Saudi Arabia and the world’s largest IPO

Saudi Arabian officials are working diligently to prepare what they say will be the world’s largest initial public offering (IPO) later this year, or in 2018. At stake is a five per cent share of the country’s national oil company, Aramco. Floating shares of the world’s largest oil company could fetch up to $100-150bn.

Through a series of press appearances soon after he was named Deputy Crown Prince, 31-year-old Prince Mohammed bin Salman, the person behind the plan for the unprecedented sale, says he aims to unshackle the country’s future from the uncertain swings of commodity prices.

‘It is a signal that there are no “holy cows” in the economic reform process initiated by Deputy Crown Prince Mohammed bin Salman, and it reflects a much higher tolerance for risk among the leadership than we had in previous decades,’ says Dr Steffen Hertog, Associate Professor at the London School of Economics, and author of Princes, Brokers, and Bureaucrats: Oil and State in Saudi Arabia.

Saudi officials insist that Aramco commands a market valuation of upwards of $2tn, making it the most valuable company on earth (as a comparison, Apple’s current market capitalisation is $710bn).

Beyond black gold

The sale is part of a broader ambitious national roadmap – known officially as the ‘National Transformation Plan’ and dubbed ‘Saudi Vision 2030’ – to make the desert country ‘enter a new era of balanced and sustainable development’.  

The unusual move of adding the crown jewel of the Saudi Kingdom, Aramco, to the list of publicly-traded companies is being marketed internally as: a way to guarantee more cash in the face of low oil prices; a necessary action for easing economic hardships; and a step towards mitigating recent austerity measures, such as higher prices, more taxes and extra fees on services.

After oil prices fell in 2014 by 45 per cent, Saudi Arabia faced difficulties in properly funding its welfare programme for its 32 million citizens. The future is similarly ominous. The country has to create an extra six million jobs for young Saudis – many of whom have attended Western universities – by 2030, and meet increasing domestic demand for energy.

“ [The IPO] is a signal that there are no “holy cows” in the economic reform process initiated by Deputy Crown Prince Mohammed bin Salman, and it reflects a much higher tolerance for risk

Dr Steffen Hertog
Associate Professor, London School of Economics

This is happening against a backdrop of rising regional tensions, lower oil prices and increasing competition in the world’s energy markets, experts say. These factors combine to make diversification and modernisation of the Saudi economy an urgent priority. While Aramco officials themselves declined to comment, many sources close to the company told Global Insight that Aramco’s share flotation is now seen as an answer to many of these woes.

‘It will allow Saudi individuals and entities to own a share and take ownership of the natural resources of Saudi Arabia, which would aid in developing the country. It promotes investing in the country, and working towards a better, safer and stable Saudi society,’ said Omar Al-Rasheed, Secretary-Treasurer of the IBA’s Arab Regional Forum and Attorney-at-Law with Riyadh-based Omar Al-Rasheed & Partners.

Internationally, the float is being peddled as a step towards modernisation and disclosure inside a traditionally ultra-conservative country,  with its signature strict Wahhabi interpretation of Islam and closed circles of power – particularly around the oil industry.

‘The Saudi government is not selling the oil company, they are allowing a negligent percentage of its shares to be bought, presumably for the purpose of transforming it into a professional entity,’ says Al-Rasheed. ‘Such private participation would definitely raise its standards in financial reporting and transparency in its transactions, resulting in better performance. I believe it is a good decision... In the short term it would add transparency and professionalism to the industry.’

Other experts say that international oil market conditions have changed dramatically beyond price fluctuations. Saudi Arabia, being at the centre of that, must adapt.

‘This is not about any old price crash,’ says Antoine Halff, Director of Global Oil Markets at Columbia University’s Center on Global Energy Policy. ‘The shale revolution on the one hand, and the energy transition on the other hand, are game-changing challenges that call for sweeping reform in the Kingdom. The Aramco IPO is part of that necessary response.’

The IPO is indeed a response, but a gigantic one. Al Eqtisadia, a Saudi, Arabic-language business publication with close ties to the royal family, estimates that selling only a five per cent stake in Aramco will likely generate at least 188bn Saudi riyals, or $50bn, still double the $25bn offered by China’s Alibaba Group in 2014 – the largest ever to date. Saudi officials, however, put the value of five per cent at between $100-150bn, based on Aramco’s size, projects and strong prospects.

