Aramco’s IPO could be affected by climate change says thinktank
The valuation of Saudi oil company Aramco at $2trn by Crown Prince Muhammad bin Salman is unrealistic, according to a report by thinktank Oil Change International. The thinktank proposed a price in the range of not more than $1.5trn. The report considers the impact of moves towards carbon reduction on the company’s initial public offering (IPO) and concludes that the “best-case estimate” for Aramco’s value could be 25% to 40% lower under the International Energy Agency’s climate recommendations. The report states that “the IPO is thus a real test of whether investors are thinking seriously about climate change”.
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Saudi Aramco’s initial public offering (IPO) could be “strongly” influenced by climate change, according to a new report.

According to Oil change International’s new briefing many analysts believe that Crown Prince Muhammad bin Salman’s $2trillion estimate of the state backed venture’s value was “unrealistic”.

Instead the thinktank claims a more realistic estimate would be somewhere in the range $1 – 1.5trillion.

However, one of the unanswered questions, which the group hopes to answer, is how moves to decarbonise the energy system will affect the IPO’s valuation.

Researchers looked at three factors: how oil price will affect Aramco’s valuation, how Aramco’s oil production will compete with that of international oil companies (IOCs) in light of constrained demand and how Aramco’s reserves relate to carbon budgets.

The thinktank concludes that a the “best-case estimate” for the value of Aramco could be between 25% to 40% lower in the IEA’s safer-climate scenarios.

And, the research is said to have found that, if oil prices stay at $50 in real terms, Aramco’s value could be reduced to less than $700 billion, 55% below the base case.

The summary of the briefing states: “The IPO is thus a real test of whether investors are thinking seriously about climate change.

“A high valuation, say above $1 tn, would indicate they are betting on a failure to address climate change, through an expectation of high future oil demand. Investments in the IPO could then be at significant risk.

“The question of whether Aramco is advantaged relative to international oil companies (IOCs) because of its low production cost depends on the shape and timing of climate policy.

“If governments continue to drag their feet on reducing emissions, IOC production will remain viable for longer, and assuming governments ultimately act to keep warming below 2 degrees, a large proportion of Aramco’s reserves may be left unburned.

“However, this scenario would also entail rapid emissions cuts later, forcing down prices within investment timescales of 15-25 years, and causing significant destruction of oil company assets. As such, it creates the greatest financial risk to all.”

The paper, written and researched by Greg Muttitt and Hannah McKinnon claims that if the IPO realises a value at the higher end of the likely range (for example, above $1 trillion), its investors could face significant risk from climate policy.

They add: “If it comes out lower, this may raise questions of whether IOCs are overvalued.

“If fully extracted and burned, Saudi reserves would have a profound impact on the climate.

“Emissions from Saudi reserves would amount to 112 Gt of carbon dioxide, one seventh of total global emissions in a 2°C carbon budget, or one third of total global emissions in a 1.5°C carbon budget.

“The problem is not so much Aramco on its own, but Aramco in combination with IOCs, which constantly explore for and open up new reserves, to replace what they have extracted.”

And the briefing warns that “rigorous scrutiny” of new investments in fossil fuels is needed.

The report states: “If IOCs continue to add new oil and gas, Aramco’s reserves stand to push the world beyond climate limits: after carbon budgets are exhausted, there will still be strong economic incentives to extract them due to their low cost.

“The world is rapidly approaching climate limits. There is an urgent need for rigorous scrutiny of any new investments in fossil fuels, not least of the partial listing of the world’s largest oil company.”