ISS Discusses Investor Considerations for Aramco Oil

When Saudi Arabia’s Crown Prince Mohammad Bin Salman announced plans to sell stakes in state-owned Saudi Arabian Oil Co. (Saudi Aramco) in 2016, he was also setting the stage for the biggest initial public offering (IPO) in history. On December 5, 2019 Saudi Aramco, the world’s largest oil company, confirmed the price of its shares at SAR 32 ainitiapiece, raising $25.6 billion before it appeared on the Saudi Stock Exchange (Tadawul) on December 11, 2019.

This investment opportunity enters the market at a time when investors are moving away from traditional energy stocks and focusing on investments with a reduced carbon footprint.


The origins of Saudi Aramco can be traced back to 1933 when the Saudi Arabian government granted a concession agreement to the Standard Oil Company, then owned by John Rockefeller. Vast oil reserves were discovered in 1938 at the Damman No. 7 well. By 1958 the company reached the annual production mark of one million barrels. Saudi Aramco’s production levels have continued to rise over time. In 2018 production levels reached 4.2 billion barrels of oil while gas production amounted to 620 million barrels of oil equivalent.

Saudi Aramco’s rapid expansion of oil production also contributed significantly to the emission of two greenhouse gases: carbon dioxide (CO2) and methane (CH4). While production only began in 1938, the company was identified in a 2013 academic study as the world’s third largest CO2 and CH4 emitter from 1751 to 2010, contributing 3.17 percent to global emissions. In October 2019, additional research placed Saudi Aramco as the number one worldwide carbon emitter with 4.38 percent of global emissions since 1965, the year when the environmental impact of fossil fuels became common knowledge among environmental advocates and public officials.

Production and Reserves

As an oil producer, Saudi Aramco’s business model relies upon continued production of its fossil fuel resources. The International Energy Agency (IEA) ranks Saudi Arabia second in global crude oil production, accounting for approximately 12.8 percent of the international total, second to the United States which produced 14.9 percent of global crude oil in 2018. However, in contrast to the U.S. where several energy companies operate, Saudi Arabia’s oil production stems from one source: Saudi Aramco. The following graph shows the total amount of oil and gas production in millions of barrels of oil equivalent during 2018.

Source: ISS ESG

While the company’s production rates are considerable, its total proven reserves are unrivalled among listed oil and gas producers, surpassing giants such as Exxon Mobil Corp., Chevron Corp., BP Plc, Royal Dutch Shell Plc, Total SA and Rosneft Oil Co. The prospective climate impact of a fossil fuel company’s hydrocarbon reserves is best understood as potential greenhouse gas emissions that would be released in gigatons of CO2 (GtCO2) if such reserves realize their potential.

The International Civil Aviation Organization, a United Nations agency, cited that international and domestic aviation represented 0.92 GtCO2 or 2.4 percent of world fossil fuel emissions in 2018, the equivalent of Germany (the world’s 6th largest emitter) and the Netherlands (36th) combined. By contrast, Saudi Aramco’s reported reserves equate to potential greenhouse gas emissions of 101.54GtCO2, representing over 100 times that amount.

Source: ISS ESG

Although Saudi Aramco’s vast reserves suggest that it can produce large quantities of fuel for years to come, the looming threat of climate change, the global momentum towards climate regulation and calls for action to reduce carbon emissions suggest that selling oil and gas will become increasingly challenging. With the Paris Agreement coming into force in 2016, the international community is committed to reducing global greenhouse gas emissions while decoupling economic growth from greenhouse gas emissions. If the goal of limiting the global temperature rise to within 2°C is to become a reality, then the majority of global fossil fuel reserves will need to remain unburnt. Mindful of this economic risk, a growing number of investors are viewing hydrocarbon reserves as increasingly stranded assets.

Impact on Carbon Metrics

The high production volumes and company reserves imply that Saudi Aramco, if included in equity or fixed income portfolios, will have adverse effects on climate metrics used by investors. By way of comparison, the total amount of fossil fuel reserves (oil and gas) held by each company and translated into GtCO2 of future potential emissions provides an understanding of the prospective impact on climate change, exposure to climate regulation and ultimately to the carbonization of an investment portfolio.

