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Fires and Floods Make Saudi Aramco IPO a Hard Sell

Julian Lee

(Bloomberg Opinion) -- It is a bad time to buy into an oil company whose major asset is reserves in the ground that can sustain current production levels of the carbon-laden fossil fuel until near the end of the century. 

Oil lost its place in the power generation market after the oil shocks of the 1970s, and it is now starting to see serious competition for powering cars, buses and trucks along with the first signs of viable alternatives for fueling maritime transport. Oil’s domination in air transport looks safer for now, and the industry forecasts the strongest growth in petrochemicals that go into everything from plastics and fertilizers to electronic gadgets and clothing. But the tide of history is moving firmly against fossil fuels.

Saudi Aramco may boast that it holds the rights to the largest reserves of crude with the lowest carbon footprint to extract, but that rather misses the point. The climate concerns around oil are not about the carbon cost of getting it out of the ground, but of what is done with it afterward.

The oil age may not be over — far from it — but oil is facing unprecedented headwinds. Here’s a sample from recent weeks and months:

Venice Mayor Luigi Brugnaro said last week that climate change is menacing the historic maritime city, which suffered its second-highest tide on record. Parts of northern England are suffering their worst flooding in decades, and millions were displaced as Cyclone Bulbul hit Bangladesh and northern India.

Storms and floods are not new, but they are becoming more severe, more frequent and causing more damage as sea levels rise and the climate changes — developments that are linked, at least in part, to the burning of fossil fuels.

Unprecedented bushfires are ravaging parts of eastern Australia rendered tinderbox dry by a two-year drought. Wildfires forced hundreds of thousands of Californians to flee their homes earlier this month. Russia is suffering one of its worst years this century for forest fires. Once again, climate change is contributing to the creation of the hot, dry conditions that have allowed the fires to spread.

Climate change is also melting Russia’s permafrost. Not a problem for Saudi Aramco, perhaps, but certainly one for Russia’s oil industry, which relies on infrastructure built in the 1970s on ground that is no longer able to support the weight it was 40 years ago.

Mounting climate concerns are inexorably turning public opinion against hydrocarbons, including oil.

What’s more, pollution caused by leaking pipelines, accidents involving oil tankers, or drilling rigs are all increasing the pressure on the oil and gas industry.  Particulate emissions from burning fossil fuels are behind elevated mortality rates, leading to stricter controls on ship fuels, measures to push cars and vans out of city centers and increasing pressure on airlines to find alternatives.

Aramco has a solution to the predicament the industry is in — petrochemicals. The company wants to turn 40% of its crude into chemicals, according to Abdulaziz Al-Judaimi, Saudi Aramco’s senior vice president for downstream. 

But petrochemicals are under pressure, too.

Globally more than 200 businesses, from Coca-Cola Co. to food and consumer goods giant Unilever NV  have made commitments to reduce plastic waste, according to the Ellen MacArthur Foundation. Unilever aims to halve its use of virgin plastic by 2025. Coca-Cola’s goal is for its bottles to contain an average of 50% recycled content by 2030. Initiatives like those will make a serious dent in the projected demand for new plastics.

And then there’s an issue that is specific to Saudi Aramco — the security of its facilities. 

The company did a spectacular job of restoring output levels after a devastating attack on its oil facilities in September, using spare capacity elsewhere to boost flows. But the very fact of the attacks has raised concerns among potential investors about Saudi Arabia’s ability to protect its oil infrastructure.

The time to bring private investors into Saudi Aramco was when everybody wanted a piece of the action. Twenty years ago investors would have fallen over each other beating a path to Saudi Aramco’s door. It’s a much tougher sell now.

To contact the author of this story: Julian Lee at jlee1627@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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