SAUDI Arabia is planning a three-way foreign listing in London, Hong Kong, and New York for the record-smashing privatisation of its $2.5 trillion oil giant Aramco, anchored on a triad of interlocking ties with three foreign energy companies.
The Saudi authorities hope to entice ExxonMobil, China’s Sinopec, and potentially BP, into taking strategic stakes, offering them long-term access to upstream operations in return for cutting-edge technology or refinery deals, according to sources close to Saudi thinking.
The moves come amid a profound shake-up of the kingdom’s energy strategy, with the dismissal of veteran oil minister Ali al-Naimi over the weekend. Aramco chief Khalid al-Falih will take over, though there may not be immediate changes to Opec policy.
The Aramco sale is planned as soon as 2017 or 2018 and would in theory be five times larger than any initial public offering (IPO) in history, a huge prize for the London Stock Exchange.
Shares will be listed in Riyadh but the internal Saudi market is too small to absorb such a colossus, responsible for a ninth of global oil supply.
Prince Mohammad bin Salman, Saudi Arabia’s deputy crown prince and de facto ruler, says Aramco will sell 5pc of its equity, valuing the shares at $100bn (£70bn) to $150bn.
The vast IPO is the spearhead of his “2030 Vision” to break the country’s “addiction” to oil and diversify, using the proceeds for an investment spree covering everything from car plants to weapons production, petrochemicals, and tourism. “We will not allow our country ever to be at the mercy of commodity price volatility,” he says.
The 31-year-old prince aims to clear away a clutter of subsidies, pushing through a Thatcherite shake-up of what still remains a medieval economic structure. The plans draw on a McKinsey report, “Beyond Oil”, which warned that the kingdom is heading for bankruptcy if it fails to grasp the nettle.
London’s hopes for the IPO may have increased with the election of Sadiq Khan as London’s first Muslim mayor, extensively covered in the Saudi media. It underscores Britain’s tolerant outlook at a time when attitudes are hardening in the US.
While the Saudis are shocked by the anti-Muslim rhetoric of Donald Trump, they are more disturbed by legislation in Congress that would let survivors of the 9/11 terrorist attacks file lawsuits for damages against Saudi Arabia.
Mr Al Falih told the Economist that an Aramco listing in New York would open the country to “frivolous lawsuits”, a hint that the Saudis may eschew the city altogether and concentrate on London and Hong Kong.
The IPO is being handled by JP Morgan and banker Michael Klein. They may have trouble finding buyers at nose-bleed prices, given investor aversion to state companies embroiled in politics, and exploited as cash cows. Russia, for instance, earned far less from Rosneft than it hoped.
Aramco funds the Saudi state, paying for a sprawling bureaucracy and a cradle-to-grave welfare system that keeps a lid on dissent. It also funds the prince’s military ambitions and a war in Yemen. Saudi defence spending was the world’s third highest last year.
Robin Mills from Qamar Energy said the market value of Aramco is probably just $250bn to $400bn, given that the state creams off a royalty rate of 20pc and tax of 85pc. Saudi officials insist that a fair deal could be found for shareholder dividends, even though the Saudi constitution stipulates that Aramco’s 260bn barrels of estimated reserves belong to the kingdom.
In a sense, any purchase of Aramco is an option play on a future oil boom. At current prices there would be no money for dividends: the Saudi state is consuming all the revenue, and burning through more than $100bn a year in foreign exchange.
Security experts say the Saudis have lent $80bn to Egypt to prop up the regime, money that will never be repaid. The kingdom’s external assets may be less than booked.
Khalid Janahi, head of Ithmaar Bank, says it would be a “disaster in the long term” if the Saudis sold off their crown jewel and traded away a future revenue stream to cover short-term needs.
The Saudis are hoping to lure foreign firms to unlock their gas fields, extract more oil from depleting oil wells, and develop shale. “Aramco has been very unsuccessful at finding gas. They have to invite back foreign companies because they need the upstream technology,” said one close adviser.
Exxon, Sinopec, and BP are all struggling with low oil prices, and are delaying investment. Foreign ventures in the kingdom have been fraught with difficulty in the past. The Saudis may have to offer a cast-iron guarantee of long-term strategic access to sweeten any deal.
Yet there are mounting concerns over the fragility of the Saudi state itself as the Middle East is engulfed by a Sunni-Shia battle for dominance, all too like Europe’s Thirty Year War.
Aramco’s oil reserves are largely in the Shia regions of the Eastern Province. This is a combustible zone after the execution of the Shia sheikh Nimr al-Nimr in January for civil protest, prompting outrage and vows for revenge.
Prince Mohammad vows to end Aramco’s culture of secrecy, introducing global standards of accounting. Daylight would help to clarify what its revenue really is, and what resources it holds.
The vast Ghawar field –with capacity of 5m barrels a day – dates back to the 1940s, with no major finds in the kingdom since the 1960s. Yet declared reserves have been strangely stable for decades.
Aramco says its wells are depleting at a rate of 2pc a year, lower than the IHS CERA estimate of 4.5pc for fields around the world. It estimates that the Ghawar field is 48pc depleted, yet it is progressing from using seawater to flush out crude to more costly methods of enhanced oil recovery.
It has already begun CO2 injections at Uthmaniyah in south Ghawar, aiming to boost recovery by 10-15 percentage points. There is no doubt that the Aramco can extract far more oil as the technology improves. The question is at what price.
Soft sceptics say the break-even cost of Saudi output is rising fast, changing the calculus of value. Hard sceptics suspect Riyadh wants to off-load “stranded assets” of the future before it is too late.
What is clear is that the days of $2 oil in Saudi Arabia will never be seen again.
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