Saudi Aramco: Bigger Oil, Bigger Trouble

“Big oil” is really a misnomer. It may not be for long.

The largest energy company that investors can easily own is Exxon Mobil. It is by most standards massive, having rivaled Apple for the global market-value crown before the latest commodity swoon. But its proven reserves of 25 billion oil-equivalent barrels pale in comparison with Saudi Aramco, which is more than 10 times its size on that measure and pumps over one-tenth of the world’s crude.

News last week that the Saudi government is considering an initial public offering for the producer set off speculation about the world’s first trillion-dollar-plus company by market value and put dollar signs in the eyes of some bankers and energy investors.

While the deal may never happen and could well be restricted to domestic buyers if it does, how should investors react if it materializes? Any trepidation should go farther than worrying about today’s very low energy prices. A little historical perspective also should make potential foreign shareholders of Aramco or any other national oil company wary.

Once upon a time, Aramco was the Arabian-American Oil Co. owned by the predecessors of Exxon Mobil and Chevron. In the same way, Iran’s National Iranian Oil Company was owned by BP and Shell and Venezuela’s Petróleos de Venezuela was owned by various foreign producers. All were nationalized at a time of high prices in the 1970s.

Another energy giant, Russia’s Rosneft, remains mostly state-owned. It assumed its current form through expropriating parts of privately owned rival Yukos and absorbing a dispute-riven local joint-venture partly owned by BP. The Russian government said last month that it might sell a 19% stake in Rosneft.

Back in the 1970s, today’s “big oil” controlled about four-fifths of global production. A decade later it controlled less than one-fifth.

The fact that the nationalizations happened at a time of then-record prices is probably no coincidence. The same goes for Saudi Arabia’s willingness to potentially sell a stake in its crown jewel with prices so low today, or for concessions that may be offered by other national oil companies to private producers to bring their capital and expertise to bear.

In either case, terms could end up seeming very attractive today. But the question is how durable the agreements will be once the price of oil recovers.

Investing in oil-and-gas production involves risks with commodity prices and politics being the two most prominent ones. Special attention must be paid to the latter in countries that have helped themselves in the past to private property.

The price of any assets on offer can only be attractive if they compensate investors for the possibility a government will once again rewrite the rules when prices again rise.

WSJ