Saudi Aramco, the world’s largest oil company, is making an intriguing pitch to investors as it prepares to go public: It claims to be the greenest player in a dirty industry.
The company readily admits that the shift to cleaner fuels will likely curb global oil demand over the next decade. But it intends to be the last producer still pumping when the world’s need for oil peaks as a result of climate change.
Aramco’s case makes some sense. The company is among the world’s lowest-cost producers. Its operations in Saudi Arabia boast the smallest carbon footprint among its peers, based on CO2 emissions per unit of hydrocarbons produced, the company says in a prospectus filed ahead of its initial public offering.
So where does that leave Canada’s oil sands, which are harder and more energy-intensive to extract? Nowhere good, if you buy into the Aramco narrative.
“Climate change concerns may cause demand for crude oil with lower average carbon intensities to increase relative to those with higher average carbon intensities,” according to the company’s prospectus.
Aramco argues that Saudi Arabia’s cleaner crude will grab market share from other countries as global oil demand levels off over the next decade. And if stricter emission rules trigger a more radical and earlier shift away from oil, those market gains will be even more pronounced, the company predicts.
Aramco’s expectation that peak demand may be just a few short years away is shared by the International Energy Agency. Last week, the IEA predicted that global oil demand will stall around 2030 in the face of more aggressive climate-change action by countries.
Aramco – the world’s most profitable company – insists it can still be a winner in a peak-demand world.
Others, including Canada, may not fare as well. Among major producing countries, Canada’s crude is second only to Venezuela in carbon intensity, according to an Aramco-funded Stanford University study cited in the prospectus. Saudi Arabia’s carbon footprint is roughly a third the size of Canada’s, and half that of the United States.
Canada’s oil sector is also at or near the top in terms of costs. The break-even price necessary to generate a reasonable return on new projects is more than US$70 a barrel, according to a recent analysis by The Economist magazine. Saudi Arabia’s is less than half that, at US$31 a barrel.
Saudi Arabia’s light crude is found in easy-to-tap reservoirs. Western Canada’s bitumen is a troublesome beast. It’s heavy and mixed with sand, requiring large amounts of energy to extract, process and ship.
Canadian producers are getting better and more efficient at extracting crude from the ground.
But Aramco is way ahead, allowing it to cleverly portray itself a green outlier.
Even so, Aramco’s IPO could still prove to be a tough sell. Beyond demand woes, the company faces other unique challenges, including the unpredictable demands of the Saudi monarchy, the constant threat of attack on its installations and growing Middle East unrest.
The IPO has been repeatedly delayed amid a debate over what the company is really worth. Saudi Arabia’s Crown Prince Mohammed bin Salman has been pushing for a US$2-trillion valuation. Analysts say US$1-trillion to US$1.5-trillion is more likely, given the gloomier demand outlook for oil.
If even Aramco is a tough sell, no wonder there is an investment drought in the oil sands.
Canada urgently needs to create its own energy narrative – a story that acknowledges that the world appears to be on the cusp of peak oil demand.
Stopping the exodus of investment from the oil sands will require more than just building pipelines and speeding regulatory approvals for new projects, as Alberta wants.
The industry will have to do much more to cut the energy content of its oil, reduce emissions and drive down costs. If Canadian producers want to remain attractive to investors – particularly foreign ones – they’ll need to improve disclosure of their environmental performance, open themselves up to independent verification and set more ambitious emission reduction targets.
The obvious message of the Aramco IPO is that selling the benefits of the oil sands is about to get a lot tougher.
So we’d better have a good story to tell.
Special to the Globe and Mail
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