By Mariana Somensi
Saudi Arabia has set up plans to sell Aramco’s shares by most likely the second half of 2018. The state-owned oil company, the world’s top exporter of crude oil and natural gas liquids, will be publicly listed both in Saudi Arabia and abroad, and its initial public offering (IPO) is expected to be the biggest one ever recorded.
The income will be directed to Saudi Arabia’s move to diversify the economy and end the almost total dependence of the Gulf country on the oil industry. As stated by the Saudi Prince Mohammed bin Salman to Bloomberg, the IPO “will technically make investments the source of Saudi government revenue, not oil.”
According to the Saudi government, the oil giant might be worth more than $2 trillion. The share sale, which may tender about 5% of the firm’s assets, is projected by the kingdom to bring approximately $100 billion of revenue.
Bringing the Books to Light
Since Aramco’s listing was announced, it has stirred up investors. The Saudi decision of selling off its shares was a boom given the fact that the kingdom holds as much as one-fifth of the global petroleum reserves and pumps more crude oil than the top four listed oil companies combined.
Aramco’s production alone, which reaches around 10 million barrels a day, is nearly enough to cover China’s daily consumption completely. Furthermore, the Saudi firm is believed to have around 265 billion barrels of crude, enough to meet the whole world’s demand for eight years.
However, although the IPO represents an exciting opportunity to have a small share of the world’s most valuable company, the lack of transparency has caused mixed reactions in the market, as the kingdom keeps information on its oil fields as a state secret. Additionally, the small number of Saudi stocks publicly traded creates an uncertain ground on which investors may think twice before walking.
To engage with the global market and to attract the private sector’s investment, Saudi Aramco may wish to let the curtains fall. Carnegie Middle East Center’s Non-Resident Scholar, Carole Nakhle, stated to Forbes that “when selling in public tender, Aramco will have to publish its books.”
In addition to the improvements in transparency, listing Saudi Aramco will also drive the Gulf country to change its economic decisions as a member of the Organization of Petroleum Exporter Countries (OPEC).
Although the firm intends to tender only 5% of its shares, which is not enough to transform a company’s standard completely, the private investment is likely to set up its interests on the Saudi oil strategies, which could conflict with those of the OPEC’s agenda. Some analysts’ speculations suggest that it would force the kingdom to withdraw from the oil cartel.
Financial Journalist and Commentator, Cyrus Sanati, stated in his review for the Fortune Magazine that, following the listing, Saudi Arabia “would need to clean up its act and put the interests of its investors ahead of the king’s.”
Hence, in order to keep up with the private investment it is currently seeking, Saudi Aramco could face considerable changes in its policies, and, consequently, influence the country’s position in the cartel.
Considering that the al-Saud family has been successfully managing the country’s fortune for a long period, in addition to its characteristic as a long-term investor, some market analyses also indicate that there is more than a financial perspective behind the enormous IPO.
An evidence to sustain the idea that other motives play a role is that the low interest rate environment makes share selling a less effective maneuver if the kingdom’s only objective was to raise funds, instead issuing debt would be more positive.
Additionally, the Gulf country does not show an urgent need for money. Despite the slump on the price of crude oil barrels, Saudi Aramco’s gigantic reserves are valued in as much as $600 billion, and its great number of barrels makes pumping oil in Saudi Arabia a lot cheaper than in other countries.
An overview published by the Strategy and Risk Consultancy, Verocy, indicated that the listing might, at a first glance, hint “an acknowledgement of its [Saudi Arabia] failure to destroy US shale or non-OPEC production.”
INSEAD Innovation & Policy Initiative’s (IIPI) Senior Research Fellow, Yasser Al-Saleh, went further on the subject and suggested in his review for IIPI’s website that “listing Aramco is not about raising money as such; it is more a bold political message that no sector is immune from privatization.”
According to him, “announcing these plans—irrespective of whether they bear fruit or not—is part of an unprecedented economic overhaul that has been enthusiastically labeled a ‘Thatcherite revolution’ for Saudi Arabia.”
Time to Adapt
Although there are no official statements on whether the IPO targets more than a fund-raising objective or not, the public listing will definitely bring more consequences than meets the eye, as it represents the opening of the kingdom’s traditionally closed doors.
To welcome its new “guests” and make the IPO effective, Saudi Arabia will have to adapt to a completely new package of responsibilities and pressures. In a short-term perspective, the share selling already brings major changes for Riyadh, starting with the end of its traditional secrecy on the company’s finances.
Furthermore, the kingdom will have to engage with investors’ expectations and adapt some of its policies to those of the liberalized market, which means that Saudi Arabia will have to enter the high-profit hunting game instead of focusing mainly on social stability.
The country must also be ready for the possibility of having its membership and commitments with OPEC in disagreement with those of its private investors, which could result in a more significant transformation for the company and, subsequently, for the whole kingdom in case of being driven to exit the cartel.
Implementing the necessary changes and breaking with the traditional management of Saudi Aramco indeed signals the beginning of a new era. Diversifying the country’s revenue sources through the IPO and the other steps incorporated in its Vision 2030 builds up the path for a more reliable economy to sustain Saudi Arabia’s wealth.
As the Atlantic Equities LLP’s London-based Analyst, Christopher Wheeler, stated to Bloomberg, following the IPO announcement, “banks are seeing a big wallet to go after and they won’t want to miss out,” so the market should be ready for the subsequent boom.