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Rabbit and Tortoise - Barış Sanlı

For some time, Saudi Aramco was on the headlines. Now Aramco is the most valuable company in the World. After years of digital companies’ reign, energy companies are still struggling to stay at the top. However, there is a hitch.

Probably at the top of the valuable list, there are two sorts of companies: the activity mediators and activity enablers. Mediators are like digital companies, and enablers are like energy, automobile companies. The value produced by mediators looks enormous. But as the creative destruction is faster on the bit level than atomic level, mediators and their rankings are subject to a lot of change. The enablers are more into fundamental activities, and despite value deflations, they persist for a longer time horizon like the rabbit and tortoise. Therefore enablers happen to be more successful in the long term transition. You may think about Nokia and Shell.

The first problem with energy companies was low oil prices. The expectation of lower oil prices for a more extended period due to shale oil also added insult to the injury. These events are pushing the fossil fuel companies to be more competitive, more efficient, more relevant. The high oil price era was a golden age for producers where everyone and every business decision was deemed successful. Like all good things, this era has ended for now. It will come back, but until then, the urge for transformation is upon them. The early signs are here with write-downs and IPOs.

Chevron announced this week that the expected write-downs for some of its costly assets. It was expected from a climate change viewpoint. But Chevron’s depreciation was due to low oil prices and fossil fuel gluts. The stranded asset discussion was fundamentally centered on the fossil fuel and infrastructure that will not be utilized or produced due to climate change policies to limit emissions. But the real stranded asset discussion hit the headlines due to lower oil prices.

At this point, we have to pause and think about the energy transformation that is said to be happening. On the one side, there is the climate emergency, COPs, Green Deals, but rising emissions. On the other hand, we see an increasingly challenging environment for fossil fuel producers due to low oil prices. For now, the latter pressure is more significant than the former to change the way energy is utilized.

Compared to the past, this is alarming. While renewable energy companies are not transforming but trying to fix their returns with long-duration contracts, the oil companies are trying all sorts of ways to stay profitable. They face a more real and destructive force than climate change: low oil prices.

One person who worked on the IPO for nearly four years talked to a news agency claiming “the royal palace panicked thinking oil prices were about to crash.” The low oil prices whipped a national oil company to rush to an IPO. Whether it is trade wars or shale oil, the pressure on the national oil companies is quite high. Therefore Aramco IPO and its aftermath will be vital for OPEC countries.

Aramco IPO has the potential to be very transformative for national oil companies. Despite all the pressure from New York and London bankers, the company achieved a $2 trillion valuation. It may be due to the Saudi strategy to increase demand for Aramco shares. But behind this IPO, there was the logic to transform the Saudi economy. It is the dream of all middle eastern oil producers. A small step in this direction will open the doors for other oil producers.

Looking into the future, the tortoise always looks like the loser, but due to its urge to transform still has a chance. Despite not having the charm of a rabbit, it is working more meticulously on the new ways to survive. These new methods will be contagious to other similar companies. Think about what will happen with lower natural gas prices for a longer time...


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