The plan is simple. Float 5% of Saudi Aramco, the world’s largest oil producer, on a foreign stock exchange and, providing it is valued at over $2trn, raise $100bn to balance Saudi Arabia’s books and/or invest to reduce the kingdom’s reliance on black gold.
This proposal is a radical departure from usual Saudi practice. Indeed, when the news first broke one American financial adviser had to stop his car and pull over because he was laughing so much with sheer incredulity.
The Aramco plan is the centrepiece of Vision 2030, an ambitious transformation programme outlined by Mohammed bin Salman, Saudi’s deputy crown prince, in spring 2016. The money will come in handy: the government has taken at least $100bn from its foreign reserves to compensate for falling oil revenues. Despite austerity measures in 2016 – including price rises for petrol, a 5% value added tax and tariffs on sugary drinks and tobacco – the budget deficit is still around 7.9% of GDP, according to the Economist Intelligence Unit.
If Aramco is valued at $2trn when it is listed – probably in New York, Toronto or London – it will easily be the largest listed company in the world. (Apple, currently the largest listed business, has a market value of around $710bn.)
Achieving that goal may not be that simple. That is why the float, originally mooted for this year, has been put back to 2018 and may slip back further to 2019.
The problem is Aramco isn’t just the world’s largest oil company. Traditionally it has functioned as a behemoth to support the Saudi state: 90% of its revenues go to the government and the royal family. Officials have said that Aramco pays a 20% royalty on revenues and an 85% tax rate. Prince Mohammed knows that such tax rates would deter investors and is trying to reduce it, some say to around 50%.
The government must also decide what to do about the way Aramco effectively subsidises other businesses. For example, it sells natural gas at a loss to state-owned power plants. Sometimes, utilities pay two-thirds of the cost of pumping gas and sometimes they pay nothing at all. Such commitments will repel investors so the government is considering taking over these subsidies.
And there’s the valuation itself. Officially Saudi Arabia has oil reserves of 261 billion barrels. Aramco doesn’t own those reserves, the government does, but it has a monopoly on producing oil from them. The most notable fields are Ghawar, the world’s largest onshore oil location, and Safanotya, the world’s largest offshore oil site.
All that means that investors will value the group not on the worth of the reserves but on future cash flows, which will depend on the profits per barrel and the quantity of oil produced. The good news for Aramco is that much of its oil all but gushes out of the ground so it can make a profit as long as the oil price stays above $12 a barrel.
Potential foreign investors may be troubled by Aramco’s long-standing pledge to “maximize the value of the country’s petroleum for the benefit of the kingdom’s citizens”. This commitment isn’t mere rhetoric – in 2014, the government instructed the company to build 11 new football stadiums across the country. As budgets got squeezed, this plan was scaled back. The clash of public and private priorities may trouble Aramco in future. The current leadership team includes two ministers and two advisers to the royal court.
This is just one of the questions swirling around a company that has a reputation for being well run but also secretive – its latest online annual report, for 2015, doesn’t include any financial information. Oil experts believe the company’s revenues reached $378bn in 2014. By its own estimates, it accounts for 12% of the world’s oil supply and creates work, directly or indirectly, for 200,000 people.
This workforce could more than double to 500,000 if Aramco continues to diversify into chemicals – another issue that is yet to be clarified. In the Vision 2030 plan, the Saudi government lists its executive programmes, the first of which is the strategic transformation of Aramco which, the document says, “has the ability to lead the world in other sectors besides oil”.
The shape of Aramco is critical. Investors may be more inclined to pour money into a clearly defined energy company than a more diversified business. “There are two options being studied now. Either to make Aramco a pure oil and gas company, or a conglomerate and expand its role in petrochemicals and other sectors,” a Saudi industry source told Reuters.
Some analysts insist that making Aramco fit to be a publicly listed company is so difficult it will never happen. Yet Prince Mohammed, who is only 31, has the backing of his father, King Salman, and is determined to make this work.
The money will prove useful but the float is also strategically necessary. A successful Aramco float will make it much easier to privatise other parts of the government and stimulate the private sector, which only accounts for 40% of GDP, but is deemed so important it is mentioned 31 times in Vision 2030.
The plan is audacious but Prince Mohammed, the most influential man in Saudi Arabia, is convinced that the greatest risk he can take is to do nothing.
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