Saudi Arabia: Shia Political Unrest and Oil
Bonds’ Risk
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| Ref. No. 13-53-21. Ian Britton. FreeFoto.com |
Saudi Arabia’s state-owned
oil company Aramco may lead Gulf in bond sales in the second and third quarters
of 2012[1].
Their two biggest oil fields (Shaybah and Ghawar) are situated in the eastern
region of the Peninsula, where Shia-minority-based political unrest would
potentially erupt. Specific attacks on refineries and oilfields, or a general
uprising in the region against the Al-Saud rule, are among possible events and
they would create political risk impacting on expectations on Aramco’s bonds’
value.
Our CALL is that this is not a real risk because Riyadh and its
security apparatus have the ability to crash any attempt of revolt.
Furthermore, any noise -potentially
wrongly interpreted by the market as a bad signal-
will create opportunities in terms of dropping prices of those highly valuable
bonds.
DEFINING THE
RISK: SHIA MOMENTUM
After
the Arab Spring has shaken some of the most stable regimes in the Middle East
in 2010-2011, some analyst point out as Saudi Arabia as the potential next
domino piece to fall. They claim that would this happen, it would all start by
protests and uprisings by the Shia marginalized minority in the east. This,
according to their view, would follow the same pattern as the one in place in
Bahrain[2].
The
Shia minority represents between 10% and 15% of Saudi’s population, and around
3.5 million people mostly concentrated in the eastern region close to the Gulf
where they might be a majority. Traditionally, the ruling Sunni-Wahhabi population
that monopolizes power and wealth has marginalized this group politically,
socially and economically. Restrictions and persecutions have not been
uncommon, and divisions in those sectarian lines have alienated Shia population
to the extent that they are currently the major criticizers of Al-Saud family.
From
February 2011, when Shia protesters started rallying on Bahrain against the
Sunni Al-Khalifa ruling, Saudi Arabia faced the fear that the situation could
spill over into its territory. And from that point on, some massive protests
broke out in its eastern region, forcing the Saudi security apparatus to
intervene. Some Shiites have been killed in clashes with the police, and this
has fueled up the tensions.
Then,
there are some political risks linked with this Shia unrest. The major one is
that the whole region would violently upraise against the Government (as we saw
in Homs in Syria and Misrata in Libya). This would mean that Aramco could loose
the physical control of their major oilfields in the region, oil production
would drop, and the company would loose millions. A second risk also connected
with Shia political tension is that protesters might sporadically attack Aramco
facilities in the region. It would a way of both harming Riyadh’s government by
attacking its wealthiest company as well as the perfect tactic to get
international attention to their cause. Protesters and insurgents in Damascus
and Tripoli carried very similar actions in their revolts last year, attacking
critical oil infrastructures.
SAUDI
GOVERNMENT RESPONSE TO THIS RISK
However,
we acknowledge that the Saudi government has all the necessary means to crush
down any kind of such a protest or unrest in its territory. Riyadh’s tremendous
security apparatus, combined with its intelligence agency (mukhabarat), is more than capable of dealing with the
situation in a quick way while protecting Aramco’s economic interests in the
region. If escalation on violence continuous, Riyadh can even send its military
personal to the region as well as increase controls in Bahrain-Saudi Arabia
borders.
It
is crucial to understand that what it is at stake for Saudi’s royal family is
its own survival as ruling entity. The have never allowed any kind of protest
against their monopoly of power because they understand this would ultimately
jeopardize its political position and wealth. Thus, the Shia unrest is not only
a question of oilfield’s interests, but also their personal interest to
survive. Consequently, we PREDICT
they will take all necessary measures to preserve stability and they will crush
down the protesters and revolutionaries. The asymmetry of the military capacity
of the parts makes us be sure Riyadh will succeed in their struggle against
demonstrators.
IMPLICATION FOR
THE MARKETS OF BONDS
This
situation will create some noise in
the next two quarters, and it might create some reluctance and doubts over Aramco
bonds’. Concretely, if at any given point violence in the region makes the
international papers (we can predict specific weeks when tensions might be
especially intense and bloody) investors would start feel anxious and
uncertain, and prices of those bonds could drop. Violent/terrorist attacks
against Aramco facilities in this context would have the same impact.
However,
if we understand those noises are not
actual signals of the potential risk
of those bonds, some opportunities will open for investors. In the mid-term,
situation will be stable again –after the crash down of the demonstrators- and
Aramco will face no problems in the region. Thus, at some point events might generate
some drops in the value of the bonds and a financial opportunity will
appear.
IF WE GET OUR
CALL RIGHT…
There
are not necessary predecessors to our call, and the best signpost that we are correct is that nothing happens. This would be
manifested in:
Ø No information about
sporadic killings in the Shia eastern regions.
Ø
No
postponement of Aramco’s bond emission.
Ø
No
political statements from Riyadh or any other Arab capital on the situation of
Shias in Saudi Arabia
IF WE GET OUR
CALL WRONG…
There are some triggers that would indicate our call is
not accurate:
Ø Bahrain unrest increases. If the Shia-minority in
the neighboring Kingdom successes in increasing its pressure on the Sunni
Al-Khalifa family (and potentially forced them to step down or substantially
reform the political system), the probability of a spill-over into Saudi Arabia
would grow.
Ø
War
against Iran breaks out.
If either Israel or the US finally decides to attack Tehran, it will have huge
implications on any aspect of Saudi politics and economics –Riyadh may actually
be forced into the conflict and would see its territory attacked-.
Ø
Aramco
starts increasing its operations in alternative parts of the Peninsula. Due to the lack of
uncensored information, a sudden announcement of Aramco on reestablishing its
operations or increasing them in oilfields in western provinces –which were
dismissed in favor of more valuable ones in the east - might be a good
indicator that the situation in the Shia region is worsening.
[1] “Saudi Aramco May Lead Gulf in Bond Sales Next Year” –Bloomberg, at
http://www.bloomberg.com/news/ 2011-10-26/saudi-aramco-may-lead-gulf-in-bond-sales-next-year-arab-credit.html
[2] For
instance, a good example of those views is “Saudi
Arabia’s Counter Revolution” –Marc Lynch, Foreign Policy, at
http://lynch.foreignpolicy.com/posts/2011/08/10/saudi_arabias_counter_revolution