The Task Force on Climate-related Financial Disclosures (TCFD) use a metric called the Weighted Average Carbon Intensity (WACI), which can be understood as portfolio-level carbon intensity per million revenue based on the weight of individual companies in the portfolio (tons CO2e/$M revenue). The chart below is based upon a hypothetical investment of $1 million in eight carbon majors and one ETF and the associated impact of each company to the overall WACI metric for a one percent share within the portfolio.

Source: ISS ESG

In comparison with its peers Saudi Aramco stands to contribute a disproportionately high carbonization component to the portfolio. Gazprom, unlike the other energy companies, owns utilities that account for 40 percent of its emissions, but only between 6 and 7 percent of its revenue. A portfolio comprising only global equity ETF (100 percent investment in ETF) would have a WACI metric amounting to 211 tCO2/$M (the above graph shows a value of 2.11 for one percent of investment into Equity ETF), whereas a portfolio composed of 100 percent investment in Saudi Aramco would amount to 732 tCO2/$M, or more than threefold equity ETF. Saudi Aramco’s WACI metric is almost double that of its U.S. peers, Chevron (396 tCO2/$M) and Exxon Mobil (378tCO2/$M), amounting to a higher carbon contribution to an investor’s portfolio.


Given its vast unexploited oil and gas reserves, Saudi Aramco is dependent on a continued fossil fuel-driven economy to realize its financial potential. Besides minor activities such as conducting research into more efficient engines, Saudi Aramco is making little effort to limit its climate impact. As a state-controlled company, with only 1.5 percent to be sold upon commencement of trade, Saudi Arabia’s actions on climate change can be interpreted as serving both national and Saudi Aramco’s interests. In addition, as the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia continues to promote the use of fossil fuels. In 2019 OPEC reportedly identified climate activists as its biggest threat.

Saudi Arabia played a significant role in obstructing international climate mitigation efforts since the first United Nations (U.N.) backed Intergovernmental Panel on Climate Change (IPCC) Assessment Report appeared in 1990. It also consistently blocked proposals to change the U.N. climate-related voting procedure from consensus to a majority-based method. Consensus is not the standard across U.N. bodies and effectively gives veto power to every participant.

During the Copenhagen talks on climate in 2009, Saudi officials reportedly expressed about the link between human activity and climate change. More recently, the media reported that during the December 2018 Katowice climate meeting, Saudi Arabia, along with Russia, Kuwait and the U.S. objected to wording “welcoming” a 2018 IPCC report on the impacts of a temperature rise of 1.5°C, effectively undermining its conclusions and hampering subsequent steps.

For multiple reasons the Saudi Aramco IPO is viewed with some trepidation on the market. It is a company that is tied closely with a state that has a poor human rights record. Saudi officials are accused of being responsible for the killing of Jamal Khashoggi, a journalist and U.S. resident, the continued bombing of Yemen, the imprisoning of political dissidents and institutionalized discrimination against women and religious minorities, notably the Shia.

Press freedoms are limited in Saudi Arabia, and Saudi Aramco’s own ESG disclosures provide limited information, thereby hindering an understanding of the company’s management of human rights and discrimination risks in the kingdom. The company does not seem to have any policies in place to protect human rights or to communicate adequately with communities affected by its activities. Owing to these risks and its opaque disclosures, ISS ESG has assigned a D (poor) grade to Saudi Aramco.

By privatizing a portion of Saudi Aramco, Saudi Arabia is, even if marginally, reducing its exposure to a carbon-based economy. However, it is also transferring it to an investment market that is increasingly averse to climate risks, one that is seeking instead to decarbonize investment portfolios. As a result, the success of Saudi Aramco’s IPO is not a certainty.

This post comes to us from Institutional Shareholder Services. It is based on the firm’s memorandum, “Investor Considerations for Aramco Oil,” dated December 11, 2019, and available here.