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Why Is Saudi Aramco Significant?

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Saudi Aramco has recently received a lot of attention for the drone attacks on its facilities and IPO plans. The state-owned company of Saudi Arabia is not only the world's biggest oil producer but also the most profitable company.

Foundation
 

Foundation

Saudi Aramco was started after an agreement between Saudi Arabia and California-based oil company Socal, giving it exclusive rights to explore and extract oil in the kingdom.

In 1944, the California Arabian Standard Oil Company was renamed to the Arabian American Oil Company, which formed its acronym Aramco-as it is known today. It was run by a consortium of American oil companies.

However, in 1960, following the creation of OPEC (Organization of the Petroleum Exporting Countries), several oil-producing countries began nationalizing their natural resources.

The Saudi government completed its buyout of Aramco's assets in 1980. A few years later in 1988, Saudi Arabian Oil Company was created.

Profits

Profits

For the first half of 2019, Aramco reported a profit of 46.9 billion USD, a 12 percent fall from 53.0 billion USD for the same period of the last year.

While the fall could have been on account of lower oil prices and reduced production, it was the first time that the oil company made its financials public. The financial information were available on a prospectus tied to its 10 billion USD bond sale planned for this year.

Its profits are significantly greater than of its oil and gas rival Royal Dutch Shell, the largest publicly-traded oil company.

Just to get an idea on how profitable the company is- Apple Inc, the most profitable publicly listed company in the world, made a profit of 59.4 billion USD in 2018. In comparison, Aramco made a profit of 111 billion USD in 2018, as per its financial information released in the prospectus.

IPO Plans
 

IPO Plans

In 2016, in an interview with The Economist, Saudi Crown Prince Mohammed bin Salman first spoke of his plans to list 5 percent of Aramco to build a large sovereign fund.

Proceeds from the IPO were projected to be 100 billion USD, which could make it the largest offering ever.

The listing plans have been postponed several times due to various factors. In June this year, Prince Mohammed bin Salman in a press conference said that the kingdom was committed to the IPO which will likely happen between 2020 and the beginning of 2021.

Aramco's CEO, earlier this month said that the company was preparing for a local listing at the Riyadh stock exchange and is also prepare to list it internationally (if sharegolders intend to) at a subsequent stage but did not mention other locations that it is considering.

According to a Bloomberg report on Tuesday, Aramco will go ahead with its IPO plans despite recent drone attacks on its facilities.

How significant are the recent attacks and how will it affect the world?

How significant are the recent attacks and how will it affect the world?

On 14 September, oil processing facility at Abqaiq and the nearby Khurais oil field were attacked by drone strikes, knocking out 5.7 million barrels of daily crude production or 50 percent of Saudi Arabia's oil output. Abqaiq is the world's largest oil processing facility.

Yemen's Houthi rebels have claimed responsibility for the attack, according to a Reuters report, and said that it was one of their largest attacks ever inside the kingdom.

The group has been behind a series of attacks on Saudi pipelines, tankers and other infrastructure in the past few years.

It is well-known that Saudi Arabia has significant power and influence in the global stage.

It holds about 18 percent of the world's proven oil reserves and is the de-facto leader of the OPEC, that practically controls oil prices with its supply rather than demand.

Western powers like the US and UK have stressed in the past that Saudi Arabia has played a crucial role in maintaining security in the Middle East by combating extremism and terrorism.

Despite various conflicts, these countries maintain close friendship with the kingdom as it has only benefited them.

Infact, Saudi Arabia helped US counter the influence of Iran.

At a time when concerns of global economic slowdown prevail amid US-China trade spat, a cut in supply and uncertainity around the security of Saudi's facilities would only cause more damage.

Energy Minister Prince Abdulaziz bin Salman said on Tuesday assured that the world's top oil exporter will ensure that it meets the supply needs of all its customers this month and assured that full production will be restored by the end of September.

However, risks prevail after the US said that the attacks over the last weekend may have originated in southwestern Iran.

Iran denied its involvement in the strikes on Tuesday and also ruled out its talks with US president Donald Trump.

In an already tense environment between the US and Iran, there are fears of an escalation in conflicts in the Middle East.

Some analysts fear that if this leads to a tit-for-tat response from a Saudi-US led co-ordinated effort, it could alleviate the concerns of disruptions in oil supplies.

Geo-political tensions and high oil prices will only hurt global economy more, especially oil-importing countries like India and China.

Higher fuel prices will cause inflation and a fall in currency values, posing a bigger challenge for the central banks and governments in the emerging economies.

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