Aug 23, 2018

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning and welcome back! Happy birthday to the late Keith Moon, The Who's brilliant drummer and the best we've ever had...

1 big thing: Saudi Aramco's teetering IPO

Illustration: Sarah Grillo/Axios

Saudi Aramco's troubled IPO plan is increasingly looking dead, or at least in a deep freeze, but the Saudis pushed back against those reports late last night.

Driving the news: Reuters, citing "four senior industry sources," reported yesterday that Saudi Arabia had called off the plan to sell about 5% of the company.

  • And a source familiar with the company's work with outside advisers and banks told me roughly the same thing after their story hit.

Why it matters: The kingdom had hoped to raise tens of billions of dollars through the IPO to help fund initiatives to diversify its oil-dependent economy away from crude oil sales.

But the plan to sell about 5% of the company has been beset with delays, indecision about an international listing venue, and related questions about the Saudis' appetite for the transparency that comes with going public.

  • Plus, multiple analysts believe the company would not achieve the kingdom's hoped-for $2 trillion valuation.

Yes, but: Khalid Al-Falih, the Saudi energy minister, pushed back against yesterday's obits for the plan. "The Government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum," he said.

  • Reality check: Absent from his lengthy statement is even a rough timeframe for the IPO.

One big question, via Axios' Dan Primack: The IPO's seeming demise, or at least deep freeze, could be good or bad news for the prospect of the Saudis bankrolling CEO Elon Musk's plan to take Tesla private.

  • The bullish case for Tesla: The Saudis think they can diversify their economy without the IPO, and Tesla could be one avenue.
  • The bearish case for Tesla: Without cash from the IPO, there's less money to spread around.

The intrigue: The fate of the IPO appears to be bound up in a separate transaction — Aramco's potential purchase of a controlling stake in the petrochemical firm Saudi Basic Industries Corp. (SABIC) from the kingdom's sovereign wealth fund.

  • Al-Falih's statement obliquely references this, noting the IPO timing will be affected by a "downstream acquisition which the Company will pursue in the next few months."
  • Bloomberg writes that could be a roughly $70 billion deal. "That will replace at least some of the money the Public Investment Fund had been expected to receive from the Aramco IPO," they report.
  • Go deeper: I wrote about the rationale for pouring resources into SABIC here.
2. Parsing Aramco's IPO retreat

Randy Bell, director of the Atlantic Council's Global Energy Center, tells Axios that the delay is a good development...

"There has been tremendous skepticism in the analyst community about the IPO as it would have been hard for transparency and legal reasons. There were also concerns about meeting the target valuation."
"A delay suggests that Saudi leadership recognizes the challenge and is going to wait until they get it right to proceed. That should give the investor community more confidence in the country over the long run."

Ellen Wald, analyst and author of the recent book "Saudi, Inc.," writes in Forbes...

"If Aramco does not go public and the company maintains its independence from the Saudi government — as it has for almost 40 years — it will continue to benefit as the one major oil company that is not beholden to short-term financials."

Jim Krane of Rice University’s Baker Institute for Public Policy says that while the rationale behind the IPO — raising money to diversify the economy — remains sound, the plan itself turned out to be "flawed." In comments circulated to reporters, Krane says...

“The public saw it as a misguided sell-off of the national patrimony. Aramco executives worried that the company's vaunted autonomy and long-term planning would be sacrificed to meet short-term demands of shareholders."
  • Krane adds that Saudi royals fear that the IPO would "expose the monarchy's internal workings, perhaps revealing details of the royal family's financial stake."
  • But he predicts that Aramco will still play a role in raising capital for the kingdom's diversification. "It may be through a private equity stake or through direct investments in new economic sectors within the kingdom.”
3. The shale boom's resource demands
Expand chart
Reproduced from an IHS Markit analysis; Chart: Axios Visuals

Two items caught my eye that underscore the sheer scale of the resource demands and challenges that come with the U.S. shale boom...

Sand: A report from IHS Markit predicts "extreme" growth in sand needed for fracking operations in the country's major shale basins over the next 5 years, main due to expanded drilling and larger amounts needed per lateral foot of the wells.

  • By the numbers: Demand for fracking sand will reach 231 billion pounds by 2023, representing a $6 billion market, IHS estimates.
  • The booming Permian Basin that spans Texas and New Mexico (broken down by the Delaware and Midland sub-basins in the chart above) sees the most demand growth.
  • Why it matters: The report underscores costly transportation and logistical problems that companies are facing. IHS said firms are working to address constraints in the sand market.
  • "[I]nvestments are being made in self-sourcing, where oil and gas operators actually own the mine, or through partnerships or direct sourcing, where sand-mining companies purchase the storage and transportation assets to ensure greater efficiency and cost containment from the mine to the wellhead," a summary of the report states.

