Aramco IPO hints at changes for Gulf oil

The Saudi Aramco IPO will soon be completed with the shares sold locally and abroad to be the largest IPO in recent history. It is no surprise as the world’s major exchanges were in intense competition to list the shares. In the first five days of the offering, retail and institutional subscription levels attracted approximately $19.4 billion. The number of individual subscribers have so far reached 2.6 million, while institutional subscriptions made up 58.3 per cent.

Aramco being the largest oil company in the world, plus the fact that Saudi Arabia is the largest source of oil in addition to holding the second largest global reserves. Moreover, Aramco generates the largest proportion of profits compared to other global behemoths.

Despite some attempts to downplay the IPO, the finance and business community were well aware of how important the step was, especially as the company had assured investors of a 5 per cent fixed dividend of $75 billion in the first five years — a guarantee no company has ever offered to investors.

However, the fact the shares are being traded heralds fundamental changes to the Gulf’s oil industry, which will definitely lead to changes in the nature of this vital industry and for its developmental role.

Some of these strategic changes have to be discussed. By completing the IPO, the Gulf’s oil industry enters a new phase in which it will be restructured into joint ownership vehicles after seven decades of being fully owned by the state. It gives a chance for the private sector to finally invest in the oil production sector. This is an important shift, which was sought by the founder of Saudi Arabia, King Abdul Aziz, but failed at the time because the private sector was reluctant and had not recognised its importance. In addition, private sector investors lacked long-term investment awareness, which led to the granting of concession contracts to foreign companies and which later morphed into partnership contracts due to the lack of funds required by governments in the region.

Besides institutions, the private sector, any Saudi or Gulf national or any resident living in the Kingdom could now consider himself a shareholder once the shares are listed.

Balance sheet transparency

The other strategic shift is that the financial statements of the region’s oil companies will become transparent and publicly audited for the first time. This will enhance confidence in these companies and establish an unprecedented culture of governance. This in turn will deepen the trust between the owner, represented by the state, and the private sector. It will also lead to increased investment cooperation.

At the same time, the transparency will reflect on the performance of the company, with a qualitative shift from being solely run by the government to joint management with the private sector. This will reduce non-essential expenses, increase productivity and make the case for higher profits.

The funds raised from the IPO will be re-injected into the arteries of the local economy and help launch large projects in the non-oil sector, especially in vital domains such as technology, artificial intelligence and alternate energy.

This means we will see greater diversification and accelerated growth in the non-oil sector, thus preparing us for the post-oil era. It will create plenty of jobs, stimulate growth and restructure the local economy.

These can bring about a radical and structural transformation in Gulf economies.

■ Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.