Aramco IPO: Really?
There is no model out there for a theocratic, absolute monarchy petro state with more than two thirds its population under the age of 30 serenely transitioning to a pluralist, open, market- based diversified economy, and it is doubtful this will happen anytime soon for Saudi Arabia. As reform progresses in the Kingdom, an IPO of its national oil company might be the least of our concerns.
The business media last week was in a tizzy over the news that Saudi Arabia was considering an IPO for Saudi Aramco, the country’s national oil company. First, the facts behind this ‘ announcement’: Deputy Crown Prince Muhammad bin Salman, in a wide- ranging and candid interview with The Economist was asked ,“Can you imagine selling shares in Saudi Aramco?”
The Prince replied, “This is something that is being reviewed, and we believe a decision will be made over the next few months. Personally I’m enthusiastic about this step. I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco ”. Two days later ( significantly on Friday, a holiday), Aramco put out a Statement “confirm( ing) that it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the Company’s shares and/or the listing of a bundle of its downstream subsidiaries”.
Thus Aramco management simply signalled that it was aligned with what the ‘ chairman of the board’ had stated ( Muhammad bin Salman chairs the Supreme Council responsible for economic matters including now Saudi Aramco) and supports economic reforms, including privatization and deregulation of markets. Above all, Aramco clarified that an IPO could be “shares in Aramco and/or some downstream assets”. In 2008 the company did an IPO for 25 per cent of a petrochemical project, Petro Rabigh, and 30 per cent of Aramco’s share of the new Sadara Chemical Company, jointly owned with DOW Chemicals, is due for an IPO this year. Perhaps the prince also had in mind SATORP, the massive joint refinery project with TOTAL at Jubail on the Gulf. So, from Aramco’s perspective, this is business as usual.
However, from the direct question, perhaps pre- arranged, we get such headlines as “Aramco could be worth ten trillion dollars” and speculation as to which investment banks would be most favoured to manage the I PO. The investment bankers have had slim picking sin oil and gas M& A while the market waits for the oil price to bottom out. Like vultures watching a shrinking watering hole in the Serengeti, the dust cloud on the horizon rising from the feet of the largest beast on the plain, surely got their juices running.
But Aramco i s no desperate, emaciated beast nor is its owner. Saudi Arabia has one of the lowest debt- t o- GDP ratios, and despite projecting a $ 98 billion deficit f or 2016, has more than $ 500 billion in reserves and could raise funds with its enviable c r edit r ati ng. The i dea of an IPO might be l ess about finances than it is about policy. The increased transparency that would come with public listing would be a marked reversal of Saudi policy. The Riyadh exchange, the Tadawul, may not require the same transparency as say London or New York with respect to reserves, a closely- guarded secret in Saudi Arabia. Also, if shares were purchased by foreigners, now permitted on the Tadawul, the principle of maximizing for Saudis the value of their crude would be undermined. However, liquidity on the Tadawul is very thin; just 1 per cent of the putative market value of Aramco would constitute nearly 20 per cent of the Tadawul’s current total market cap. So, was this merely an important prince musing about his version of Reagan/ Thatcher reforms for the country, or is there more to this?
Change comes slowly in this very conservative country. The new regime under King Salman is actively instituting long overdue reforms and Salman has been given broad powers. After nearly doubling gasoline prices recently ( still below cost at US$ 0.21/ litre), reductions in subsidies for water, electricity and other services, sales taxes and increases in sin taxes ( tobacco and sugary drinks), he might be telling the Saudi people that while they will pay more for fuel, they will have greater opportunities to invest in its production. This is a populist gesture to counter criticism that the common folk are being asked to pay more for services while the cosseted royal family continues to appropriate vast amounts of the country’s wealth. However, with the royals holding the lion’s share of the country’s wealth, will they merely become the oligarchs in a partial privatization of the country’s oil?
THE INCREASED TRANSPARENCY THAT WOULD COME WITH PUBLIC LISTING
WOULD BE A MARKED REVERSAL OF SAUDI POLICY.