Aramco IPO - too late? Or great future potential?

Last December's Aramco IPO seems like it has come about a decade too late. Given the limited carbon budget we have remaining to not completely blow past any reasonable and survivable temperature increases, Aramco's reserves appear largely worthless.

It seems that a continuity bias leads investors to assume that there may be still enough time to capitalize on the company's reserves by getting them out of the ground and selling them on the open market. However there are considerable headwinds, some of which could also represent opportunities for Aramco should it develop the ability to think "outside the box" to use the well worn platitude.

Carbon pricing schemes are likely to come into force in major markets such as as Europe. Subsidies for the fossil fuel industries will increasingly come under pressure as voters and the alternative energy lobby demand their reallocation, pension funds are beginning to divest their fossil fuel based assets and insurance providers and banks are growing more reluctant to underwrite and fund new production sites.

However, all this may in fact not be the biggest challenge for resource rich oil companies like Aramco. The real challenge is likely to come from alternative fuels. Bio fuels are probably their weakest competitor, well established and with well documented problems and relatively high production cost.

Synthetic fuels and synthetic or green ammonia however, while not yet on the general public's radar, are likely to become the undoing of Aramco and its peers. Unless they themselves chose to become major players in this field.

Two industries are likely to drive the change, aviation and marine transportation. Both are major emitters, essential to our global economic system and are facing increasing scrutiny regarding their climate impact.

Against this backdrop the recent progress in direct from air carbon capture has received a lot of interest. Two companies, Climeworks and Carbon Engineering have industrial processes available ready for scale out. While politicians and journalists often still see direct carbon capture as a means to prolong the fossil fuel age, or a means for undoing past sins, their real value lies in providing an important raw material for synthetic fuels - cheaply.

Because, once you have cheap CO2 and cheap electricity, you can derive cheap hydrogen from water, and combine it with the CO2 to custom engineer any hydro carbon you'd like.

Ammonia on the other hand is even easier to make, nitrogen is the main constituent of our atmosphere and can thus much more easily and inexpensively filtered from the surrounding air. Again, add hydrogen from water, electric or heat energy and you are done.

Either process has ultimately one main driver for the cost of the resultant fuel, the cost of its input energy. With solar electricity prices in particular soon approaching 1c per kWh for silicone based cells and like to fall further by at least another order of magnitude once perovskite based, reel to reel printed, cells become available, these synthetic fuels will first become price competitive, then cheaper than their fossil based counter parts.

Essentially while current fossil hydrocarbons follow a resource economy, synthetic hydrocarbons will follow a manufacturing economy.

Since cheap solar electricity is the key to clean aviation and marine shipping, there is also a massive opportunity for Aramco. Saudi Arabia does not only sit on vast oil deposits, it also has an incredible abundance of sunshine, open space, and capital. As do several other oil rich nations that are currently waking up to the threats to their economies by the impeding decarbonization of our civilization. It won't bring back the hay days of the fossil fuel boom of the past, but it does represent a viable path forward to cushion these societies from the epochal changes in our economic structures.

I leave the discussion of the potential impact of synthetic fuels on personal transportation and associated policy considerations for different blog post.

But a synthetic fuel giant like Aramco could actually be essential for enhancing global economic growth through more affordable aviation and marine transportation, with a stable fuel cost basis. The latter being a side effect of the transition to a manufacturing based fuel production system as opposed to a resource extraction based one.

So if investors and management can't quite yet see the way forward to a synthetic fuel producer, then policy makers will have to step in an step up. Restructuring fuel taxes and carbon levies to strongly favor synthetic over fossil based fuels would be an important first step at the international level. Joint research or technology transfer for building synthetic fuel processing facilities at the local level, potentially in co-ordination with Saudi Arabia's agenda 2030 would be another important step. Lastly, particularly for maritime shipping, a global common regulatory framework to enable ammonia based vessel propulsion is also needed.

Thus there is still a lot of work to be done by all stake holders. However, all these obstacles are largely administrative rather than technological ones and thus could be over come. For now it remains an interesting space to watch, but one with a growing sense of urgency as this next decade represents more or less our last chance to turn a potential catastrophe into a giant new opportunity. After all, an economic system no longer constrained by resource economics on the energy front, could be a rather exiting thing, and bring about a more profound change (hopefully for the better) to the human condition than any of the industrial revolution(s) of the past.