The Intrigue At The Heart Of The Beijing-Riyadh-Washington Triangle
Saudi Aramco (the Saudi Arabian Oil Company) is the world’s largest petroleum business. It owns more than 100 oil and gas fields in Saudi Arabia with reserves of at least 264 billion barrels of oil, which is estimated to be approximately one-fourth of the world’s known reserves of this raw material. The company’s production figures do not give the full picture, as data exists only for a few years. But as an example, in 2013 Saudi Aramco produced 3.4 billion barrels of crude oil. Analysts calculate that every year the Saudi company extracts about twice as much oil and gas, in terms of barrels of oil equivalent, as the largest US company ExxonMobil. Interestingly, Saudi Aramco never appears in the rankings of the world’s largest oil producers, since it does not publish financial information such as profit, sales, assets, or market capitalization. Therefore America’s ExxonMobil and Chevron, China’s Sinopec and PetroChina, the Anglo-Dutch company Royal Dutch Shell, Great Britain’s BP, and France’s Total top the rankings. But everyone knows perfectly well that these leaders in the global oil industry are mere dwarfs compared to Saudi Aramco.
Saudi Aramco’s management set off a real bomb in early 2016 when they announced their plans to privatize part of the company through a stock market IPO. The proposal was to sell shares in Saudi Aramco equal to about 5% of the company. But an estimate of the company’s potential market price is needed in order to understand how much this would be in absolute terms. Almost the next day after the announcement of the potential sale of part of the company (in January 2016), the global media published a stunning evaluation by the independent oil analyst Mohammad Al Sabban, a former senior adviser to the Saudi Arabian oil ministry. He estimated the company’s worth at $10,000,000,000,000 (ten trillion USD). For comparison I should add that in 2016 the largest US oil company, ExxonMobil, barely exceeded $350 billion in share capital. And yes, It’s true that later on some of the hype in the assessments died down and more rational numbers were cited, most often $2 trillion. This meant that Saudi Arabia would be able to rake in approximately $100 billion from the sale of 5% of the company. But the company’s biggest trump card isn’t even the current record levels of oil production, but rather the reserves of hydrocarbon raw materials at Saudi Aramco’s disposal. And that’s a number that none of the companies named in the rankings of the global oil industry can even begin to approach.
At present, Riyadh adjusts and verifies the data on the hydrocarbon reserves in the fields owned by Saudi Aramco. Financial reports are painstakingly drafted in the needed formats for a public offering of shares. The company is being restructured to optimize the way it is organized and managed. And finally, a crucial step was taken to lower the taxes on the company’s profits. The traditional tax rate has been 90%, but this year it was set at 50%, which roughly corresponds to the level at which the leading Western oil companies are taxed. Lowering the tax rate raises dividends and makes the company a more attractive target for investment.
But beginning in early 2017, the estimates of Saudi Aramco’s market value have unexpectedly begun to decline. Appraisals began to surface that claimed the company’s share capital was only worth $1.5 trillion, then $1 trillion. The consulting firm Wood Mackenzie estimated Saudi Aramco’s worth at $400 billion overall, bringing it closer to US-based ExxonMobil. And suddenly Western consultants began talking about the need to “discount” the value of the Saudi company, since it is state-owned, and in the securities markets all government issues are by convention sold “at a discount.” They point out that although Saudi Aramco currently pays 50% of its profits in taxes, since the government owns the company anyway it could restore the 90% tax rate tomorrow with a simple stroke of the pen. There is also the fear that oil prices could be low for the next few years, and Saudi Aramco might not be able to generate big profits. But none of that can remotely explain why the valuations of the Saudi company have dropped so precipitously in the past year.
Analysts blame this on the pressure Washington is putting on Riyadh, for reasons that have as much to do with the currency market as the oil market. And the pressure coming from Washington is, in turn, a response to the pressure also being exerted on Riyadh by China, which wants to buy oil from Saudi Aramco in renminbi instead of dollars. China is currently the world’s biggest oil importer, knocking the US out of its former first-place position. China is also the Saudi oil industry’s biggest customer, and Beijing does not want to pay extra for that black gold using American currency. A number of oil exporters that sell to China have already partially or entirely transitioned to settling their accounts in renminbi. Topping that list are Nigeria and Iran. Russia has also recently begun to sell some oil to China for renminbi (although only small percentage as yet).
Saudi Arabia, however, is heavily dependent on the US and has thus far refused to settle its accounts in renminbi. And that rebuff is costing the country dearly: Beijing is gradually finding other suppliers to take Riyadh’s place. The Saudis used to be China’s biggest foreign supplier of oil, but recently Russia has squeezed them out for that number-one spot. If this continues, Saudi Aramco might lose its Chinese market altogether.
Riyadh now finds itself caught between a rock and a hard place. It’s hard to imagine what Saudi Arabia could be hit with from across the Atlantic, should it sell even one barrel of oil for Chinese currency. After all, that would be a direct challenge to the petrodollar, which was born right there in Saudi Arabia in the 1970s, midwifed by the negotiations between Henry Kissinger and King Faisal.
Washington has sternly warned Riyadh to refrain from any ill-considered move to replace the dollar with the renminbi in its transactions with China, lest other players in the oil market follow suit (oil might then be traded for rubles, rupees, rials, etc.) And tomorrow that epidemic of transitioning to national currencies could infect other commodity markets. Incidentally, this year Beijing will begin to trade oil futures priced in renminbi on its commodity exchanges and claims that this is only the first step.
Voices have already been heard within the US president’s entourage that suggest blocking the listing of Saudi Aramco shares on the New York Stock Exchange. Signs have emerged of an organized campaign to short-sell the Saudi oil company. In light of that development, Riyadh has announced that it will put off its share listing until a later date. But its problem isn’t going to go away – Saudi Arabia will still have to make a choice between the dollar and the renminbi.
Although Beijing is upping its pressure on Riyadh, it is also simultaneously offering to directly buy out 5% of Saudi Aramco, while allowing the Saudis to forgo the usual ritual of listing shares on Western stock markets. And China is prepared to shell out a “fair” price (about $100 billion). The Chinese government has already announced that it is forming a consortium of energy and finance companies, plus China’s sovereign wealth fund, in order to purchase a “chunk” of the Saudi company. The Chinese media reports that that consortium is ready to become a cornerstone investor in Saudi Aramco.
Beijing’s winning move in its chess game against Washington has neutralized the US threat to disrupt the sale of Saudi Aramco, while simultaneously pushing Riyadh toward a decision to transition Saudi oil sales to the renminbi.
And so the plot thickens inside the Beijing-Riyadh-Washington triangle of intrigue.