“Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy,” Mike Pompeo said, following one of the most grave attacks on Saudi Arabia’s oil infrastructure in history.
Half of the kingdom’s daily production, nearly 10 million barrels was affected after 10 explosive drones hit Abqaiq and Khurais. Aramco convened an emergency meeting to assess the situation, and said it hopes to have lost output back online within “days.” The company is still evaluating the damage at Abqaiq, which most agree is “the single most valuable piece of real estate on planet earth.”
Abqaiq is 60 km (37 miles) southwest of Aramco’s Dhahran headquarters. The oil processing plant handles crude oil from the world’s largest conventional oilfield, the supergiant Ghawar, and for export to terminals Ras Tanura – the world’s biggest offshore oil loading facility – and Juaymah. It also pumps westwards across the kingdom to Red Sea export terminals.
“A successful attack on Abqaiq would be akin to a massive heart attack for the oil market and global economy,” said Bob McNally, who served in the United States National Security Council during the second Gulf War in 2003.
Oil prices leapt when markets opened on September 16th, following a drone attack on the Abqaiq oil-processing plant and the Khurais oilfield in Saudi Arabia on September 14th. At one-point the prices were as much as 20% higher—the biggest intraday jump since Iraq invaded Kuwait almost 30 years ago. At 7 pm London time, Brent, the leading international benchmark, was 14.7% up, at $69.09 per barrel.
Even though we witnessed the biggest intraday jump in oil prices since Iraq’s invasion of Kuwait, the prices have been around 10% lower than its peak for the year. This showcases that the markets had adjusted and accounted for this incident. As the markets opened two days after the strike, it gave time to the investors and the markets to form their expectations. Hence, the entire market was expecting a price increase, which lead the prices to increase and settle at around $69 per barrel. Surely, there were intraday fluctuations, but the expectation formation of the markets ensured that the price did not cross the $70 barrier.
Prices have been remarkably choppy this year: driven up as American sanctions on Iranian and Venezuelan oil have threatened to restrict supply; and down by signs that the world economy is slowing down, thus, dampening demand. Saudi Arabia, by far the biggest producer in the Organization of Petroleum Exporting Countries (OPEC), has tried to stabilize prices, but with limited success. In December 2018 OPEC and others, notably Russia, said they would cut production by 1.2million barrels a day in order to stabilize prices. During the year, the Saudis have reduced their own output by more than they promised as other OPEC countries have kept pumping. The rise of shale oil in America which is now the world’s biggest oil producer, has made it even harder for OPEC to control global oil prices.
The drone strikes in Abqaiq and Khurais have also caused a major disruption to the timeline of Saudi Arabia’s crown prince, Mohammad Bin Salman’s way of diversifying and opening up Saudi Arabia’s economy to the rest of the world by issuing Aramco’s Initial Public Offering (IPO). Mohammad Bin Salman had planned of issuing 1% share of Aramco, officially known as Saudi Arabian Oil Co. for a record USD 20 Billion, giving the company a valuation of USD 2 Trillion and making it the most valued IPO and company in the world.
However, these drone strikes have somewhat complicated that plan.
Initially planning for an IPO release as early as November, the drone strikes have put that plan in jeopardy with most investment banks agreeing that a four to five-month delay in the release of IPO is expected. According to leading investment banks, these strikes would also have a massive effect on the valuation of the company, with most agreeing that an USD 1.5 Trillion valuation is more feasible and achievable.
According to various analysts and reports, this event would force the investors to go back to their drawing boards and reassess the risk valuations of Aramco. Most people fear that the current valuation of the company does not take into account the sensitivity of the geopolitical situation in the Middle East and risks associated with it. There is no doubt that the risk premiums associated with this valuation have to be increased and reassessed. Whereas, Aramco has to step up and regain the trust of the investors by showing that it has the financial and operational capability to go through this stress test in order to ensure that its IPO and valuation is a success.
Only time will tell whether Aramco would be able to do so.
By Abhishek Sancheti
2nd year Undergraduate Student, SRCC