Saudi Arabia’s anticipated Aramco initial public offering – valued at $1.5 trillion – is fully subscribed thanks to domestic demand, which has been fuelled by increased lending lines from Saudi banks to Saudi citizens, so they can increase share purchases. But Aramco’s forecast oil production may turn out to be over-optimistic, as demand for fossil fuels comes under increasing global scrutiny and negative reaction to plastic pollution drives down demand.
Saudi produces about 10% of the world’s oil. While it holds the largest crude reserves globally with a low carbon extraction footprint, the problem is what happens once the oil is out of the ground where it then fuels plastic pollution and GHG emissions.
Betting on Plastics Growth
Aramco’s IPO with its Saudi Basic Industries Corporation (SABIC) purchase means that Aramco is betting on an expanding plastics’ future to grow its revenue and maintain its dominant market position from oil production to plastics manufacturing.
Aramco’s petrochemical business has a large exposure to the production of chemicals fundamental to plastics production. Earlier this year, Aramco agreed to purchase a 70% stake in SABIC from the Kingdom’s sovereign wealth fund for $69.1 billion. SABIC is the largest public company in the Middle East. It is a diversified manufacturing company, active in petrochemicals, chemicals, industrial polymers, fertilizers, and metals.
With the SABIC acquisition, Aramco would operate a vertically integrated plastics business active in over 50 countries. Aramco would then have the largest ethylene company – a key plastics feedstock – and a top four global polyethylene company – which uses ethylene to produce single-use plastics – (Aramco prospectus, p. xxxvi).
But Aramco is facing problems on two fronts. Plastics competition is stiff. In the U.S. alone, there is at least $179 billion invested in 294 projects involved in polyethylene plastics production. At the beginning of 2019, 41% of these projects were in the planning or early construction phase.
At the same time, global plastics demand is facing strong headwinds. More than 200 corporations globally have made commitments to reduce single-use plastics. For example, Unilever has pledged to reduce its virgin plastics use 50% by 2025.
So the question is, can the world really absorb another boost to plastics production and if not, what effect will that have on Aramco’s IPO investment?