With Dr. Ellen Wald, Author of Saudi, Inc.: The Arabian Kingdom’s Pursuit Of Profit And Power
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Dr. Ellen Wald joins the show to explain what’s going on with the Saudi royal family, their oil company Aramco, and their plans to bring it public.
What Is Aramco?
Aramco was originally an American oil company which is now run by the Saudi royal family. They’ve reported 260 billion barrels of oil in their reserve, making them the biggest oil company in the world. Comparing that to Exxon at 20 billion and Shell at 6 billion, Aramco has approximately 10 times more reserves than both companies combined.
Immense oil profits have enabled Saudi Arabia to usher the country into the modern age. Starting from scratch, they’ve been able to build the hospitals, airports, and modernizations needed to bring them into the 21st century.
Why The Saudi Royal Family Wants To Go Public With Aramco
Mohammed Bin Salman, the Saudi crown prince, wants to attract international businesses to move into the country. With unemployment high and the fact that oil reserves aren’t going to last forever, he’s looking for long-term solutions. A public offering of stock (IPO) could be the key to diversifying the economy beyond the oil sector.
Salman has also visited the U.S. several times in an effort to entice investors like Amazon and other companies to move facilities to Saudi Arabia. The hope is that by incentivizing these companies, they won’t be so dependent on oil as their main monetary source.
What American Investors Gain From Aramco
Saudi Arabia is offering stimulus packages to select businesses, encouraging them to set up plants with the promise of low operating costs, as well as other financial incentives. Particularly when it comes to foreign companies that use petrochemicals in their manufacturing, the Saudis stand to benefit greatly by this influx of new business.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: For over more than a century, the Saudi royal family has risen from next to nothing to establishing complete control over its country and its immense oil reserves. The Saudi royal family and its oil company, Aramco, have almost always been motivated by ambitions of long-term strength and profit. Accomplished by a clever use of Islamic law, traditional ideology, and harsh justice in order to maintain stability and their own power. But underneath and behind the religious fanaticism and il-liberalism lies a sophisticated and ruthless business enterprise, and today that corporation is poised to pull off the biggest IPO in history.
So to get more detail I have with me today Dr. Ellen Wald whose new book Saudi, Inc: The Arabian Kingdom’s Pursuit of Profit and Power takes us from the very beginning when a lonely refugee fought his way to make Al Saud the wealthiest family in the world. Welcome to the show, Ellen.
Ellen Wald: Thank you for having me.
Steve Pomeranz: So the book really goes right back to the beginning and explains how oil was found and the Americans got involved. What is the history of Aramco?
Ellen Wald: Aramco has always been or had always been an American company, an American enterprise which was really very central to the company’s success because they brought with them not just American expertise and American engineering know-how, but a management structure that the Saudis, when they took over the company, adopted for themselves. And they’re very, very proud of the fact that they say their company runs just like Exxon or any other American company
Steve Pomeranz: It wasn’t really that way in the beginning, as a matter of fact, there were a lot of tensions that developed between the US and the Saudi family because the US was looking at the Saudi family as over-spending and trying to get more out of Aramco than was originally negotiated. Tell us a little bit about that.
Ellen Wald: That was definitely a problem in the early years. Particularly, the US felt that the Saudis should be a bit more austere in their spending. But when you look at it from the Saudi perspective, you see that they understood that they had this incredible resource that everyone in the world wanted and that they could make a lot of money off of this resource, this oil.
And from their perspective, it was very important to them to use the money from this to bring it to their citizens, to bring it to the kingdom. Because you have to understand, this was a kingdom, they had nothing. They had very little infrastructure, they had nothing modern, and so they wanted to very quickly modernize their country. They wanted to build hospitals, airports, all sort of modern things. And to them, it wasn’t out of the question to want to overspend, especially when they knew that the company could pay. And so, in the early years, it was very much kind of a dance or almost a very detailed negotiation between the Americans and the Saudis, for the Saudis to try to get what they felt they deserved. And ultimately, they did get an agreement to make half of all the money that the American company was making. And this was really a landmark deal in the Middle East.
Steve Pomeranz: Well, the Saudi family was part of a tribal condition in which enemies were vanquished, and their citizens were showered upon with gifts and goods and services in order to keep the family in power.
So, this was really just an extension of that, but now you’re talking about a kind of an international oil company or selling to international countries. But it was kind of run with the same tribal enterprise idea. So, when we look at Aramco, the oil company, which had just announced that it’s going to bring an initial public offering to market, an IPO, how big is Saudi Aramco versus the huge ExxonMobil and Shell?
