v2030

The beginning of a new era is approaching Saudi Arabia as it officially presents its “Vision 2030”, a plan for a post-oil economy. It will dedicate a whopping US$2 trillion toward a Public Investment Fund, which will be the largest sovereign wealth fund in the world and will help the country reduce its dependence on petroleum exports, which currently contribute 90% to the country’s budget. The radical national plan is based around three pillars: a vibrant society, a thriving economy, and an ambitious nation, to further increase the international position of the Kingdom. To the surprise of many, the conservative country is even striving to improve the economic position of women, a huge step toward progress. Its market vision is centered around share hold with reference to revenues.

As part of the strategy, Aramco will transform from being a completely state-owned oil producer into a global mass by privatizing 5% through public offerings by 2018. The revenue that will be generated from the sale of the Saudi Arabian Oil Company, the world’s most valuable company in terms of market capitalization will shatter Apple’s record cap of US$756 billion. History in the making. On the other hand, Dr. Sheridan Titman, Director of the Energy Management and Innovation Center at the University of Texas, explains that the greatest repellant for Saudi Arabian stocks is the country’s political instability, which it will have to work toward improving. Similar to the reform that was implemented recently by Mexico’s administration, it is expected to take years before the revolutionary shift is truly seen and felt, locally and internationally.

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Mohammed Bin Salman, the Deputy Crown Prince of Saudi Arabia

Reactions

International analysts have reacted positively toward the announcement of Saudi Deputy Crown Prince Mohammed Bin Salman, and have even labeled it as “bold and ambitious”. Yet, many have called it unrealistic as a result of its proposed deadlines, almost impossible. For instance, by 2020, it is proposing to increase foreign investment to 50% from its actual 5%. Bloomberg also explains that the reforms might be too late as its best chance was when the barrel was above US$100 and the country’s leader waited until it lowered to today’s barrel of US$40 or less. Analysts from the Economist additionally see a risk of Saudi Arabia falling short of its ambitious plans due to previous patterns and its slow productivity growth. The government is committed to its economic metamorphosis, but how and when remain to be determined.

Overall, the instability of oil prices has had a profound impact on the oil industry all around the world, causing major deficit and bankruptcy for both private and state-owned companies. In response, players like Saudi Arabia have begun to re-think their strategies and maximize their output spectrum through diversification. As the market is capital-intensive, many state-owned companies are choosing privatization as a way to share and minimize risks.

PEMEX has not been left behind and is predicted to improve efficiency and production levels thanks to its famous bidding rounds that have attracted entities of all sizes, from entering companies to renowned multinationals. It adjusted its mission as a consequence of the reduced crude oil prices with budget cuts that total MX$100 billion. Previously, the NOC was pushing itself to master every aspect of the industry, while bureaucracy slowed down its development. It was able to survive in the past with the hefty cushion of profit it was receiving. Now that the industry is more complex, its tenders have proven to be attractive investments for international players that are giving the parastatal the motivation to generate efficiencies and increase the productivity of operations through partnerships, new technology, and shared expertise.

The failure of the recent Doha talks to negotiate the freeze of overproduction among the leading oil producers of the world is another piece of the puzzle that is causing speculators to lengthen their estimate on the amount of time it will take for the oil prices to return to a profitable level. As Harvard Business Review points out, players fear that its traditional OPEC method of negotiating and bringing balance to the oil industry is no longer a reality as the new business model includes disruptors like shale oil and gas that are waiting to jump in and bridge any gaps. The latter explains Saudi Arabia’s refusal to freeze its production until all main producers decide to do so as well.

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Perhaps while a new balance of power enters the ever-changing oil market and international context and negotiations began to crystalize, companies can take advantage of the opportunity to create more intelligent strategies. In the business world, going all-in in terms of investment brings vulnerability. Diversification may be one of the best paths to follow in terms of reducing liabilities, particularly in consideration of the fact that non-renewable sources such as petroleum are not permanent.

 

Sources: Harvard Business Review, Nathan Hodson, Forbes, Bloomberg, BBC, and Al Arabiya.

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