When oil was discovered on the Arabian Peninsula in 1932, one could not imagined that the arid wind-swept desert populated sparsely by nomadic tribes would explode into skyscraper-adorned cities housing hundreds of millions of people spread over a dozen countries. The discovery also spawned fighting (in addition to conflict over religion), resulting in five major wars that often fielded the largest armies used in the latter half of the 20th century. That this outcome was not envisioned by Standard Oil of California (later re-branded as Chevron) would be a vast understatement, whom only saw the incredible profits one could earn from easily accessible oil, even if it was on the opposite side of the globe.
At first, Chevron’s partnership with the tribes went smoothly. Chevron paid a handsome fee for drilling concessions, and the company in return got to keep all of its operating profits. After WWII, when oil field discoveries and operating profits exploded, the tribes rejected the concession model and demanded 50% of all profits. By this time Standard Oil of New Jersey and Socony Vacuum (later merged and re-branded as ExxonMobil) and the Texas Oil Company (later re-branded as Texaco and eventually absorbed by Chevron) had partnered with Chevron to spread the exploration risk. The partners grumbled about the profit grab, but inevitably gave in.
By 1973, even half the profits were not enough for the assorted kings, sheiks, and dictators that had risen to the top of the tribal pecking order, creating countries and jockeying for territory. Following military defeats by Israel, itself a relatively new country on the peninsula, the Arab partners began to nationalize the operations of the foreign partners, fulling assuming control within several years. With minor exceptions, this has been the state of affairs for the last four decades.
Now the Kingdom of Saudi Arabia wants to sell 5% of the old partnership (now branded as Saudi Aramco) back to the U.S. partners, or frankly anyone else who would be willing to pay the Saudi government $100 billion for the stake. Initially slated for a 2018 sale, the Saudis have delayed the auction until 2019 in the hopes that the price of oil will move closer to $100 per barrel rather than the upper forties it sells for now.
Is 5% of Saudi Aramco worth $100 billion? Probably not. While one could make a discounted cash flow argument that analyzes the oil output of the company over the next five to ten years, no financial model can account for the expropriation (government nationalization) risk. In the end, if governments do not observe reasonable laws regulating commerce and financial ownership, assets in those countries are worth zero. Throw into the mix the volatility of religious zeal and widespread poverty (in spite of the oil wealth), it is hard to imagine any price that makes sense for investors.
Then again the 21st century has brought us billions of dollars being traded over worthless cryptocurrencies. Compared to the cyber and legal risk in investing in intangible electronic commodities, expropriation risk may not seem like such a bad thing.