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Energy Journal
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The Aramco IPO process delivered another weekend of suspense and drama that will likely linger for weeks to come.
The oil giant released a valuation target ranging from $1.6 trillion to $1.7 trillion. The figures fall short of the $2 trillion target Saudi Crown Prince Mohammed bin Salman has been fixed on for more than two years. The difference in value illustrates the operational, geopolitical and governance risks that investors face betting on the offering, writes Ben Dummett.
The IPO still has potential to be the world’s biggest by surpassing the $25 billion Alibaba raised in 2014. But the stock listing is beginning to reveal a set of dueling interests for Saudi Arabia. Saudi leadership wants the stock offering to be a success, but the kingdom’s OPEC commitments—and oil market realities—could get in the way, as Benoit Faucon observes in his Reporter’s Notebook (below).
The Saudis are telling investors that the world’s most profitable oil enterprise can grow cash flow from its operations and thereby have no trouble funding a dividend. But that promise could someday find itself at odds with Saudi Arabia’s role as a swing producer, able to balance global crude markets by increasing or decreasing production when needed.
Aramco continues to market the listing to retail and institutional investors in Saudi and the surrounding region, but it can still decide to halt the IPO if its valuation expectations aren’t met. The company and its bankers will be able to gauge demand for Aramco’s shares after Nov. 28, the deadline for investors to submit share requests.
— John Simons, London Energy Editor
Reach me at john.simons@wsj.com, or on Twitter @thinksimons.
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The oil drilling rig Polar Pioneer is towed toward a dock in Elliott Bay in Seattle. PHOTO: ELAINE THOMPSON/ASSOCIATED PRESS
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• The World Energy Council holds a two-day event in London starting Tuesday about the future of hydrogen in the energy system.
• Activist investor organization Follow This hosts an event with Royal Dutch Shell in London on Wednesday on the role of the energy industry in combating climate change.
• Individual Saudi investors have until Nov. 28 to submit requests for shares as part of Aramco’s initial public offering of stock on Saudi Arabia’s Tadawul exchange. Shares are expected to begin trading in early December.
• Executives from companies including Denmark’s Ørsted and Siemens Gamesa Renewable Energy will converge on Copenhagen for the Wind Europe Offshore conference Nov. 26 to 28.
• The U.S. Energy Information Administration releases its monthly natural gas report Nov. 29.
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Oil prices were down on Monday after climbing last week. Investors are mulling over data that projected an increase in non-OPEC supply for next year, writes the Journal’s David Hodari.
Brent was trading down 0.28% at $63.13 a barrel on London’s Intercontinental Exchange. WTI futures inched down 0.29% at $57.55 a barrel on the New York Mercantile Exchange.
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“I don’t think OPEC has to worry that much more about U.S. shale growth long term.”
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— Scott Sheffield, chief executive of Pioneer Natural Resources, recently told investors.
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Russian President Vladimir Putin shakes hands with OPEC Secretary General Mohammed Barkindo in Moscow in October. PHOTO: SPUTNIK/REUTERS
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OPEC Set to Keep Current Supply Cuts in Place Until Next Year
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OPEC and an alliance of oil producers led by Russia are set to maintain their current curbs on crude output through next year, write Summer Said and Benoit Faucon. The move dashed investors’ hopes that the cartel might agree to more vigorous efforts to mop up a global supply glut that has put pressure on crude prices.
Booming U.S. shale-oil production is set to diminish OPEC’s market power in the coming years, according to the International Energy Agency. Higher U.S. output—expected to rise to 19 million barrels a day of production over the coming decade—will push OPEC and Russia’s share of the global oil market to 47% by 2030, compared with 55% in the mid-2000s, the agency said.
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Saudis Aim to Value State Oil Company at Up to $1.7 Trillion
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Saudi Aramco said it is aiming for a valuation of $1.6 trillion to $1.7 trillion from the planned initial public offering of the state-owned energy giant, falling well short of the initial $2 trillion targeted by Saudi Crown Prince Mohammed bin Salman in what could still be the world’s biggest ever IPO, reports Ben Dummett.
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The price target below the crown prince’s original pronouncement acknowledges the operational, geopolitical and governance risks that investors face betting on the offering.
