The oil Big Bang

During Italian Prime Minister Matteo Renzi’s latest business trip to Riyadh, Saudi officials offered him a “small” gift: a Rolex. That was in November, and soon there will be a great financial feast in the capital of the Wahhabi kingdom. A feast of petrodollars.

Now the deputy crown prince who holds the scepter of command, Mohammad bin Salman al Saud, faces a $90 billion hole in the budget after the fall in the price of crude oil — which went from $100 to the current $34 a barrel in less than a year, the lowest in 12 years. The austerity measures necessary to contain the deficit threatened to weaken the kingdom on the domestic front. So two days ago, he decided to put at stake, that is for sale, part of Aramco, the oil company controlled by the state that holds the second-largest oil field in the world and is already the world’s largest exporter of crude oil.

Stuff to make the top two public giants — the American Exxon Mobil and Russia’s Rosneft — blanch, because what matters is the evaluation of the reserves. Aramco alone has an estimated 267 billion barrels in reserves, equivalent to one quarter of world reserves — enough for at least another century — with an extraction capacity of 12.5 million barrels a day, which can even be increased.

The terms for the landing of this oil goliath on the international stock market are still being studied — as the leaders of the group were quick to point out Friday — but the simple announcement of this gigantic privatization deal is considered by the news agency Bloomberg as “the Big Bang of Saudi Arabia” and deserves to be put on the calendar.

It will be a matter of months, from what we understand from an interview the Saudi prince gave to The Economist. According to economic analysts, Aramco could rival Apple as the largest listed company in the world. A true earthquake of the indexes.

It goes without saying that this will unhinge first the current system of fossil fuel prices and, in particular, it may be the final blow to OPEC.

According to Bob McNally, White House adviser on oil markets: “Saudi Arabia is preparing to ride the oil price roller coaster, not to control it.”

McNally describes this step as “momentous,” perhaps fraught with the heaviest economic consequences since 1970, when the Saudi kingdom nationalized its resources, causing a swell in the most energy-intensive economies, starting with Britain’s. Now, the most relevant effects are expected on China’s economy, which is still the largest importer of oil and the first buyer of the Saudis. But that locomotive that has already slowed global growth.

The rumors at The Economist seem to indicate that the initial offer would cover 5 percent of the company’s stock, but the sales operation could then continue with more substantial divestitures, including the subsidiaries of the group. But the state would always keep ownership of the controlling interest.

The first actors to be involved will be, of course, the partners and strategic investors of Saudi Arabia: primarily the United States, Riyadh’s top supplier of everything from machinery and plant designs.

Italy is prey

Historically, Rome has been the main European importer of oil from Iran, and even in the years of the embargo, it maintained this leadership with reduced trade volumes, since oil products had to be excluded.

In 2014 in particular, the exchange with Italy restarted strong: a 221-percent boost imports and 9.5-percent growth (€1 billion and €100 million in value) in exports from Italy. These especially include machinery and technology that Iran desperately needs to modernize its wells and its infrastructure and increase oil production up to 5.7 million barrels a day in five years. Iran’s economy, like Saudi Arabia’s also seeks to diversify production in an effort to reduce their 80 percent dependence on the extractive industry.

With the end of the sanctions on oil exports expected on Jan. 16 under the agreement on nuclear non-proliferation signed on July 14, it is clear that Tehran looks in particular to the U.S. and Europe, in addition to China, with which it has always continued to trade. And Italy, as underlined by the Iranian president Hassan Rohani in his recent visit to Rome, is considered the ‘gateway to Europe.’

Saudi Arabia, where the Italian oil giant ENI is securely established and its subsidiary Saipem has just won yet another €600 million contract with Aramco, is likely to go sideways.