Ellen Wald: Saudi Aramco is possibly the biggest and most valuable company in the world. Not to mention other oil companies. When we look at it, Saudi Arabia has, and they report this, they have 260 billion barrels of oil in their reserves, that’s their reported number. That is far in away larger than anything that Exxon or any other country, national oil company, or international oil company has.
Steve Pomeranz: Exxon has about 20 billion and Shell has about 6 billion. So, you’re talking with Exxon, which is already a huge company, you’re talking about 13 times more proven reserves than, well, than actually, both of those companies combined, truly. What does it mean? Why would they need to raise money in an initial public offering, then?
Ellen Wald: The answer is really two-fold. The first is that Saudi Aramco doesn’t really need the money. They have self-financed all of their expansion over the years. They have hardly any debt, whatsoever.
And they spend more than probably any other company out there on capital expenditures. But they are looking to expand globally even more than they have been. One of the major differences between Saudi Aramco and a company like Exxon is Saudi Aramco has compared Exxon an underdeveloped downstream sector. They’re refineries, petrol chemicals.
Steve Pomeranz: Okay, so downstream. Upstream is getting the oil out of the ground. And downstream is processing it through refineries.
Ellen Wald: Exactly. And Saudi Aramco wants to expand their downstream sector in a much bigger way. They have been expanding but they’d like to do that much more. In addition, the Saudi government would like to make use of some of those funds that they hope to make on this initial public offering to diversify their economy.
Steve Pomeranz: So, do they own companies, do they own refining companies in other countries other than their own?
Ellen Ward: In fact, Saudi Aramco owns the largest refinery in the United States, the Motivo refinery, down in the Gulf of Mexico. They also own refineries all over China and South Korea. And they just went into business with some Indian companies to build a brand new huge refinery in India.
Steve Pomeranz: With alternative methods of energy production, call it solar, which doesn’t really account for a large amount of the energy use in the world, it is growing with technology and the like. Are they still betting heavily on the future of oil?
Ellen Wald: They are betting on the future of oil, but they’re also betting on the future of energy. And oil for the Saudi’s isn’t just about fueling cars; it’s also about natural gas that fuels power plants. It’s also about using oil and natural gas as feedstock to produce the products that we use every day, plastics. They make everything, all different kinds of plastics, things that we use every day.
Steve Pomeranz: My guest is Dr. Ellen Wald. The book is Saudi, Inc.: The Arabian Kingdom’s Pursuit of Profit and Power.
Ellen, recently Saudi crown prince Mohammed Bin Salman visited Amazon’s Jeff Bezos and Lockheed and numerous other technology companies in Seattle. What was he there about?
Ellen Wald: Mohammed Bin Salman was in the United States to bring business investment back to Saudi Arabia. He’s not necessarily looking for money. But he’s looking for businesses to come and open up in this Saudi kingdom. And part of the reason is that his kingdom has fairly high unemployment, and so he’d like them to employ Saudis in say defense manufacturing plants, in possibly an Amazon data center, things like that. So, he’s looking for them to bring their business to Saudi Arabia to help diversify this economy that’s been so dependent for so long on oil revenues.
Steve Pomeranz: However, in your book, you describe the fact that the finances of Aramco and so many other things that take place in Saudi Arabia are Byzantine in nature and very opaque. Is it really possible that they’re going to be able to open that up for international investors?
Ellen Wald: It is very opaque, but behind the scenes there is real change going on, and I’ve seen from inside the ministries they are creating and implementing new bankruptcy laws that will protect all sorts of companies foreign and Saudi. They are working on stimulus packages to provide cheaper utilities and all sorts of things to entice companies to come and set up shop there. So while there’s a very opaque place to do business, they are making real changes behind the scenes.
Steve Pomeranz: As an investor, a possible investor, for Saudi Aramco when it becomes an IPO, the one thing they’re going to have to open up is their financials. You think they’re really willing to do that?
Ellen Wald: I think if they want to list on the New York Stock Exchange, they’re going to have to be very transparent. If they’re just going to list on a local exchange or perhaps on the London Exchange or Hong Kong Exchange, they won’t have to be as transparent, but they’re still going to have to be more transparent than before.
Steve Pomeranz Mm-hm.
Ellen Wald: But I think that the company is very proud of its financials. They’re very proud of the ability that they have to produce oil and other petrochemicals and products at very low cost, and they’re very proud that they do it with very little waste. So, I think that they will be excited to show the world what kind of company they are.
Steve Pomeranz: On the other hand though, they just recently detained numerous princes which sounds pretty dicey to me. What is the purpose of this? I mean, it doesn’t I think reflect well on them and it sounds very un-businesslike to us in the US. First of all, how was this being treated or greeted in Saudi Arabia itself?
