29 January 2016

Saudi Arabia’s Aramco considers IPO

State-owned Aramco (formally Saudi Arabian Oil Company) is the largest energy company in the world and generates more than USD 1 billion in revenues per day, according to Forbes.  The Saudi oil behemoth claims to have crude reserves of around 260 billion barrels (representing more than 15 per cent of all proven oil reserves) or ten times the reserves of American energy giant ExxonMobil.

In an interview with the Economist earlier this month, Saudi Arabia’s deputy crown prince Muhammad bin Salman disclosed plans to list shares of Aramco, with the kingdom intending to retain control over the company. He hinted that the state might possibly offer a 5 per cent stake to the public. Based on Aramco’s widely reported valuation of over USD 10,000 billion, the deal could be valued at a whopping USD 500 billion.

Following the interview, Saudi’s Health Minister and Aramco’s chairman Khalid A. Al-Falih unveiled two possible ways the initial public offering (IPO) will be launched. The first option entails bundling together and subsequently listing the company’s refining, chemical and marketing businesses known as its “downstream portfolio”. The second involves offering a significant stake in Aramco, although he emphasised that shares of its oil reserves will not be up for sale. Regardless of how the transaction will play out, the deal value is likely to be massive given the sheer amount of resources that are associated with the company.

Oil prices have been in decline since 2014, partly attributed to a shale oil boom in the US, coupled with Saudi Arabia’s refusal to decelerate oil production. The prospect of a further oil supply boost in the market put hopes of an imminent recovery to rest. On 16th January, the US, alongside other western powers, lifted sanctions against Iran in return for a curb on its nuclear programme.

Without an embargo on Iran’s exports, the global market is expected to be flooded with even more oil, further dampening prices. The West Texas Intermediate (a popular benchmark for oil prices) fell to its lowest level since 2003 following the lifting of sanctions. According to Iranian news agency Shana, the country’s deputy oil minister Amir Hossein Zamaninia said: “With consideration to global market conditions and the surplus that exists, Iran is ready to raise its crude oil exports by 500,000 barrels a day.

Shia-majority Iran and Sunni-dominated Saudi Arabia have been in a conflict for years. Their already strained relations worsened as Saudi Arabia executed a Shia cleric on 2nd January. With the now severed diplomatic ties, effective cooperation between two countries to contain supply and stabilise prices may seem far-fetched. Adding to the turmoil is China’s slowing economic growth; lacklustre prices may hence be here to stay for now.

The oil slump has taken its toll on Saudi Arabia, which posted a budget deficit of USD 98 billion last year. Proceeds from the Aramco IPO could help to alleviate the shortfall. Apart from that, the deal could also attract foreign investors into the plummeting stock market amid sliding oil prices, according to Yasser Al Saleh of INSEAD.

The country is currently pushing for a Margaret Thatcher-style economic reform, which will include privatisations alongside subsidy reductions and tax increases, as revealed by Salman during the interview with the Economist.  Besides its oil company, the government also announced plans to privatise several airports and seeks to sell assets in other industries. Considering that over 50 companies were privatised, including giants British Gas and British Airways, during Thatcher’s time in office, it makes one wonder how far Saudi Arabia will go in implementing the reform. Perhaps what we currently know about the Aramco IPO could well just be the tip of the iceberg.

© Zephyr