The Blow to Saudi Aramco’s Achilles Heel

Introduction

On September 14, a daring drone and cruise missile attack targeted two of the state-owned Saudi Aramco’s major oil processing plants, causing considerable damage to the facilities and disrupting the global energy market. The Iran-backed Houthi rebels, who have been withstanding the Saudi-led military intervention in Yemen since 2015, were quick to claim the responsibility for launching the attacks. However, numerous investigations were opened by the United States, Saudi Arabia and various other countries, which produced findings that were seemingly contradictory to Houthi claims. Eventually, these developments led the United States and major European nations to blame Iran for the strike, further escalating the Persian Gulf crisis.

Short-Term Impact and Saudi Arabia’s Oil Infrastructure

As the world’s most prominent oil exporter, Saudi Arabia had a production capacity of 12 million barrels of petroleum products per day prior to the attack on its Abqaiq and Khurais facilities. The Abqaiq plant, the world’s largest oil processing facility, refined 7 million barrels of crude oil in a single day whereas the Khurais oil field could generate an output of 1 million barrels of crude oil a day. Evidently, the damaging attack heavily disrupted the oil production and exports, turning 5.7 million bpd of crude oil production offline and cutting Saudi oil production by half and the global oil production by 5 percent. Although there had been no immediate effect on global oil prices due to the market closure for the weekend, the price of Brent crude oil rocketed nearly 20 percent on September 16 and later settled to around $69 per barrel.

Following the attack, the US President Donald Trump announced the authorization of the employment of the US Strategic Petroleum Reserve, with the intention of sufficiently supplying the markets and aiding the process of stabilization of energy prices in the United States. In the meantime, Saudi Arabia had also stated that it would draw the already-refined oil from inventories in order to maintain export levels. According to Stratfor, Saudi Arabia retained a storage of 187.9 million barrels in the inventories by the end of June 2019. Therefore, the data showed that Saudi Arabia could maintain export levels for around 71 days, even if the lack of capacity following the attack fully persisted.

Seen as Saudi Aramco’s Achilles Heel, the Abqaiq facility has always been of paramount importance both for the country and the global oil industry. Throughout the last few decades, concerns regarding the critical nature of the Abqaiq plant and Aramco’s overdependence on the facility have been repeatedly raised. Considering the previous minor attacks on Saudi oil and natural gas infrastructure, the country’s lack of preparedness for the attack despite the solid precedent and the possession of Raytheon Patriot missile system received a significant backlash and may become a hindrance for Aramco’s future plans.

The Road to Recovery and Aramco’s Future Prospects

Saudi authorities had initially planned on returning the plants to their nominal production capacity by September 16. However, it soon became apparent that it would take far longer than that to restore the full capacity of the facilities. A few days after the attack, Saudi energy officials, including Energy Minister Prince Abdulaziz bin Salman, delivered an overly self-assured forecast regarding the restoration of oil production, claiming that 50 percent of the lost production had already been restored and that the national production capacity would reach 12 million bpd by the end of November.

In light of the attack, another threat regarding the sustainability of the OPEC+ alliance emerged due to the rising prices and a destabilized market. It was speculated that a steady continuation of the rise in oil prices may eventually lead to the dissolution of the current OPEC+ alliance. Indeed, Russia, Iraq, Algeria and several other oil producers would surely become highly discontent with a significant rise in oil prices and may even consider withdrawing from the current production-cut agreement. After such a turn of events, it would undoubtedly be extremely difficult for Saudi Arabia to restore its production capacity and maintain its global prominence in oil exportation.

Moreover, the fact that Saudi Arabia has been planning on launching the initial public offering for Saudi Aramco for a long time makes the attack even more crucial. What will be the world’s largest ever IPO would have taken place in November if not for the fateful attack. In the wake of the attack, the kingdom reportedly considered delaying the IPO proceedings until the infrastructure is repaired and the production capacity is restored. However, fixing the physical damage is not excepted to fix the reputation of the national oil company. Investors have already been extremely concerned about the company’s lack of transparency and in the aftermath of the attack, Saudi Arabia’s domestic media blackout and slow release of information only intensified those concerns. Nevertheless, Saudi Aramco officially announced its plan to launch the IPO on November 3.

Lingering Concerns

On the 9th of November, Saudi Aramco released a detailed 600-page prospectus for the upcoming IPO, stating its target valuation between $1.3 trillion and $2 trillion. Reportedly, Saudi Crown Prince Mohammed bin Salman is planning on using the revenue generated from the offering to fund his ambitious National Transformation Program, which aims to sustainably diversify and modernize the Saudi economy. While his plans regarding the IPO and the transformation program remain unchanged, brand new questions and geopolitical concerns are raised.

The first problem is derived from the apparent Saudi attempt to veil a national oil company with prerogatives as a public company. While public companies have the primary goal of maximizing values and profits for shareholders, national oil companies often serve as a nest egg for sovereigns and are effectively used in advancing their agendas. This situation is likely to create a conflict of interest between the investors and Saudi officials. Additionally, a stock market listed Aramco may put the company on a collision course with OPEC and potentially lead to the dissolution of the organization.

Lastly, as Saudi Arabia’s strategically vital assets, Aramco facilities are clear targets for the kingdom’s foes. A western purchase of equity in Aramco may very well increase the aggressiveness of regional rivals and give them a fresh incentive to disrupt the firm’s oil production. Given the glaring inability of Saudi Arabia to prevent previous attacks on its soil, another major attack may irreversibly cripple the ailing Saudi economy.

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