Saudi Aramco is searching for deals that will enhance investor confidence in the world’s biggest oil company. The deals might include asset sales and supply agreements, according to an August 9 Reuters report that quoted Aramco chief executive Amin Nasser. Life was relatively easy for the Saudi giant firm until recently. It pumped oil, sold the product to the international markets, and then used the revenues to fund most of the Saudi economy.
Now, things have changed and they are slightly different. While Saudi Aramco’s top priority remains its largest shareholder, the Saudi government, global trends seem to be pushing it strongly towards diversification.
The company’s asset sale plan mirrors that of the UAE neighbor Adnoc, which has reportedly been selling minority stakes in its energy assets. It is conducting these sales to monetize the assets while it still can. Since the oil prices seem to have recovered from the pandemic lows, it is the best time for the company to diversify its portfolio.
Notably, Adnoc has been divesting assets for up to four years and has so far acquired some $30 billion in proceeds in this period. This latest divestment plan is a listing of the Emirati firm’s drilling business. The proceeds will allegedly be used for clean energy projects.
Saudi Aramco is still in a very similar position to Adnoc, thus it is not a wonder that it has taken a page out of its new playbook. Both of these state-owned firms have found themselves in uncharted territory with the energy transition push that has shaken the very foundations of their existence.
Just like most of the other oil producers, both must look for ways to survive in a world where oil demand is expected to be considerably lower. The obvious strategy is to expand into low-carbon energy projects, just like the case of Big Oil. That now seems to be the path for Aramco and Adnoc.
Earlier in the past week, after the release of Aramco’s second-quarter and first-half results, chief executive Amin Nasser explained that the firm was looking into some new deals aiming to unlock significant capital.
While he never detailed these deals, Reuters remembers an earlier report based on an anonymous source of information that said Aramco wanted to sell a stake in its gas pipeline business in a scheme that is identical to the one that the firm used to divest a minority interest in its oil pipeline business. This deal, with a consortium led by EIG Global Energy Partners, was valued at around $12.4 billion.
Another possible sector for deal making is hydrogen. At the financial results release call with analysts, Nasser stated:
“We are looking to capture a big percentage of that market, we have an advantage.”
He was reiterating the remarks that were made by Aramco’s chief technology officer earlier in the year. Ahmad Al Khowaiter told CNBC sometime in late June:
“We see a real market forming. This is an opportunity for us to supply a new market, a growing market, and a sustainable market, because it is a decarbonized energy product.”
The executive also explained that the hydrogen market was at an inflection point, with technologies for the use of the gas becoming quite mature and commercially available.
Al Khowaiter also said at the time:
“We have the lowest-emission hydrocarbons. We have an ability to capture CO2 and therefore supply hydrogen reliably at a reasonable cost, without the CO2.”
In August, Aramco said it had already signed a preliminary agreement with the German government for joint work in the hydrogen area, which, according to the comments that were made by Nasser, will take the form of Saudi hydrogen supply to Germany.
The plans seem ingenious, but a few issues remain. For example, would a shift to hydrogen and maybe other low-carbon products manage to generate the same revenue levels as Aramco’s core business? That question is critical since the Saudi major has been striving relentlessly to make ends meet, which means to distribute dividends it has promised to distribute, amid the pandemic, oil demand drop, and the renewable energy push.
Aramco has even turned to borrow to do this. Most notably, it will be quite sometime before the company is compelled to choose between oil and low-carbon energy if the choices and options are ever presented to it. What the oil firm seems to be doing currently is greening up its CV while simultaneously monetizing its energy assets in a favorable price environment.
The entire Gulf region is doing the same thing since the price environment is favorable. Big Oil is also doing it for similar reasons. But it has already been called on what some people may see as a greenwashing bluff.
BlackRock’s Larry Fink noted in July that:
“Divesting, whether done independently or mandated by a court, might move an individual company closer to net zero, but it does nothing to move the world closer to net zero.”
In a fair contest, nonetheless, it is not Big Oil’s, Aramco’s, or Adnoc’s responsibility to work to reduce global oil demand. That is the job of governments and maybe the finance titans like BlackRock. Oil firms have learned to go with the flow and adjust as it carries them into new areas, whether they are public supermajors or state-owned giants like Saudi Aramco.