Ellen Wald: Well, it’s a very confusing issue and some have felt, and many Saudis have told me, that they’ve long felt that there has been way too much corruption in Saudi government and in business dealings. And so for many, it was greeted with, they really greeted it with great happiness to see that the government was really doing something. On the other hand, some see it as a shakedown, power consolidation, and a power grab, and it does underscore the fact that Saudi Arabia is not a transparent place. But like I said, what I can tell you is behind the scenes, they are making real changes. And they are inviting new businesses to come. And they are interested in making those businesses feel comfortable. And they all want to make a profit. That’s really what the Saudis are about. They’re about doing business and everyone making a profit.
Steve Pomeranz: What is your personal opinion about what they actually did with…I mean, that was a pretty significant event. Of course, they are staying at a five-star hotel. So, I mean, it’s not like they’re in an un-air conditioned cell somewhere. But what do you think?
Ellen Wald: Well, Al-Waleed bin Talal, who is one of the more well-known Saudi investors and members of the royal family, did say that the Ritz was very nice, but it’s not the Four Seasons, which happens to be the hotel chain that he invests in. But I do think that this issue was not very well timed, particularly in the way that it looks to the outside world, it wasn’t a particularly well-timed thing to do when you’re trying to invite foreign businessman in. But at the same time, that seems to be how the Saudis do things. They haven’t really shown a whole lot of evidence and due process, which Americans and other Westerners would definitely like to see. But on the other hand, that’s how the Saudis do things.
Steve Pomeranz: What are the opportunities for American business people in Saudi Arabia, now that it’s opening up, and they’re looking to bring companies, not just the big ones in Seattle, but others that are in the areas of manufacturing that interests them, what are the opportunities?
Ellen Ward: There are definitely opportunities. They are particularly with the stimulus packages that the government is offering for companies to get good deals on, real estate and utilities, particularly when it comes to companies that want to use petrochemicals in their manufacturing processes. So, they are very keen on attracting say, I know they are bringing in a detergent manufacturer to set up shop right next to their big plant in Saudi Arabia that makes the chemicals that are needed for detergent. So, they’re very interested in bringing in these things. It’s not necessarily what the Crown Prince has been talking about in the flashy meetings, but they’re very actively pursuing these business opportunities.
Steve Pomeranz: But this is not a country that other countries can put low wage businesses in, it’s not that kind of country, right?
Ellen Wald: No, it’s not, we’re not talking about, say like the Asian Miracle model where you have very low-cost textile manufacturing, for example. Many Saudis who want to work in and be employed are actually fairly well educated and highly educated, many of them have gone to schools in the United States, studied engineering etc. So, they’re not necessarily looking at a country where you have a lot of people willing to work for low wages. But you do have a country that has plenty of space, access to good utilities, access to cheap electricity, and other sorts of benefits.
Steve Pomeranz: I mean they were very wise at the very beginning.
They brought in the US outside expertise, outside management skills, and the like. And eventually, they started to understand that, and then they started to elevate the talented young people and then have them educated outside the United States in these areas, so they could eventually bring all of those techniques and so on in country. Is that something that you think that they will continue to do as companies go over there, they didn’t actually nationalize Aramco, right? But they basically squeezed them for about as much as they can get. Do you think there’s a risk there that in the future, they may try to do the same thing with US companies?
Ellen Wald: I think the way that it’s always worked there is that when there’s something that the Saudis can’t do, they will import that expertise. So, they did it with Bechtel, with engineering, project management, things like that. Bechtel is still very active in the kingdom now and has lots and lots of great contracts there. I don’t think that the Saudis are interested in just nationalizing companies the way we saw in Iran or in other areas. But if they have learned the processes that these companies and expertise they’ve brought, they may work to buy it out. And we saw that a little bit in the United States with their refinery, Motiva. It used to be owned jointly with other oil companies, and since then, Saudi Aramco has bought it out completely and is the sole owner.
Steve Pomeranz: All right. Well, that’s a legitimate way to go. That’s the way the world works. My guest is Doctor Ellen Wald. The book is Saudi, Inc.: The Arabian Kingdom’s Pursuit of Profit and Power.
If you’re thinking about anything, any business in Saudi Arabia, this is a must-read book. If you’re doing anything with regards to that. But if you’re just interested in the world around you, I recommend it as well. It’s a very accessible book to read. If you want to listen to this and download the full show whenever you want, if you have any questions for me, don’t forget to visit our website at stevepomeranz.com. That’s stevepomeranz.com.
Doctor Wald, thank you so much for joining us.
Steve Pomeranz Thank you.