Saudi Arabia

2012-03-17T22:27:00.001-04:00

Saudi Arabia: Shia Political Unrest and Oil Bonds’ Risk

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

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