Privatizing Aramco: Not as simple, ‘complex’ process
Transparency key part of going public
Saudi Arabia is in the process of privatizing its national oil company for it to become the biggest oil company worldwide in every sector, from upstream to downstream, by the end of 2018. This is part of the Saudi Arabia Vision for 2035 — to sell five percent of Saudi Aramco to the public and for being traded in the New York Exchange market. This is a very difficult task to accomplish in such a short time, with the intention of generating $2 trillion as a result of the sale of five percent of the total company shares.
Transparency is an essential part about going public and being accepted globally in order to generate the $2 trillion. There should be transparency in opening the oil company’s books, the crude oil reserves, production capacity and future long-term expansion plans. It must of course be audited by international firms, as Aramco has never published its annual financials broken down by profit and loss statement.
In this regard, none of the national oil companies do, except Kuwait’s national oil companies, which have been doing so on annual basis since 1975 and have been audited by international firms and including profit and loss results.
The doubts are still there in the financial markets regarding the fact that privatization of five percent of Saudi Aramco is a complex process and might take longer than 2018. The real value of the company will heavily weigh on the oil price at the time of the announcement or evaluation of assets, and what value they allot for one barrel of oil on that day as well as in comparison to the long forecast price range of oil.
Surely, higher the value of a barrel, the easier it will be to reach the target value of Saudi Aramco at $2 trillion, even though the markets are hugely doubting this figure.
The other elements that should be taken into consideration are the oil reserve of around 270 billion barrels and Saudi’s supply of 16 percent to the markets which should achieve its target figure. On the other hand, analysts are looking at the cost of production of one barrel of oil and the value of its core business after eliminating other non-core aspects such as hospitals, sports arenas and investing in local universities.
The tax structure must change too, as Aramco today is paying 85 percent of its profit to the government in the form of tax. Such arrangements must change.
Certainly, the task is not easy. The gap is big between $2 trillion and $400 billion, which some financial houses estimate to be the final price for privatizing five percent of Saudi Aramco “Jewel in the Crown”. However, with this, nothing will remain secret.