Aramco’s 2014 annual statement asserts that its proven reserves inched up 0.3 billion to 261.1 billion barrels by the end of 2014. The company’s top daily production capacity now stands at 12 million barrels per day – the world’s highest. That’s equivalent to China’s daily consumption and more than three times what a country the size of India consumes per day.

The company is also important for Saudi Arabia for other reasons. It employs 62,000 people, some 83 per cent of whom are Saudi nationals. The Organization of the Petroleum Exporting Countries (OPEC) said in its 2014 Annual Statistical Bulletin that Saudi Arabia’s ‘black gold’ generated 85 per cent of total Saudi export revenues in 2013.

Huge investment fund

The proceeds from the mega-listing will seek to keep some of those benefits and perhaps add to them. The money will go through a huge investment fund that will plunge the cash back into local and international projects by way of diversifying income for the nation.

The timing is near-perfect for the Saudis as well, despite the comparatively low oil prices. ‘A privatisation of this kind is like having children – it is never the right time,’ says Jean-François Seznec, Visiting Senior Fellow at the Global Energy Center of the Washington-based Atlantic Council. ‘However, the main purpose of the privatisation, in my view, is not to cash in on the value of the company, but to create transparency in the management of the main asset of the Kingdom.’

Another argument for a sale later this year or in 2018 – rather than waiting for higher oil prices – is that oil exporting countries will soon face a day of reckoning, when oil demand reaches its global peak.

‘Many, though not all, analysts believe that oil might never move much above US$60 per barrel again. Waiting for the right moment might only bring Aramco closer to the day of peak demand, when prices will enter terminal decline,’ explains Hertog.

Halff predicts oil prices will rise in 2018, which would add to Aramco’s share value at the time of issue. ‘2018 is soon enough to keep the momentum going and maintain a sense of urgency, yet distant enough to give Aramco time to prepare. By 2018 prices will likely have risen further from current levels, which will help with the valuation.’

Opening entry to the Kingdom

Saudi officials say they are getting ready for the moment of truth when shares hit the market. They point to a new way of thinking in the Kingdom. Riyadh, for example, adjusted national laws to enable foreign corporations to enter the Kingdom as public-limited firms, which allows for their shares to be traded legally on the Saudi stock market. Saudi authorities also revoked ownership limits for non-nationals, giving them up to 100 per cent ownership of tradable stock of companies operating in Saudi Arabia.

Aramco is preparing to file for the IPO at the Riyadh Stock Exchange along with two other international stock-markets. Aramco is studying the tax code to find ways to allow them to pay dues to the Saudi government after the flotation, and is working on creating a new set of guidelines that would govern its future disclosure and corporate governance policies. They are also adding to their own pool of auditors to help prepare for the IPO.

Though thought commendable by many observers, Hertog says the company will still have to produce retroactive accounts to international standards, and set a reliable fiscal regime for taxes and royalties that both provides reasonable dividends to investors and is credible going forward.

‘It has to register as a corporation. It has to actually issue shares. It has to sign long-term leases with the state to have the official concession to extract/manage the oil/gas reserves of the country,’ says Seznec. ‘The company, like all companies listed in Saudi Arabia, as well as companies listed on large markets, have to follow the regulatory process on management disclosure, major events that affect the company etc, even if demanding.’

“ The shale revolution on the one hand, and the energy transition on the other hand, are game-changing challenges that call for sweeping reform in the Kingdom

Antoine Halff
Director of Global Oil Markets,
Colombia University Center on Global Energy Policy

Other steps Aramco will need to take include separating the company’s core operations from the various developmental and infrastructural functions it has assumed on behalf of the government of Saudi Arabia, such as hospitals and schools.

Mysterious reserves

But nothing seems more pressing than the issue of the actual reserves the company holds. Oil industry watchers, as well as observers of Saudi Arabia, say that the litmus test for the seriousness of the sale is whether Aramco will reveal it’s oil reserves, which is essential for accurately estimating the health of the company’s business future. Releasing the oil reserve figures would assure investors that their money would be protected by the company’s vast reserves, they argue.

‘It comes down to whether the Saudi oil reserves are included in the IPO. If they are included, then Aramco and Saudi oil in general will become much more transparent. If not, then the underlying value of Aramco is much easier to obscure,’ says Steven Kopits, Managing Director of the New Jersey-based Princeton Energy Advisors.

