All these myriad details of economic reform in many ways are dwarfed by the Kingdom’s plan to sell 5% of Saudi Aramco, the national oil company.
Aramco is the golden goose that has funded the Kingdom since Americans discovered oil there in 1933 and created California Arabian Standard Oil Company. In 1944 to better reflect the ownership, CASOC was renamed Arabian American Oil Company or Aramco. Since Saudi Arabia bought out American interests in 1980, the company has been known as Saudi Aramco.
With the price of oil down sharply in recent years and a worldwide combination of conservation and technological breakthroughs in oil recovery creating the possibility of a prolonged imbalance in demand and supply, the deputy crown prince seeks to monetize the value of Aramco now and invest the proceeds to produce a new and lush stream of revenue to fund Saudi Arabia’s future. By floating only 5% of the company, which he insists will fetch $100 billion from investors, he hopes to establish a $2 trillion value for Aramco. Proceeds of this IPO would go into a Public Investment Fund, or PIF, which would serve as a Sovereign Wealth Fund for the Kingdom.
Proceeds from PIF would be invested both at home to develop new industries and abroad in high yielding assets with the hope of emulating the investing success of much older sovereign funds in countries like the United Arab Emirates or Norway. Details of precisely who would manage this fund and how it would be invested have yet to be disclosed.
Despite the crown prince’s enthusiasm for marketing Aramco, obstacles abound that raise questions whether this can be, as promised, accomplished before 2021. Failure to do so—or a failure to achieve the $100 billon valuation for 5%—would be a big blow to Vision 2030 and personally to Mohammed bin Salman, who has made it the centerpiece of plans to privatize the economy and create a new source of wealth for Saudi citizens.
Continuing low oil prices obviously makes more difficult securing a high valuation for Aramco.
One important set of opponents is the Saudi royal family who long have lived lavishly on the nation’s oil wealth. The King is said to receive a 20% royalty from oil sales which he parcels out to key members of the sprawling thousands of Al Saud princes. A tax imposed on the remaining revenue goes to the Finance Ministry to fund government and its largesse to Saudi citizens. Aramco from its inception has been a sacred possession to the Al Saud. “We know Aramco better than others do,” the late King Abdulaziz al Saud told a visiting writer for The American Magazine in 1947. “I shall protect it as if it were my most valuable subject.”
That Abdulaziz’s grandson seeks to sell even part of that precious asset literally horrifies not only many in the royal family but also the Saudi public. Saudis regard Aramco, which manages the Kingdom’s oil, as the nation’s patrimony. Not surprisingly, many of them fear that the sale of shares in Saudi Aramco to investors worldwide will transfer their national patrimony into the private hands of a few wealthy princes and foreigners, leaving the Saudi people with nothing but the sands of Arabia. Prince Mohammed bin Salman has dismissed such criticism as “close to the socialist, communist approach where everything is owned by the state.”
Selling 5% of Aramco, he told a national television audience, will allow the government to develop more quickly other sectors of the economy such as mining or logistics that will create jobs for citizens and revenues for government. “And all this will happen while Aramco is still in Saudi Arabia,” he said.
Beyond these political challenges, listing a stake of Saudi Aramco also involves technical and legal challenges. Before any valuation can be established, the Kingdom has to be able independently to certify the level of Aramco’s oil reserves and production and the way that production will be taxed. Without this, investors can’t judge the value of what they are being offered.
Energy Minister Khalid Falih has promised to provide before 2018 independent confirmation of the Kingdom’s claim that reserves total 260 billion barrels. To make Aramco more appealing to investors, the government already has announced it will cut the tax rate on Aramco to 50% from 85%. A lower tax rate obviously leaves more money in Aramco for investment or dividends to shareholders and thus makes its shares more attractive. Since government will remain a 95% shareholder of Aramco, it will receive 95% of dividends. To the Saudi government, whether its revenue comes from dividends or taxes is immaterial.
Where to list Aramco, the largest IPO ever, also is complex. While Riyadh has made clear it will be listed on the Saudi exchange, that market is far too small to absorb what is hoped to be a $100 billion offering. To lure investors capable of purchasing that large an IPO will require a deep market like New York or London. Yet lawyers for the Kingdom have warned that the New York
exchange is risky because the U.S. is litigious. Deep concerns already exist in the Kingdom about a law Congress passed in 2016 allowing relatives of those who died in the World Trade Center attack on September 11, 2001, to sue Saudi Arabia, home for 15 of 19 hijackers.
Whether Donald Trump could persuade Congress to overturn or limit this law is an open question. Beyond that, Aramco could face class-action litigation should it be seen not to comply with strict rules from U.S. regulators for transparency on reserves and data disclosure.
Moreover, U.S. shareholder lobby groups are another threat. All this focus on obstacles to a New York listing has put the spotlight on London. A “premium” listing on the London Stock Exchange, however, requires by its rules a float of 25% of a company’s shares. Obviously, Saudi Arabia wants nothing less than a “premium” even though it wants to sell only 5% of its crown jewel. The United Kingdom Investment Association is insisting on no bending of the rules. One big concern of the London Stock Exchange: a listing there would put the Saudi oil company into the FTSE 100 index, making an arm of the Saudi state automatically a holding for millions of pension funds. To ease that concern, Saudi Arabia has stated it will not seek inclusion in the FTSE.
Regardless of the obstacles at home or on foreign exchanges, the Deputy Crown Prince seems absolutely determined to sell a 5% share of Saudi Aramco before 2021. He isn’t likely to be deterred even if, as increasingly speculated by market experts, the offering values Aramco at $1 trillion, only half the $2 trillion he has touted as its value. “He will find a way to spin it,” says a disgruntled Saudi.