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Saudis Urged to Become Stakeholders in Aramco
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Saudi Arabia’s citizens are preparing to spend billions of dollars for Aramco’s shares at the state oil company’s highly anticipated initial public offering, write Donna Abdulaziz and Rory Jones.
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A bombardment of marketing is aimed directly at domestic investors who are expected to help anchor an IPO that has faced a mixed reception from foreign institutional investors.
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Shale Producers Hit the Brakes on Output
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U.S. oil and natural-gas companies have pumped at record levels recently, but now some plan to reduce output, write Rebecca Elliott and Christopher M. Matthews. A pullback by oil producers would likely cause U.S. oil production growth, already slowing this year, to flatten further in 2020. The belt-tightening comes as many shale companies come under financial pressure to produce returns as their access to capital narrows.
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Market Giant ICE Launches Middle East Crude Exchange
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Energy-markets giant Intercontinental Exchange, or ICE, is teaming up with Abu Dhabi’s state oil producer to launch a futures exchange in the emirate, reports the Journal’s Alexander Osipovich.
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ICE and Abu Dhabi National Oil said last week they aim to launch the new exchange—along with its new Murban crude-oil futures contracts—in the first half of next year. BP and Royal Dutch Shell are among the companies expected to support the new marketplace. Nasdaq is set to sell its struggling energy-futures business, NFX, to a unit of German exchange group Deutsche Börse.
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McDermott Kept Investors in the Dark About SEC Probe
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McDermott International investors knew they were investing in a struggling business when they lent the oil-and-gas engineering company $1.7 billion last month, but were unaware of a Securities and Exchange Commission investigation into the company.
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McDermott didn’t tell investors about the SEC’s investigation until the financing deal was completed. The belated disclosure has aggravated a number of lenders, reports Alexander Gladstone.
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Iran Is Carrying Out Threat to Enrich Uranium
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Iran moved ahead with its threat to enrich uranium at its underground Fordow nuclear site, the United Nations atomic agency said last week.
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The move is Iran’s most serious step away from the 2015 nuclear deal, in which Tehran promised to limit its nuclear program in return for the removal of sanctions against the country, reports Laurence Norman. The U.S. exited the landmark agreement last year. Washington has moved to reimpose sanctions aimed at constricting Iran’s economy and oil exports.
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• Researcher views trash including plastic waste as a valuable commodity. (National Geographic)
• A bipartisan carbon tax could reduce U.S. emissions by 40% by 2030. (The Atlantic)
• A deposit of U.S. nuclear waste in the Marshall Islands is starting to crack as the surrounding sea water is rising. (Business Insider)
• Major U.S. utilities are pledging to have zero carbon emissions in the next two decades but many are developing gas generation that could complicate their efforts. (S&P Global Market Intelligence)
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128 million
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That’s how many metric tons of carbon dioxide Aramco produces in extracting, refining and marketing its products, according to Bernstein estimates, which is the third-largest globally behind Russian gas-giant Gazprom and Chinese producer Sinopec. As Aramco moves toward its early December IPO, this metric may scare away some investors focused on sustainability, writes WSJ columnist Rochelle Toplensky.
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Reporter’s Notebook: Ahead of Aramco’s IPO, Saudi Arabia’s Relationship With OPEC Is Already Changing
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Ahead of Saudi Aramco’s giant listing next month, experts and oil producers have wondered how the share sale might change Saudi Arabia's avuncular relationship with the Organization of the Petroleum Exporting Countries, writes the Journal’s Benoit Faucon.
In my 11 years covering OPEC and oil, I’ve rarely seen delegates question Saudi Arabia’s motives as de facto OPEC leader. The kingdom has done the heavy lifting for the cartel when it comes to boosting or cutting output, but once its national oil company goes public, such moves could reflect poorly on Aramco’s stock.
As the IPO ramped up in recent months, the Saudis have been trying to allay OPEC's fears that it might favor Aramco investors over fellow cartel members.
“They have reassured us several times the IPO will not in any way affect their role in OPEC” and “their participation in supply adjustments,” OPEC's secretary general Mohammed Barkindo told reporters last week on the sidelines of an Abu Dhabi energy conference.
In my recent conversations with OPEC delegates and oil ministers, I’ve learned that the Saudis are saying something different in private. Pressure to get an optimal valuation for Aramco ahead of the IPO is driving the Saudis to prod other producers to reduce their output in order to stick to a previously agreed-to set of production curbs.