Such information will likely be demanded by the stock exchange where the company will be listed. ‘The IPO will have to conform to relevant regulations of the markets on which the securities are being offered. Such regulations in the United States and the United Kingdom are strict,’ he adds.

On this point, Hertog says that the company will also need to allow for independent oil reserve estimates, which may yield figures below the official 261 billion barrels.

In February, Khalid Al-Falih, Oil Minister and Aramco’s former CEO, told reporters in Riyadh that Aramco will disclose its 2017 annual statements ahead of the IPO, but didn’t specify details about oil reserves.

But, well-versed with oil investors, the Saudis, are encouraging reputable names to play at least an advisory role in the IPO process, in order to win credibility for the flotation. They have asked international banks HSBC and Goldman Sachs to bid for consultancy work regarding the sale. Bloomberg Newssays that JP Morgan Chase and the former Citigroup investment banker Michael Klein are already working in advisory roles on the sale. Whether those heavyweight names will alleviate concerns over actual reserves without an independent audit is yet to be seen.

Revealing for the royals

Another sticking point that will influence the details around the sale is how much Aramco will disclose about its financial relationship with the Al Saud ruling family, including payments to the royals.

‘By going public, by law in Saudi Arabia and wherever they float the shares, they will have to give audited statements and extensive details on their operations, sales and investments. This will signify that the amounts paid to the royal family will be known, thereby creating transparency,’ says Seznec.

“ If oil reserves are included in the IPO, then Aramco and Saudi oil in general will become much more transparent. If not, the underlying value of Aramco is much easier to obscure

Steven Kopits
Managing Director, Princeton Energy Advisors

Hertog says there will likely be a format under which payments can be made to the royal rulers and still satisfy accounting standards: ‘In principle, stipends to royals can be paid out of the regular budget, which is not public, rather than in parallel to it. It might be tricky to explain what has happened in that regard in the past – investors will want answers.’

It is not only investors who would want to know how much the royal family receives. Those transparency openings are measures regime opponents could be waiting to jump upon. On social media, critics and opponents already voice concern over how the Saudi government has targeted the public with price hikes, taxes and fees, but has not focused on the lavish lifestyle of the royal family; their circles of well-connected top merchants; or the business elite.

Inside the Kingdom, even regime supporters and independent analysts are nervous that the sale could lead to foreign takeover of the main national asset.

Al-Rasheed notes that there is apprehension in the country, for example, towards a possibly larger sale of shares in Aramco, noting that there is strong opposition to allowing ‘exclusive rights of Aramco to the oil reserves that would affect the sovereignty of the Saudi government at a later stage if such licenses are given to other investors’.

Saudis reacted quite extremely when Al-Eqtisadianewspaper ran a story in late-2016 citing inside information that the government was considering selling 49 per cent of Aramco, not five per cent. The newspaper quickly rescinded the article, stating that it ran in error.

Noticing creeping resistance among citizens to letting go of what many perceive as a national treasure, Saudi officials announced in February that they are considering giving nationals ‘discounted shares’. While there hasn’t been any agreement on the sale value per share, the nod to citizens is likely designed to alleviate concerns that Aramco will be taken over by foreigners, leaving nationals behind.

Sensing that not all Saudis are on the same page with the sale, the country’s Commerce Minister, Majid Al-Kassabi, used a meeting with the Jeddah Chamber of Commerce and Industry (JCCI) to tell local media in February that the word ‘sale’ is not the right description for the government’s plan for Aramco, but that it is more of ‘a sharing listing’.

Al-Kassabi told the JCCI that the government’s legal guardianship over Aramco will continue undiminished. He stated that the company’s valuation is currently high and the ‘listing’ faces almost zero risks. He further argued that citizens on the Riyadh stock market will be given priority and that the only reason they are listing overseas as well is that the market locally is too small to absorb the value of the five per cent intended for sale.

In a tightly controlled country like Saudi Arabia, it’s hard to gauge whether Al-Kassabi’s words assuaged fears. But, if social media is any judge, they did not.

Nationalistic sentiments aside, local and international investors alike will need to see a solid governance regime before they can part with their money. As with other listings, at the top of their demands will be an organisational structure that will reduce the risk of political interference rather than protect it.

Hertog says political interference in Aramco now often happens ‘through the Aramco’s unusual “Supreme Council”, which is above the board and directly controlled by Prince Mohammed bin Salman and advisors with no foreign representation’. The Council, like much of Saudi Arabia, has an opaque accountability and governance composition that can deter some investors.