Water: A new Wall Street Journal feature looks at a trend in water management. They report that young, private-equity backed companies are moving in to help oil-and-gas companies deal with huge wastewater volumes.

  • Why it matters: Extracting hydrocarbons from shale rock creates lots of wastewater, and the piece has some eye-popping numbers.
  • "Drillers in the Permian Basin in New Mexico and Texas currently generate more than 1,000 Olympic-size swimming pools full of this murky, salty water every day," WSJ reports.
  • Go deeper: Study finds surging water volumes needed for fracking boom.
4. The politics of Colorado's fracking fight

My colleague Amy Harder writes ... Colorado’s candidates for governor from each party, speaking at an industry event in Denver on Wednesday, both expressed opposition to a likely ballot initiative that would significantly curtail oil and gas production in the state.

Why it matters: The opposition shows the influence and large economic footprint of the oil and gas industry in Colorado despite intense environmental and local resistance to increased development. Colorado, an important political battleground, is America’s fifth-largest gas-producing and seventh-largest oil-producing state.

Quoted:

  • Republican Walker Stapleton, via Denverite: "This is nothing more than a job-killing measure, plain and simple."
  • Democrat Jared Polis, via Colorado Springs Gazette: "[W]e can’t ignore the role that the oil and gas industry has played in our growth, or the significant wages and tax revenue it creates in our state. … But neither can we ignore the conflicts between homeowners and operators, between surface rights and mineral rights, between state government and local government."

Driving the news: The initiative would increase a buffer zone between buildings and future drilling from 500 feet to 2,500 feet, and expand it to other "vulnerable" areas, which could encompass rural areas. It's waiting for final state approval to make the ballot; backers are confident they have needed signatures.

The intrigue: Polis’ position represents a nearly 180-degree turn. He helped fund a similar initiative in 2014, only to back off as he and Gov. John Hickenlooper, a Democrat, agreed to create a task force, which hasn’t put concerns to rest as wells continue to pop up around neighborhoods.

Go deeper: An important oil-and-gas fight in Colorado.

5. Climate change opens new Arctic era

Axios' Andrew Freedman reports ... A Danish cargo container vessel is about to set out on a voyage that will be a milestone in the opening of Arctic waters to marine shipping — and it's a direct result of climate change.

Why it matters: The Arctic has been warming at least twice as fast as the rest of the globe, and sea ice has declined sharply since 1979. As the ice melts, Arctic shipping routes are becoming more attractive as an alternative to sailing through the Suez Canal.

The details: Danish shipping giant Maersk will send the first cargo container vessel unaided through the Arctic's Northern Sea Route, departing from Vladivostok this week and passing the Bering Strait on Sept. 1.

  • The ship, known as the Venta Maersk, will move across the top of Russia from east to west and should arrive in St. Petersburg by the end of September.
  • This route used to require the help of nuclear-powered icebreakers, and was not economically attractive for cargo shipping companies.
  • The declining sea ice that's opening up new shipping access in the Arctic is also creating new competition to tap hydrocarbons and minerals in the region.

Read more of Andrew's piece in the Axios stream.

6. Quote of the day
“I try, in my day to day work with Republicans, to... stay away from using the words ‘climate change.’”
— Democratic Sen. Martin Heinrich of New Mexico

The context: That's part of a long interview with Heinrich on the new episode of Greentech Media's Political Climate podcast.

  • Heinrich talks about his long-term vision of a grid powered with 100% clean energy, and near-term legislative efforts around energy storage incentives and more.

Why it matters: The comment underscores how some climate advocates tailor their message to try and widen support for climate-friendly energy initiatives.

  • Heinrich said he instead emphasizes topics like jobs and infrastructure when talking to Republicans.

Reality check: Ultimately, policies strong enough to ensure very deep, economy-wide emissions cuts will need to be openly based on the dangers of global warming.

Flashback: There's a years-long history of trying to advance climate policies with this tactic. Back in 2010, when sweeping climate legislation still had a faint pulse, then-Sen. John Kerry said this about his cap-and-trade plan:

“What we are talking about is a jobs bill. It is not a climate bill. It is a jobs bill, and it is a clean air bill. It is a national security, energy independence bill.”
  • It still didn't advance.
Ben GemanAmy Harder