very different thing for Aramco to have to deal with after so much independence.
--:-- Sean Rameswaram: It sounds like you're saying it's hard to separate the Saudi monarchy from Aramco. It's hard to separate them from Aramco in terms of the big decisions. So Aramco isn't nearly as intertwined with the government as any other national oil company. but this is the real issue with this IPO.
--:-- Sean Rameswaram: And that's that normally when a company does an IPO, the money is going to go to the company to expand, to do new things, but that's not the case here. The monarchy wants to monetize Aramco shares and to take that money that they make from the share sale and put it into things that are not involving the company.
--:-- Sean Rameswaram: So they want to put it into their sovereign wealth fund, which is designed to make investments both in companies in Saudi Arabia to help promote economic development and diversification, but also companies all over the world, international companies, and use it to make investments in tech companies and in all sorts of crazy firms that they've been investing in, like Magic Leap Virtual Reality or a window tech company or Uber or Tesla.
--:-- Sean Rameswaram: But this is supposed to be one of the wealthiest countries in the world, right? How do they need the cash for some sovereign wealth fund that will finance startups? Saudi Arabia has a problem, and they know they have a problem. They have essentially a one-trick economy, which is selling oil.
--:-- Sean Rameswaram: And they done pretty well with that but that doesn always go very well for the general economy at large It doesn necessarily employ everyone It doesn foster small business development It doesn foster a vibrant economy What if oil prices tank and stay low for a long time What if the oil will run out?
--:-- Sean Rameswaram: At some point, the oil will run out. So the Saudi government has put together this plan that's designed to diversify the economy so that they're no longer wholly dependent on a single commodity. The Saudi Arabian cabinet has now approved sweeping economic reforms aimed at moving the country away from its dependence on oil profits.
--:-- Sean Rameswaram: As part of the Vision 2030 plan, the country wants to ensure it can live without oil by the year 2020. The interesting thing is that the Saudi budget doesn't need the money from the Aramco sale. It's not going to go into their operating budget. It's going to go into this sovereign wealth fund and the idea behind it.
--:-- Sean Rameswaram: I'm not saying that this is necessarily a good idea or the right idea, But the idea behind it is that the returns that they make on these investments will help to fund the country and also fund the sovereign wealth fund. And so they will be able to live off the proceeds of these investments. It's kind of like an endowment in a university.
--:-- Sean Rameswaram: And so that's their idea. Is Saudi Arabia worried that oil isn't quite as sexy as it used to be with all those Teslas and other electric vehicles on the road? There are people who believe that we have reached a peak or we will soon reach a peak in terms of oil demand.
--:-- Sean Rameswaram: Now as a planet, our use of oil will peak in the 2030s. That's a view of BP, which expect current demand will probably rise by another 10 percent before leveling off. That is possible. They don't talk about this. But that is a reason that many people have put forward that if you're going to IPO Aramco, you better do it soon.
--:-- Sean Rameswaram: Because pretty soon the asset isn't necessarily going to be worth very much. I personally don't ascribe to those forecasts. I think that they are very optimistic in terms of electric vehicle adoption and other issues. But there are a lot of people out there who do support this argument.
--:-- Sean Rameswaram: It's interesting. You'd think an IPO of the most profitable company in the world would be the most exciting financial event in the world. But instead, it's starting to sound a little sketchy. And we haven't even mentioned Jamal Khashoggi yet.
--:-- Sean Rameswaram: A year after the murder of Washington Post journalist Jamal Khashoggi, Saudi Arabia's crown prince Mohammed bin Salman continues to deny ordering the hit. He says he's ultimately responsible because it happened within his government. And he suggested it may have been orchestrated by people close to him.
--:-- Sean Rameswaram: Have all of these things made this IPO less appealing? The PR nightmare that Saudi Arabia brought unto itself with the killing of Jamal Khashoggi is absolutely affecting this IPO. And it has definitely soured investors and financiers on Saudi Arabia in general.
--:-- Sean Rameswaram: The idea is that the money from the share sale would go to support the Saudi Arabian monarchy that has done and continues to do many horrible things, both in terms of human rights and also, you know, in terms of the war that they have been perpetuating in Yemen for quite some time.
--:-- Sean Rameswaram: And so there are a lot of people out there who look at that and say, no, I'm not touching this because I don't want to help these people. But will that matter? Will the critics have significant sway here? Do we have any idea how this IPO will go in December?
--:-- Sean Rameswaram: One of the interesting things is that this company makes $111 billion in profit. That's what it made in profit in 2018. Apple, I think it's the next most profitable company, only made $60 billion in 2018. And people are not going to just toss that aside, especially in a market today when so many of the IPOs that come up are companies that don't even make a profit and have never made a profit and may never make a profit.
--:-- Sean Rameswaram: So when an IPO comes along for a company that is immensely profitable, it's very hard to turn away. If the IPO doesn't go very well, and there's a distinct chance that it might not go very well, it could affect other oil companies' earnings.
--:-- Sean Rameswaram: Although I would say that if it doesn't go well, that's reflective more of the Saudi government than it is of Aramco itself. If the IPO doesn't go very well, and politically the Saudi monarchy looks bad, that could be very far-ranging, particularly for the United States, which maintains strong diplomatic ties to Saudi Arabia.
--:-- Sean Rameswaram: So it's something that people definitely need to be on the lookout for, that this could, in some ways, potentially fundamentally alter the balance of power in the Middle East. Dr. Ellen R. Wald wrote much more about Aramco in her book Saudi Inc. You can find it wherever you find your books.
--:-- Sean Rameswaram: I'm Sean Rameswaram for Today Explained.