Close connections with the royal family means politics are often unpredictable in the Middle East. This will always influence the company’s decision-making, which has the state’s interest in mind, not just the investors’.For example, the Saudi regime needs funds, as it is in a cut-throat race with Tehran over regional hegemony. That race has led to massive and costly arms purchases, particularly from the US.

A Saudi woman experiences a Saudi Aramco virtual oil plant tour during the 20th Middle East Oil & Gas Show and Conference in Manama, Bahrain.

In 2012 Aramco suffered an unprecedented cyber-attack that wiped out data on thousands of company computers. The US later said the attack originated in Iran. The hackers displayed images showing they were protesting Saudi and Middle-Eastern policies.

Riyadh is also engaged in a costly war in Yemen with Iran-backed Houthis. As with the Aramco IPO, Prince Mohammed bin Salman, who is also the Defense Minister, is widely believed to have engineered the Saudi venture in Yemen.

Initially, the Yemen war was promoted as a small incursion that the well-equipped and generously-funded Saudi military would conclude in just a few weeks. It’s been a year and half and the war is nowhere near over, with the Saudi image and that of Mohammed bin Salman dragged through the mud over mounting civilian casualties.

For prospective investors in Aramco, this invokes an image of the Aramco Supreme Council running company affairs while being headed by a minister of defense who is engaged in a taxing war in Yemen that he has repeatedly failed to bring to a close as promised.

Riyadh needs money for other regional obligations it took on in its bid to thwart the Arab Spring and prevent the calls for change from destabilising the Kingdom. Riyadh is working to bolster anti-Arab Spring allies, especially military cliques around the Middle East who could oppose Iran. Security experts have said that the Saudis have given Egypt’s military rulers billions of dollars since their take over in mid-2013. Billions have also gone to the Pakistani military.

On top of regional and domestic issues, international relations are already forcing changes to the sale. The New York Stock Exchange, for example, was on the table as the primary listing location. But, recent US legislation – the Justice Against Sponsors of Terrorism Act (JASTA) – that allows families of victims of 9/11 to take Riyadh to court will likely change that. Oil Minister Khalid Al-Falih minced no words when he stated that he doesn’t want to see Aramco open itself to ‘frivolous lawsuits’.

“ It will allow Saudi inividuals and entities to own a share and take ownership of the natural resources of Saudi Arabia, which would aid in developing the country

Omar Al-Rasheed
Secretary-Treasurer, IBA Arab Regional Forum

Kopits says he is ‘astounded that JASTA has not been repealed. Under no circumstances would I recommend the Saudis IPO in the US with that law in force.’

Seznec thinks London has now become the likely destination. ‘I would imagine that the float will take place jointly between London and Riyadh. Some have mentioned Hong Kong or Singapore, but I don’t think those two markets are prestigious enough,’ he says.

Smaller stock exchanges like the Singapore Exchange and the Toronto Stock Exchange are not giving up, and have vied for a piece of the listing, sending officials to Riyadh to promote their venues. The Exchanges are said to be rolling a number of incentives to the Saudis.

New York cannot be completely struck out either. Riyadh is keen to capitalise on the Middle East policies of the new Trump administration, such as taking a tough line on Iran. A listing in New York could be something the Saudis offer back to officials from the Trump administration – if they keep the heat on Tehran. Kopits predicts better Saudi relations with the White House: ‘I expect Saudi relations with the Trump administration to be constructive, notably as Iran will be on the chopping block,’ he says.

Despite concerns over such domestic and international issues, many experts say that those fears will not dampen enthusiasm about the flotation, with its enormous economic and business benefits.

Al-Rasheed says investors will flock to Aramco because of its good fundamentals and also because of the solid future of the country at large. ‘Saudi Arabia is a young country. Seventy percent of Saudis are below 30 years old and any sector would be a great opportunity for investors in Saudi Arabia, as in any developed countries of the world.’

The fundamentals of the world’s most valuable company are likely to satisfy eager investors as well. ‘Aramco is unique among national oil companies not only for the unparalleled size of its reserves, but also for the professionalism and sophistication of its staff and the quality of its governance,’ says Halff. ‘It is the combination of underground assets and above-ground know-how and corporate culture that makes it so tantalising to would-be investors.’


Emad Mekay is a freelance journalist. He can be contacted at emekay@stanford.edu