Saudi Aramco IPO Prospect Reflects Kingdom Looking Beyond Oil

Saudi Arabia, the world’s biggest petroleum exporter, is staring into a future in which its most valuable asset — the oil under its sands — is shrinking in value.

That is not only because the price of oil has been plummeting over the last year, but also because the climate-conscious world has a diminishing appetite for fossil fuels.

So, in a potential strategic shift made public this week, Saudi Arabia is considering a public offering of shares in its giant state-owned oil company, Saudi Aramco, or possibly some of its subsidiaries.

While investors might want to think twice before snapping up shares backed by a diminishing asset — huge in value though that asset might be — the Saudi kingdom has many good reasons to seek to monetize at least some of its oil wealth and begin diversifying its economy.

“There is a political agenda behind this,” said Valérie Marcel, an independent consultant and author of a book on national oil companies. “I think they are responding to the expectations of a new generation.”

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As the Saudi kingdom is engaged in a face-off with Iran that has further escalated tensions in the Middle East, it is well aware of the need to address the rising desires of its own people, despite the erosion of Saudi Arabia’s vast wealth.

In the view of Ms. Marcel and other Saudi watchers, the country’s new leadership is trying to use the oil price collapse over the last two years to remake the economy and shift away from an oil-funded, government-dominated system to one where private business has a larger role. The leaders were appointed by King Salman, who came to power early last year after the death of his brother King Abdullah.

“They are using this crisis as an opportunity to make structural changes in the economy” that should have been made several years ago, said Rachel Ziemba, an analyst at Roubini Global Economics in New York.

As is the case with other major oil producers, Saudi Arabia’s oil income, which furnishes about 90 percent of government revenue, has been slashed by the fall in oil prices — about $35 a barrel now, down from $110 in early 2014. Although the Saudis still have about $630 billion in financial reserves, they are burning them at a rate of $5 billion to $6 billion a month, Ms. Ziemba estimates.

The idea of listing Saudi Aramco was first made public by the king’s 30-year-old son, Prince Mohammad bin Salman, in an interview published by The Economist on Thursday. The prince, who is deputy crown prince and defense minister, as well as chairman of the Supreme Council that governs Saudi Aramco, is in the vanguard of those pushing for broad changes in the kingdom’s economy.

Saudi Aramco confirmed in a statement on Friday that it was studying options to offer the public an unspecified, “appropriate percentage” of its shares or some of Saudi Aramco’s subsidiaries. But the company and the government declined to comment further.

At first glance, it might seem that an enormous pile of cash might be raised through such an offering. Saudi Aramco is the world’s largest oil-producing company, pumping out about 10 million barrels a day, with estimated oil reserves of 261 billion barrels. Those reserves are more than 10 times the oil and gas reserves reported by Exxon Mobil, which has a market valuation of around $314 billion.

But analysts say that an effort to list a stake in Saudi Aramco would present enormous complications. For one thing, the company annually hands over more than 90 percent of its profit, on average, to the government. Public shareholders would demand a piece of that money, which the government has often used for public projects having little to do with oil.

Because Saudi Aramco has many talented managers, the company often acts as prime contractor to put these big projects into effect, often with little regard to whether they are profitable. Saudi Aramco, for example, is a key contractor for Jazan Economic City, an industrial zone in an impoverished area in the southwest part of the country. The company also builds sports stadiums, including the King Abdullah Sports City in Jeddah.

“From a cost-benefit analysis, these are good projects, but for a private investor, they are not a good investment,” said Paul Stevens, a Middle East oil analyst at Chatham House, a London-based research organization. Mr. Stevens said that while Saudi Aramco was generally well managed, it would be “a lousy company for a private investor.”

In addition, a public listing of Saudi Aramco would require detailed revelations of its financial performance, which are not provided now, as well as scrutiny of matters like the size of its oil reserves, which have been questioned in the past. “I think they would never list the full company,” said Ms. Marcel, the author. “The government would not want those finances to be exposed.”

Instead, Ms. Marcel and others think that the Saudi government is probably considering putting a small portion of Saudi Aramco on the market or perhaps a package of refineries and other assets.

As to why would the government want to go to the trouble of listing the company and facing controversy, the answer might be economic diversification.

With the country’s oil wealth slowly dwindling, Prince Mohammad is looking for ways to cut the budget, find new revenue and energize the private sector. He and his aides have already taken steps that were long considered almost impossible politically, like raising gasoline prices. Price increases for electricity and water are in the works, as is a value-added tax, a radical step in a country that has no income tax. They are also considering selling other assets, like airports.

“The government is under a great deal of fiscal pressure,” said Farouk Soussa, a Middle East economist at Citigroup in London. “They are looking at what assets might give them the biggest bang for their buck.”

The Saudi leadership also seems to be hunkering down for a long siege of oil prices around the current levels. If prices of $30 to $50 per barrel are the new normal, then the government is going to need to find other ways of financing economic growth.

With more than half of the Saudi population younger than 25, a recent study by the consultants McKinsey warns of a coming demographic bulge that will require creating almost three times as many jobs for Saudis as were created during the oil boom of 2003-13. Otherwise unemployment, estimated at 12 percent, could soar, creating a potentially volatile political environment in a country that borders war-torn Syria and is engaged in fighting in Yemen, its neighbor to the south.

“The private sector has to do more of the heavy lifting going forward,” Mr. Soussa said.

Other big oil companies that are listed on stock exchanges but remain government-controlled include Statoil of Norway. Ms. Marcel said that many governments of emerging-market countries are considering partial listings of their national oil companies as a way of opening up to public scrutiny and curbing corruption. But she warned that having so much power in the hands of the deputy crown prince is a source of concern.

“The new master is too powerful,” she said. “Who is going to hold him to account?”

New York Times