Aramco’s IPO a Test of Saudi Transparency

When Saudi Arabia decided to launch its economic reform plan, no one thought the Arab American Oil Company (Aramco) would be on the list of government-controlled companies slated for privatization. Surprisingly, Deputy Crown Prince Mohamad Bin Salman told The Economist the kingdom was considering floating shares and that he was enthusiastic about it. Given both supply side and potential demand side problems, investors are wary of placing too much faith in the Saudi oil giant. Yet, Aramco’s initial public offering (IPO) may force the company to become more transparent about its dealings. For the first time, Saudi Arabia may forfeit some of its economic sovereignty for the sake of financial sustainability.

Different estimates place the company’s value at trillions of dollars, constituting the world’s largest corporate entity. Aramco’s hydrocarbon reserves stand at 261 billion barrels and it pumps about 9.5 million barrels a day (b/d), which gives it the upper hand in the international oil market. In addition, recoverable gas reserves (associated and non-associated) total 294 trillion standard cubic feet. Although Riyadh had already decided to privatize portions of its other industries (e.g. airports), Aramco’s IPO will top the records as the world’s largest listed company coming from one of the most conservative economies.

One Saudi economist told MENASource that the kingdom wants to attract more foreign investment and more private sector involvement in the economy; Aramco will be mouthwatering for them. If just a small percentage of its shares were placed on the domestic stock exchange, the recent changes allowing foreign traders to access the Saudi market would provide a convenient point of entry and spark massive interest. Nonetheless, the unknowns surrounding the Aramco IPO have tempered foreign investor enthusiasm.

Although the Saudi government has been open in its plans to keep a controlling share, the target percentage to be listed remains unclear, according to Aramco’s Chief Executive Officer Amin Nasser in a letter published in the company’s magazine The Arabian Sun. “A range of options are being considered, including the listing in the capital markets of an appropriate percentage of Saudi Aramco shares with the government retaining a controlling interest, as well as the option to list a bundle of downstream businesses and interests,” he said.

It is unclear which ventures might be involved in a sale. The range of candidates may include SASREF, a joint refinery with Royal Dutch Shell in Jubail, and SAMREF, a joint venture with Exxon Mobil in Yanbu`, and its YASREF refinery, a joint venture with China Petrochemical Corp. Subsidiaries of Aramco abroad include S-Oil in Korea, and a refinery in Fujian, China owned jointly with Exxon and Sinopec, in addition to Motiva a joint venture with Shell in the United States.

Nasser, who chairs the committee overseeing the process, said broader economic reforms and the government’s privatization initiative were the key drivers behind the intended move. Aramco’s Chairman Khalid al-Falih told the Wall Street Journal that officials had yet to develop a specific timeline or concrete plan for the listing. However, a listing of the main company, which includes upstream, as well as refining and petrochemical assets was being considered, he said.

Prince Muhammad says a listing would make Aramco more transparent and “counter corruption, if any,” raising questions of any potential misappropriation regarding the company. The company’s website does not have any reports about its revenues or financial statements, but it owns a fleet of eight jets, football stadiums, and a hospital system serving 360,000 people. A listing would require it to become more transparent about its assets, acquisitions, and contracts. Increased transparency could air potential dirty laundry that would have significant implications. The Petrobras corruption case in which Brazilian officials have been implicated in a $3.8 billion kickback scheme has severely damaged the reputation of the country’s largest oil firm and created a headache for President Dilma Rousseff. Similar cases may exist elsewhere at any time, but a reproduction of such incidents in Aramco will have global echoes.

The Saudi company is not only the economic arm of the kingdom, but also part of its foreign policy and control of its oil output plays an international role. Saudi Arabia led the market-share-defending policy in the Organization of Petroleum Exporting Countries (OPEC) in 2014, which caused the price of oil to plummet from $115 per barrel range to near $29 per barrel in 2016. Norwegian consultancy firm Rystad Energy warns that Saudi Arabia’s flood of oil production not only creates a mismatch in supply and demand, but also leaves the global oil market at risk of price spikes due to a lack of capacity to significantly raise production in the event of a sudden disruption.

Interested investors may also fear a risk to the demand side of the equation: increasingly rising renewable energy market share. Any threats which may loom over oil will definitely reflect on Aramco’s future and its shareholders. Selling shares in the company may be an idea to collect any additional cash possible before the end of fossil fuel economy.

Last April, the leading German energy company Siemens quoted Dr. Omar Abdul-Hamid, Director of the Research Division at OPEC, as saying, “News of the end of oil has been exaggerated. We saw on average 91 million barrels of demand every single day in 2014. By 2040 we expect 111 million barrels of demand per day … We at OPEC believe there are sufficient resources to satisfy growing demand for oil. New capacities from unconventional sources are a case in point. Demand growth mainly comes from emerging economies and developing countries, particularly in Asia, and from OPEC member states. Their demand more than compensates for shrinking use in highly developed countries.”

But the International Renewable Energy Agency said renewable sources account for almost half of new electricity capacity installed and costs are continuing to fall. “The rapid deployment of renewables, working in combination with high learning rates, has produced a virtuous circle that is leading to significant cost declines and helping to fuel a renewable revolution,” it said in a policy brief.

Fears about the future of fossil fuels or the role of Aramco as a foreign policy tool do not undermine the importance of the awaited IPO. The move will demand a high level of transparency and disclosure of information related to revenues and sales long-considered confidential by the Saudi government, but could provide Saudi Arabia with the financial flexibility to address its own economic issues and pursue its regional agenda. However, it would also mean answering to shareholders and would come at the cost of complete autonomy over oil-related decision making.

Haytham Tabesh is a Beirut-based economics researcher and editor.

Image: Khalid A. Al Falih, President and Chief Executive Officer of Saudi Aramco attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 23, 2014. (Reuters)