Russia, OPEC's main non-member partner in the pact, seems to grasp Saudi Arabia’s motivation.
“We understand that the tough stance, including from our friends from Saudi Arabia, is linked to the Saudi Aramco IPO,” Russian president Vladimir Putin told reporters in Brazil on Thursday. “It's an open secret.”
All of this could mean that going forward, Saudi Arabia's mammoth IPO won't mean it will disengage from OPEC but the opposite: a roaring Riyadh could become even more assertive in the group to defend the interests of Aramco shareholders.
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A European Utility Is Trying to Usher in the Hydrogen Era
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It powers the sun, space rockets and now pasta-making.
Hydrogen is key to the reduction of carbon emissions and an important tool in the energy industry’s transition away from fossil fuels, says Marco Alverà, the chief executive officer of Snam, operator of Europe’s largest natural gas pipeline network. The company completed a pilot project in April, piping hydrogen into an Italian pasta factory to show the viability of the gas as an energy source.
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The gas is already a $100 billion per year market, used to make products including plastics and fertilizers. But proponents say the market for hydrogen could be scaled up to a $2.5 trillion sector by 2050 in order to solve the world’s energy needs.
Hydrogen could play a role in reducing the globe’s carbon footprint, say experts. It can function as a long-term storage for solar and wind. The gas is a more stable medium for storing and transporting energy than batteries. It can then be piped or shipped between distant regions and could also be put in long-term storage in subterraneous caverns–with little or no energy loss.
Hydrogen can also be used as a zero carbon-emitting complement to natural gas for heating homes. Hydrogen fuel cells, which convert the gas to electricity, could eventually help power the world’s heavy duty car fleet such as trucks, that need more energy than conventional batteries can provide, says Mr. Alverà, who spoke to the Journal’s Neanda Salvaterra about the challenges of using hydrogen to generate energy. Edited excerpts:
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Q:
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What’s so special about hydrogen?
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A:
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Mr. Alverà: Hydrogen is extremely abundant. It’s everywhere. You can make it from electricity and you can turn it back into electricity. It’s a very cheap way to store and transport renewable energy and that’s why it’s being used and thought of as a solution for big offshore wind farms as well as distant solar projects, where instead of transporting electrons, which generate friction, you produce hydrogen with the renewable energy at the site and then you pipe it for long distances [and there is little or no energy loss].
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Q:
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What are the challenges associated with getting the world to use more hydrogen?
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A:
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Mr. Alverà: The costs are very high. A conventional way of making hydrogen [is by running] electricity through water in a tank [or box] separating the oxygen from the hydrogen [known as electrolysis].
These simple boxes are made by dozens of [companies] but they are not made at scale. What we have asked the manufacturers is if we standardize it, how much can the cost come down? And they have said [the electrolyzer capital expenditure can come] down from about $1000 to $150 per kilowatt. At that cost combined with declining solar, hydrogen can become competitive with fossil fuels in some applications.
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Q:
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Do policymakers need to get involved to spur the adoption of hydrogen?
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A:
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Mr. Alverà: I think it will happen regardless. The question is whether we want to accelerate it. If the world can get to 50 gigawatts of electrolyzer capacity, that’s the tipping point to make hydrogen sort itself out. 50 gigawatts seems like a big number but Europe and Japan could achieve that by simply saying, “Let’s blend 7% of pure hydrogen into the gas grid.” Fuel cells for cars will happen once hydrogen is very cheap.
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Q:
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Why is your experiment with pasta made with hydrogen useful?
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A:
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Mr. Alverà: [It’s] important because we are showing the world that it can be done without changes to infrastructure. Snam has been the first in Europe to blend hydrogen into the existing natural-gas grid in Southern Italy. We delivered pure hydrogen blended [with natural gas] at 5% into two factories, one making pasta and one making mineral water. We have gotten the regulatory greenlight to go from a 5% to 10% blend of hydrogen by year end.
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A:
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Mr. Alverà: It was delicious.
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We want to be your first energy read of the week. This newsletter is a production of the global WSJ energy team, which is made up of a dozen editors and reporters in Houston, New York, London and Dubai. Send feedback to John Simons and Neanda Salvaterra at EnergyJournal@wsj.com.
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