Climate change-related litigation and regulation, alternative power supplies, a shift to electric vehicles, and political conflict from regional state actors or terrorists are the key threats to the world’s largest oil and plastics company, Saudi Aramco.
Saudi Arabia has continued to drip-feed world markets details of the float of Saudi Aramco. The company’s initial public offering prospectus (IPO) was released on Sunday, a normal working day in Saudi Arabia. There was relatively little new information about the nuts and bolts of the IPO to add to what FreightWaves has already reported. For example, details of how much stock will be sold, at what price and when the listing will take place on the Saudi Arabian stock exchange, Tadawul, are yet to be decided and/or disclosed.
Nonetheless, the IPO prospectus did shed light on the company’s views on the future state of world oil and chemical markets.
Global demand for crude oil is expected to continue to grow, “with global GDP growth being a key driver,” according to the prospectus. Growth will likely be led “primarily by non-OECD Asia Pacific,” the prospectus said.
Global demand for refined products and chemicals is expected to grow, the prospectus added, and this would be driven by demand in Africa, the Middle East and the Asia Pacific region. Global demand for ethylene (a precursor chemical for a wide range of plastics and industrial chemicals) is forecast to grow at a compound annual rate of 3.3% because of anticipated growth in demand from China and North America.
Wide range of risks to Saudi Aramco
Aramco lists an extensive breadth of potential risks. Some of these might be expected in any IPO prospectus: competition risk, risks to growth objectives from such issues as workforce availability, natural disasters, an economic slowdown in key Asian markets and so on.
Yet a number of the risks enumerated specifically relate to the looming effects of human-induced global warming. There are also important technology-related risks, such as electric vehicles and solar power, to the fundamental nature of the oil business.
Saudi Aramco says the demand for and price of hydrocarbons may be affected by climate change.
“Climate change concerns and impacts could reduce global demand for hydrocarbons and hydrocarbon-based products and could cause the Company to incur costs or invest additional capital,” Aramco said in its prospectus.
Aramco noted that climate change concerns have manifested in public sentiment, government policies, laws and regulations. The company said these and other actions may “propel a shift to lower carbon intensity fossil fuels or alternative energy sources.”
The prospectus noted that increasing pressure on governments to reduce greenhouse gas emissions has led to, among other things, carbon emissions cap-and-trade schemes, carbon taxes and energy efficiency standards, along with “incentives and mandates for renewable energy and other alternative energy sources.”
Aramco added that, especially after the Paris climate accord, which took effect in November 2016, many countries are reducing use of fossil fuels or increasing use of alternative energy sources.
“The landscape of GHG-related laws and regulations has been in a state of constant re-assessment and, in some cases, it is difficult to predict with certainty the ultimate impact GHG-related laws, regulations and international agreements will have on the Company,” Aramco wrote.
The company added that increasing attention to climate change risks “may result in an increased possibility of litigation. … Claims relating to climate change matters have been filed against companies in the oil and gas industry by private parties, shareholders of such companies, public interest organizations, cities and other localities, especially in the United States, including claims that the extraction and development of fossil fuels has increased climate change,” the prospectus stated. It added that the number of claims could grow, and the company could be subject to similar claims in the U.S. or elsewhere.
Electric vehicles and renewable energy
While the prospectus did not go into nearly as much detail about electric vehicles and renewable energy, it did note that technological developments in the cost or endurance of fuel cells or electric vehicles and changes in transportation-mode preferences, “including ride-sharing,” could affect the price of crude oil. It also said the price of alternative energies, “including renewables,” could affect the price at which it sells crude oil.
Political and conflict risks
Aramco also noted that it is headquartered in the Middle East and North Africa (MENA) region.
“The MENA region is strategically important geopolitically and has been subject to political and security concerns and social unrest, especially in recent years,” the prospectus stated.
“For example, since 2011 …, a number of countries in the MENA region have witnessed significant social unrest, including widespread public demonstrations, and, in certain cases, armed conflict, terrorist attacks, diplomatic disputes, foreign military intervention and a change of government.”
Aramco noted that armed conflict is underway in Yemen, Iraq, Syria and Libya.
“No assurance” can be given that political, security or civil unrest concerns will not have a material adverse effect on the company, it added.
The company referred to the sabotage attacks on oil tankers moored near the Strait of Hormuz in May this year and the Iranian seizure of a British oil tanker in July. It also pointed to attacks by Yemen-based forces on tankers off the coast of Yemen in April and July this year.
“Any political or armed conflict or other event, including those described above, that impacts the Company’s use of the Strait of Hormuz, Suez Canal or other international shipping routes could have a material adverse effect on the Company’s business, financial position and results of operations,” Aramco said.
It also noted potential risks from terrorism. The company referenced the drone attacks on its Abqaiq and Khurais facilities by drones in September this year. It added that, in May and August, its east-west pipeline and its Shaybah field were both attacked by drones. The company noted as well that areas of Saudi Arabia have been hit by ballistic missile and other aerial attacks from Yemen since 2017.
“Any additional terrorist or other attacks could have a material adverse effect on the Company’s business, financial position and results of operations, could cause the Company to expend significant funds and could impact investors’ willingness to invest in the Shares,” Saudi Aramco said.