Saudi Arabia’s Aramco IPO remains a pipeline dream
With staggering proceeds, country planned to finance sweeping social, economic reform
A promising nation-building project in the Middle East has come to a standstill.
For the past two-and-a-half years, Saudi Arabia has been poised to partially privatize the Saudi Arabian Oil Co., or Aramco, the world’s biggest oil production company.
As the largest oil exporter in the world, Aramco is the means by which Saudi Arabia has de facto control over the world oil price. Aramco was Saudi Arabia’s device in waging a ruinous price war against U.S. shale-oil producers, causing the world oil price to collapse, and driving foreign investment out of the Alberta oilpatch.
A more transparent Aramco would help Athabasca and other world producers to more accurately calculate anticipated rates and return on their costly long-term investments. For now, the Saudi oil industry is opaque. For competitive and national-security reasons, Saudi Arabia provides only the sketchiest data on the true extent of its massive reserves, rivalled only by those of Athabasca and Venezuela.
Aramco’s impact on the market would be easier to assess if it were publicly traded. In the largest initial public offering in history, Aramco was to become a publicly listed company with total stock-market value of $2 trillion (U.S.). With the staggering $100-billion proceeds from selling just 5 per cent of Aramco to investors, Saudi Arabia planned to finance sweeping social and economic reforms.
Those reforms would diversify the kingdom’s economy away from hydrocarbons ahead of widespread global adoption of alternative energy sources. It would narrow one of the world’s widest gaps between rich and poor. And it would transform Riyadh, the Saudi capital, into a regional financial powerhouse . The privatization of my. Aramco was expected to pave the way for still more privatizations of Saudi state assets, further increasing the stupendous funds available to upgrade hospital, highways, schools and other social and physical infrastructure. Finally, privatizing Aramco was expected to promote the emergence of an “ownership society” in Saudi Arabia. Everyday Saudis would reap dividends from Aramco through widespread ownership of its shares. Few international investors now believe Saudi officials who say an Aramco IPO to have taken place last year is still planned for 2019. Several factors have conspired against a planned transformation of Saudi Arabia into a modern, dynamic-econo--More on those factors later.
To be sure, there were skeptics from the beginning, when future Saudi Crown Prince Mohammed bin Salman, known as MBS, first hinted in January 2016 that Aramco would be privatized.
Elevated last year to crown prince and heir apparent to his father, King Salman, MBS then outlined his proposed reinvention of the kingdom as an economy based on high-tech and service industries rather than oil. He packaged the reforms as “Vision 2030.”
That scheme calls for Saudi Arabia to achieve world leadership in a wide range of manufacturing industries and 21stcentury technologies.
But it’s a sobering fact that never in history has an economy dependent on oil revenues ever managed to shed its reliance on crude. Neither have such countries succeeded in sharing the oil wealth among the general population. Together, those two phenomena have been long known as the “oil curse.”
To be sure, oil-producing countries including Canada, the U.S., Norway and Britain have spread their oil wealth, but none have been reliant on hydrocarbons the way Saudi Arabia and most other members of the Organization of Petroleum Exporting Countries (OPEC) are. Norway, for instance, looks to its North Sea oil endowment for about 20 per cent of GDP. By contrast, oil and gas production accounts for more than 50 per cent of Saudi GDP.
And the Saudi kingdom has made previous stabs at diversification and social modernization, with disappointing results.
MBS, 32, would seem to be an ideal candidate to transform his country. So zealously has MBS promoted his vision of a new Saudi Arabia, to appreciative audiences of leading investors, industrialists and politicians in the U.S. and Europe, that until recently it seemed likely, as U.S. Commerce Secretary Wilbur Ross said, that Vision 2030 was “very very likely to succeed.”
The benefits from MBS’s ambitious plans for Saudi Arabia and foreign investors eager to profit from a modernized Saudi economy were too alluring to be dismissed.
The privatization of Aramco was expected to be followed by another estimated $200 billion in proceeds from the sale of other Saudi state assets, in telecommunications, housing and water utilities.
Those funds would subsidize the creation of high-tech incubators, data-processing centres, advanced manufacturing operations, and refineries that would process crude into high-margin petrochemicals, ending Saudi Arabia’s status as an exporter of low-priced, unprocessed crude feedstock.
But a distracted MBS has lately shown a lack of conviction about his transformation- al plans.
Global investors were unsettled by MBS’s dragnet last November, in which he arrested internationally prominent Saudi businessmen. What MBS claims is a campaign against Saudi corruption looks to outside potential investors like a destabilizing power grab that could recur.
Also disturbing is Mohammed bin Salman as an agent of regional destabilization. MBS has intensified Saudi Arabia’s feckless war in Yemen. He has also spearheaded the multi-country ostracization of Qatar for hosting the Arab news service Al Jazeera, deemed insufficiently orthodox in its content.
Those are not the actions of a man who earlier presented himself as a democratizing and secularizing force in the Middle East.
Meanwhile, MBS advisers at Aramco and the Saudi energy and finance ministries have warned the crown prince that a publicly traded Aramco would face unwelcome regulatory scrutiny for the first time in its 74-year history. They also fear that an MBS-planned listing for Aramco in the U.S. would invite shareholder lawsuits.
Finally, certain financial realities have kicked in. The $2-trillion valuation MBS insists on for Aramco isn’t readily justified by business fundamentals.
Underpinning that steep valuation is a current world oil price in the $70 range. But that price is inflated by supply disruptions in Iran, Venezuela, Libya and Athabasca. Just over two years ago, the notoriously volatile oil price plunged to a modern nadir of only $27.
Aramco may account for 10.5 per cent of global oil production. But is the company really worth more than three times Exxon Mobil Corp. and Royal Dutch Shell PLC, the world’s largest publicly listed oil companies, with a combined market value of $665 billion? MBS has been humbled early in his tenure as crown prince, learning how difficult change is even in a centrally planned economy such as Saudi Arabia.
His best hope is the model of China’s economic renaissance, an overnight success story that is actually about 40 years in the making.