Aramco’s IPO As An Offering to Western Multinationals?
The front-page maker, deputy crown prince, Mohammad bin Salman, the favorite son of Saudi King Salman, made waves at the beginning of the year by suggesting that Aramco, the state-owned energy monopoly, was nearing its first ever IPO. Most of the comments, unsurprisingly, circled as vultures over the assumptions of what it might be worth.
Since ExxonMobil, boasting of the possession of 25bn barrels of oil, is estimated to be worth around $320bn, Aramco with its immense hydrocarbon reserves of 261bn barrels could weight some $3400bn.
An expert with Bloomberg called the most likely capitalization of Aramco something ”out of this world”. While another shrewd market watcher claimed the final fix of the price tag for the Saudi’s giant would make Apple look like a ”small family owned business.”
The details of the IPO are yet unclear but promised to be revealed in the coming months. The news that world’s largest NOC would accept a qualitatively new level of transparency and exposure to global financial markets triggered off a tsunami of speculations on the actual goals of the Kingdom of Saudi Arabia (KSA). Mass media was genuinely intrigued at the prospects of what one of the energy guru called the coming to light of a “most coveted and secretive oil company.”
Nevertheless, Aramco is a game-setter on the oil markets by the mere fact that says no other country except Kuwait, according to experts of Rystad Energy, a Norwegian consultancy, can produce oil at a lower break even cost. No other country has such a solid spare capacity to up production and fill in the void, if any. At this point, however, it does not make any sense with the global oil glut likely to be preserved throughout 2016, no matter what OPEC might come up with in March.
Basically, the emergence of Aramco was due to the marriage of the Western sophisticated management and technologies with the natural wealth of the desert kingdom. The absolute authority on the subject, Daniel Yergin accentuated in his bestseller “The Prize” that back in the 1940s and 1950s the American masters were smart enough to recruit young ambitious Saudi managers and engineers with an entrepreneurial spirit and appetite “to do oil.” It paid off creating an “unlikely union of Bedouin Arabs and Texas oil men, a traditional Islamic autocracy allied with modern American capitalism.”
Both American ownership of the company and American guidance served well the yesterday’s nomads. After being nationalized, Aramco preserved the traditions and methodology, which still contribute to its resilience. At least, so it did until Riyadh had embarked on a risky road to outwit and outlast the American marginal shale oil producers by pressing down the prices, and convincing OPEC this strategy will benefit all the oil-exporting countries, at the end of the day.
Since no one knows at the end of which day things will turn for the better, current turmoil with its disastrous consequences for the community of nations dependent on revenues from oil exports has already placed Saudi Arabia at odds with the apparent losers, from Iran and Russia to UK, Norway, Holland, and Venezuela.
The biggest ever gamble has wiped almost $500 billion since the end of last year from the Bloomberg World Oil & Gas Index, depleted the Saudi kingdom’s coffers, and set the course toward stagnation not only for the global energy sector but the whole world’s economy.
This could be the number one reason for the IPO: raise money at a time when the stream of revenues has shrunk while the kingdom’s budget, taking into account social liabilities, was originally pegged on expectations of $100 per barrel. The end-result of the oil price artificial depression, initiated by KSA, does not look good: the 2015 budget deficit reached 15 percent of GDP, while foreign currency reserves, counted since mid-year 2014, have lost some $120 billion.
Rumors have it that only 5% of Aramco’s shares would be floated in order not to compromise the government’s control over the company. The rationale is rooted in the value of the monopoly: it delivers 9/10th of all the national revenues. The IPO would be a test of the interest of private and sovereign stakeholders, if they surface, and would facilitate attracting further on new foreign investments.
This assumption is supported by analyst at Natixis, Abhishek Deshpande, who views this move as a decision to raise cash. This viewpoint is shared by Jasper Lawler of the CMC Markets, who claims the Saudis want above all “to generate liquidity at dire times.”
However, there could be a no less formidable geopolitical reason for the IPO. It could be aimed at downgrading the chances of Iran to lure foreign investors to its obsolete sanctions-hit energy sector. The House of Saud would like to outbid the Tehran ayatollahs in the flirting with the European and American energy majors, now lining up to examine the possible rate-of-return on the untapped Iranian market.
Moreover, the Aramco IPO announcement came amid the mounting anger of the grudgingly disappointed oil dependent nations, and tacit displeasure of some Western nations. In a surprise move, the usually reserved German intelligence agency (BND) recently made public one-and-a-half-page memorandum, which basically concludes that Saudi Arabia had adopted “an impulsive policy of intervention”.
The 29-year old Mohammed bin Salman was qualified by an expert in regional affairs Patrick Cockburn of The Independent, London-based daily, as a “political gambler” and a “naive, arrogant Saudi prince playing with fire.” The reason for such a derogative assessment was prince’s highly risky foreign policy aimed at “destabilising the Arab world through proxy wars in Yemen and Syria.”
The name-and-blame shot by BND could be a demonstrative move to put Saudi Arabia on the defensive and force it to accommodate concerns of all the losers of its oil prices gamble and adventurous policies in the region. The Aramco IPO fits well into the category of concessions. Should it attract significant foreign investments, then Aramco would be automatically become the joint asset, and Western business would most certainly advocate before the governments a more lenient policy toward Saudi Arabia and make the media guard its tone when accusing the “Bedouin Arabs” of any wrongdoings.
Such an interpretation of the IPO initiative echoes the opinion of a British energy market analyst, Paddy Blewer who took a skeptical view of the carefully publicized endeavor. “It’s not impossible that KSA would consider a “political” listing that is economically useless, but is used as a propaganda tool by Saudi modernizers to demonstrate to the world that KSA is committed to economic and possibly even social modernization – not unlike the process of the Chinese NOCs that have listed locally and don’t actually give full transparency on the topco – but have been used to demonstrate China’s commitment to global capital markets and international trade,” Blewer pointed out in an immediate comment to the IPO announcement.
In any case, the Aramco IPO would be well received by many foreign investors, which were kept lately on an anorexic diet due to the apparent fact that there are too few assets left around to be acquired. Whether or not the ≈5% of Aramco ”for sale” is actually an offering particularly to Western multinationals, designed as a safeguard against the displeasure of the West and most of all of the United States, remains a multi-billion dollar question. Worth watching how it goes.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Europe Business School.