The great ‘crude’ game is on
RIYADH and Tehran are engaged in an intense ‘crude’ battle, making in the process interesting moves to checkmate the other on the geopolitical chessboard.
The arch rivals are driven by domestic compulsions too.
Saudi Arabia is gradually running out of money, the former chief of the CIA David Petraeus told CNBC. It needs the initial public offering (IPO) of its state oil company Aramco to be successful. It needs to attract outside investment and, frankly, it needs the money, Petraeus emphasised. “They need that outside investment that is crucial to delivering ‘Vision 2030’,” Petraeus added.
The success of ‘Vision 2030’ — presented by the de facto ruler Prince Mohammad bin Salman (MBS) — is tied to the market valuation of Aramco. MBS has given his word about a price tag of $2 trillion for the prized trophy. He doesn’t want to miss it. By far the political fortunes of MBS — to a great extent — depend upon the success of Aramco’s IPO.
The low market price of crude is making the task of hitting the target difficult for MBS and his team. Saudi Arabia is now pulling all the stops to boost the company’s valuation.
While attempts are being made to make the IPO still more attractive, for now, the Kingdom is reportedly focussing on high net worth individuals in the country to invest in the offering.
And as of now, carrots are being laid out.
“Aramco management has stressed the possibility of additional distributions to shareholders above and beyond the minimum dividend pledge,” Bank of America Merrill Lynch said in a report for investors seen by the Financial Times.
In order to get close to the target value for Aramco and firm up the crude markets, Riyadh needs to go for deeper cuts at the next Organisation of Petroleum Exporting Countries’ (Opec) meeting in December.
Press reports at this stage suggest that the Organisation of the Petroleum Exporting Companies (Opec) and its allies — also known as the Opec+ — are likely to roll over the cuts rather than deepen them. Instead of advocating for a deeper overall cut, Saudi Arabia will be pressuring non-compliant members to fall in line with their quotas so as to ensure higher oil prices ahead of the listing of Aramco.
The Kingdom is on a mission to get all overproducing countries in Opec, and in the larger Opec+ group such as Kazakhstan, to respect their production quotas under the deal. If all overproducers in the Opec+ pact were to stick to their respective targets, the group will deliver an effective 500,000 barrels per day cut in oil production, Saudi oil advisers told The Wall Street Journal.
This could be a strategic move on part of Riyadh. It would remind investors, just before the IPO, that Saudi Arabia retains its influence over Opec and has the final word on its policy, WSJ reported, citing sources with knowledge of the Saudi plan ahead of the Opec meeting in early December.
Tehran, however, continues to counter Riyadh’s efforts. Last week, President Rouhani of Iran announced the discovery of a massive, new oil field in the country’s south with over 50 billion barrels of crude oil. The find could boost the country’s proven reserves by a third.
The timing of the announcement was interesting. It was made at a point in time when the Saudi Aramco IPO is just around the corner.
The announcement came roughly two months after the attacks on the strategic, Saudi crude infrastructure in Abqaiq and the massive oil field in Khurais. And, for once, the attacks shattered the very impression of the ‘invincibility’ of the Saudi oil infrastructure. The attacks highlighted geopolitical risks to the company’s operations, revealing that a sizable chunk of the country’s crude assets could be knocked out, essentially overnight, by an unexpected attack.
For decades, Riyadh had been nurturing the very impression that its crude infrastructure is invincible. It is not, the attacks underlined. And though Iran denied any involvement in the attacks, yet, most blamed it for the assault.
But the attacks definitely went some way in meeting the strategic objectives of Iran. These carried serious consequences for Riyadh, especially while it was pursuing Aramco IPO and endeavouring to boost the company’s valuation.
The attacks on the Saudi oil infrastructure and a major find of 53bn barrels in Iran, although questionable, make it still difficult for the economy managers in Riyadh to achieve their targets within the stipulated time.
The game is on.