Saudi Aramco IPO – an upside for the climate?

May 02, 2017


May 02, 2017

Ben Caldecott

Director of the Sustainable Finance Programme

Ben Caldecott is the founding Director of the Oxford Sustainable Finance Programme at the University of Oxford Smith School of Enterprise and the Environment. The Oxford Sustainable Finance Programme is a multidisciplinary research centre working to be the world’s best place for research and teaching on sustainable finance and investment. 

Ben is concurrently an Adviser to The Prince of Wales’s Accounting for Sustainability Project, an Academic Visitor at the Bank of England, and a Visiting Scholar at Stanford University. He serves on a number of boards, including the UK Green Finance Taskforce, City of London Green Finance Initiative, University of Oxford Socially Responsible Investment Review Committee, and the Green Alliance.

The planned listing of part of the Saudi Arabian Oil Company (‘Saudi Aramco’) on one or more international stock exchanges is one of the big energy stories of this year and next.

It is anticipated that the listing of around 5% of Saudi Aramco could give it an implied value of potentially up to , making it the most valuable company on earth.

This is likely to be viewed with some trepidation by those concerned with tackling climate change. After all, Saudi Aramco has both the proven oil reserves and largest daily oil production. If its oil reserves were burnt they would account for around 15% of the remaining global carbon budget - the amount of carbon that can be emitted for a 66% probability of keeping the rise in global temperatures below 2°C.

If Saudi Aramco listed in London, one of the more likely listing destinations, it may also intensify oil, gas, and mining sector on the FTSE 100 and by extension the concentration of the kinds of geopolitical, governance, and commodity price risks associated with extractive industries. This is something I have argued against in the .

However, there is a potentially compelling, if counter-intuitive, climate ‘upside’ associated with the IPO of Saudi Aramco and there could be good cause for those concerned about climate change to promote its listing, particularly on a well-regulated exchange such as the London Stock Exchange. The case for a successful Saudi Aramco IPO from a climate change perspective could be as follows:

Reasons for a brightside 

First, the listing is meant to raise cash to help diversify the Saudi Arabian economy. It has been reported that part of the cash raised will be used for diversification and is likely to be invested , which would help to wean the country’s inefficient and heavily polluting economy off oil as its primary source of energy. This could significantly reduce carbon emissions from Saudi Arabia, the largest greenhouse gas emitter, helping to meet its obligations under the Paris Climate Change Agreement.

Second, Saudi Aramco has some of the lowest cost and lowest carbon intensity oil reserves. In contrast, international oil companies (IOCs), such as BP and Shell, have some of the most expensive oil reserves, often located in hard to reach places and in or near pristine natural environments. Investors, particularly if Saudi Aramco listed on the London Stock Exchange, would be able to reduce their exposure to IOCs with high cost oil reserves at significant risk of asset stranding, towards lower cost oil with fewer environmental impacts. This is a shift that many investors would like to make. If they did, it would constrain the ability of IOCs to raise capital to invest in new high cost and particularly environmentally damaging projects. It would be the jolt from investors that IOCs need to begin seriously considering diversification strategies away from fossil fuels.

Third, Saudi Aramco is a significant part of the Saudi Arabian economy and listing on an exchange with high standards will help to improve transparency and promote good governance in Saudi Aramco and in Saudi Arabia more broadly. This may open up both the company and the country to greater accountability. This has multiple benefits, including potentially forcing Saudi Aramco to implement climate-related financial disclosures recommended by the Task Force on Climate-related Financial Disclosures (TCFD) set up by the G20 Financial Stability Board in 2015. This could help the company and the country better plan for and manage the transition to the low carbon economy.

Raising standards 

The climate upside hinges on the cash raised from a listing being used for diversification away from fossil fuels; a listing putting pressure on IOCs and their ability to raise capital when competing against a much lower cost producer; and the listing happening on a high standard exchange to promote good governance, including on climate change. Those concerned with the climate outcomes of the listing should encourage it to have these characteristics. Saudi Aramco needs to list somewhere with high standards (e.g. London), the company needs to commit to implementing TCFD recommendations on climate disclosure, and the country should be clearer about how the cash raised from the IPO will be used to diversify Saudi Arabia’s economy away from fossil fuels.

Peak oil demand is imminent from new technologies and changing vehicle use. This will structurally reduce oil prices over time. In this new reality, IOCs and large state-owned national oil companies will only be able to sell a fraction of their reported oil reserves. But as the largest and lowest cost producer, it is in the interests of the climate for Saudi Aramco to be the ‘last man standing’ in the market. The higher cost and more polluting reserves held by others should be pushed off the market first. To the extent that the IPO helps this process, it could be seen as a positive step for reducing global carbon emissions and tackling climate change. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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