Growing to the Sky
Have you noticed that there is a lot more talk these days that involves the word Trillions? I see that the largest IPO ever, the public sale of the Saudi Arabian oil company called Aramco, is being debated as valuing the company between $1.5 and $2.0 Trillion. Let’s put that into perspective for a moment. Aramco is touted as the world’s largest company with revenues of over $350 Billion and net income of over $111 Billion. It has proven oil reserves of 270 Billion barrels of oil. It is 100% owned by the Kingdom of Saudi Arabia. This IPO, if it sells 5% of its shares at a valuation of $1.7 Trillion, would raise over $75 Billion in cash, three times the amount raised by Alibaba, hitherto the largest IPO ever. Now $75 Billion is a lot of money, but for Saudi Arabia, it represents one quarter’s worth of Aramco revenues, so it is not exactly the badly needed operating cash that most IPOs represent. It is a symbolic offering for Saudi Arabia, much like it’s recent tourism advertising campaigns. “Hey, we’re Saudi and we’re a friendly bunch of dudes and you should join our fan club.”
Before we try to explain this, let’s remember that Aramco was formed a hundred years ago during the global oil boom by a combination of American oil companies that had formed around all the “There Will Be Blood” tribulations in California and Texas. Between Standard Oil of California and Texaco, followed by Standard Oil of New Jersey (Exxon) and Mobil, the mainstays of American oil formed Arabian American Oil Company (Aramco) during WWII. It was 100% American owned. As King Abdulaziz, friend to Lawrence of Arabia and the father of modern Saudi Arabia, consolidated his power, he threatened to nationalize Aramco and then settled on taking 50% of the company to avoid bloodletting. After the U.S. showed its support of Israel during the Yom Kippur War, Saudi used that to justify another 25% Aramco nationalization and then made a cursory payment to the corporate minority owners to get to their current 100% ownership. And now we come full circle with Saudi’s Mohammed bin Salman (MbS) wanting to look global and friendly all over again by going public for a few measly Billions. What a century.
Hydrocarbons are wonderful things. They have powered a century of human advancement. We use the stuff in countless applications because they combust so well. There are billions of years (maybe trillions) of buried organic material (plant and animal matter that dies, gets buried and decomposes) that we have been able to extract and burn to extract their imbedded energy content. Cool stuff. Also, ironic stuff. We are a carbon chauvinistic world. 50% of our bodies are made up of carbon. We know that all life on earth is carbon-based and we extrapolate that all other life in the universe must also be carbon-based. That would be hard to prove, but since proof is based on our known universe, I guess it’s as solid an assumption as any we have. But wait, aren’t all our climate change worries a function of the release of carbon (as a monoxide, a dioxide and as methane)? Yes, the greenhouse gases are creating a blanket around the earth and causing it to warm by small but gradual degrees. Because human life has such a small range of acceptable temperatures in which it can exist, this is, naturally, quite concerning to us.
The thing is, it isn’t carbon, and this bad greenhouse gas stuff, that we want when we burn a fossil fuel. That’s funny, because it’s the good/evil of carbon that while it is the basis of life, it is also the basis of global warming and possibly the death of life as we know it. We really burn fossil fuels to extract the hydrogen, which is the greatest energy carrier known to man. It is the most plentiful element in the universe, and it is a primary part of both water and hydrocarbons. Get it? It’s not about carbon, stupid, it’s about hydrogen.
Trees don’t grow to the sky and burning organic matter in the form of fossil fuels can’t go on forever. And lucky us (us being the human race), we are smart enough to recognize that the all-important hydrogen is carried as much or more in water as it is in hydrocarbons. All we must do is break-down water into hydrogen and oxygen, both useful compounds for us. We can use the hydrogen as our source of energy and let the oxygen go up in smoke to balance out all that carbon dioxide and methane we and all those cows have been emitting. Easy peasy.
Back to Saudi Arabia. This past week, MbS regaled the crowds at the Financial Conference in Riyadh (called FSC), most of whom had completely forgotten about Jamail Khashoggi. The Kingdom of Saudi Arabia hosted this conference as a showplace for its increasing importance in the world. And what was the biggest buzz at the conference? Not Aramco. One of our big investors as well as our investment bankers were present and they reported back that the biggest buzz was the importance of the new hydrogen energy economy as a replacement for the hydrocarbon economy. Supposedly, Rick Perry, Secretary of Energy for the U.S., apologist for President Trump (in Ukraine and elsewhere), and poster-boy for the Texas oil culture of the past century, was on a panel at the conference and admitted that hydrogen was the future.
How does this buzz comport with the Aramco IPO, which MbS announced he is ready to advance ASAP? It is 100% consistent. To remind us of my prior Chairman’s infamous observation, “why would I want to sell something others want to buy and why would others want to buy what I want to sell?” The reason people buy and sell stuff is that this is clearly not the way the world thinks at any moment. Saudi is over-exposed to hydrocarbons. Hydrogen isn’t replacing hydrocarbons tomorrow, no matter how fast the world is warming. Short-sighted people still like the certainty of hydrocarbons. But if importance is to be attributed to market signals, I view this as a double signal, that Saudi wants to lighten-up its hydrocarbon exposure and is sponsoring a conference where the buzzword is hydrogen.
Trees didn’t grow to the sky, at least not all at once. They grew, they fell, they decomposed, they morphed into oil, gas and coal and then we burned them and threw that carbon up into the sky. Now Saudi Arabia’s infamous reformer and Grand Poohbah (remember he is King only in deed, not in name yet) is screaming to us, “Sell! Sell!” and the trees may finally have grown as close to the sky as the earth will permit. What to do now? Do what Rick Perry has probably already done, find a way to buy into the hydrogen economy, the next Trillion dollar sure thing set to start growing to the sky.