Look For Oil Industry Divergence If Aramco's Public Offering Is Nixed

Reuters is now reporting that Saudi Arabia’s plans for an initial public offering of the Saudi oil giant, Aramco, are cancelled and the financial advisors have been dismissed. These reports have not been officially confirmed by the Saudi government or by Aramco.

 In the short term, news that Aramco won’t be going public has little to no impact on oil prices . Oil prices are facing upward pressure as demand remains strong, production growth in the United States is expected to stagnate and oil exports from Iran come off the market in preparation for new U.S. sanctions that will take effect in November. The Aramco IPO was never expected to have a significant impact on Saudi Arabia’s oil production.

There were some industry analysts who believed that Saudi Arabia would cut oil production to push up the price of oil just prior to Aramco’s initial public offering. However, there was never any confirmation of this strategy, and the Saudi oil ministry has always set oil production levels according to market forces.

When it comes to the long-term future of the oil industry, the implications are more important. 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.

The other major comparable oil companies are all publicly traded international oil companies (IOCs) and thus concerned about shareholder sentiment. They see a need to increase profit, even short-term profit, to keep their stock prices high. When oil prices were very high, as they were for the first decade of the 21stcentury, oil profits were so outrageous that the companies continued to invest freely in the future. For the last few years, with depressed oil prices, and even today, with crude oil prices around $70 per barrel, IOCs like Royal Dutch Shell , ExxonMobil XOM +1.43% and BP have been hesitant to invest like they once had. In fact, Shell has made a point of divesting from upstream oil assets both to bolster profit and as a move to promote its commitment to alternative energies.

Conversely, an independent Aramco that can continue to look to the long-term, as it has since Saudi Arabia first took full ownership of the company in 1980, would be much less concerned about short-term profits. Aramco has vastly superior upstream assets to any other company, but it still lags in downstream. The company is working to expand its investment in refining and petrochemicals. It also has an extensive research and development arm that expands into parallel industries. In addition, Aramco is also putting significant resources into exploring for new oil fields as well as innovation to improve efficiency and the health of its current fields. One could even imagine a time in the long-term future in which Aramco buys oil and gas fields outside of Saudi Arabia, if the behavior of Aramco continues to diverge from that of its major competitors.

If Aramco does not go public now or in the near future, industry watchers will have to keep an eye on how the one private major oil company continues to invest and expand as the others seemingly focus on their next earnings call.