Is Saudi Arabia About to Sell the Family Silver?
On the 7th of January 2016, Saudi deputy crown prince, Mohammed bin Salman, the King’s son, told the Economist magazine that ”the Saudi government is considering whether to sell shares in state oil giant Saudi Aramco as part of a privatisation drive to raise money in an era of cheap oil”.
Saudi Aramco is the world's largest oil company with crude reserves reported to be 267 billion barrels, over 16% of all global oil deposits. It employs 60,000 people worldwide and produces 10 million barrels a day (mbd), three times Exxon Mobil’s. If it went public, it could become the first listed company valued at more than $1 trillion or more, almost three times as much as the world's largest listed oil company, Exxon Mobil, analysts have estimated.
Prince Salman, who as chairman of the powerful new Council of Economic and Development Affairs has broad authority over the economy, said the government would sell assets in a range of state companies in order to decrease some of the financial pressure that the government currently has.
The fact that Saudi Arabia is considering selling shares in the country’s jewel in the crown speaks volumes about the adverse impact low oil prices are having on the Saudi economy. What is more astonishing is that right until the steep decline in oil prices the prospects of a selloff of any part of the Saudi piggy bank was closer to a science fiction than reality. However, Saudi Aramco may sell shares in some of its downstream assets such as refineries and petrochemicals but not in its upstream business because to do so they will have to have their oil reserves audited by independent assessors and this may expose Saudi claims about the actual size of their reserves. I, for one, have written a lot about OPEC and Saudi reserves and reached the conclusion that Saudi proven reserves are no more than 80 billion barrels.
Whilst Saudi Aramco claims to own reserves of over 267 billion barrels of oil, a prevailing culture of secrecy prevents any independent verification of this figure. Outsiders have questioned how Saudi reserves estimates could rise by 50% in 1988, whilst many experts have dismissed the figure as ‘political reserves’, the amount claimed to justify demands for higher production allocation within OPEC. This means that if Saudi Aramco’s much-touted initial public offering (IPO) does go through, it will be difficult to put a reliable dollar figure on its value.
Aramco will, of course, never float all of its shares on the stock markets. The company’s chairman of the board recently confirmed that whilst the oil giant is looking into going public in some form, the Saudi Government will always retain a controlling share. Speaking arbitrarily, if Aramco floated just 4% of its shares it could raise some $400 billion in what would be the largest IPO in financial history. This would have the additional effect of almost doubling the value of the Saudi stock market, which has been underperforming lately. Listing any slice of the business would however require Aramco to become more transparent about its operations and revenues, and exposed to external auditing.
Regardless of its ‘famously’ secretive nature, Saudi Aramco is considered the most efficient and least corrupt Saudi corporation, so it is often tasked with the design and construction of key infrastructure projects outside the energy industry.
International investors have of recent times become increasingly concerned about Riyadh's ability to cope with low oil prices in the long run; the riyal has already dropped to a record low against the US dollar in the forwards market.
A sale could in the short term cover much of the huge state budget deficit which Riyadh is running because of low oil prices; the deficits in 2015 and 2016 totalled $140 billion and $134 bn respectively.
Saudi Arabia says it has low debt and a huge array of assets to enable it to cope easily with financial pressures. However, as part of efforts to diversify revenues beyond oil, the government has said it would sell assets in a range of state companies and it also plans to introduce for the first time a value-added tax by the end of 2016 or 2017. The tax would not apply to basic items such as water and dairy products, to protect the welfare of lower-income people.
Saudi Arabia faces a challenge creating jobs for a young and growing population. But the prince said Saudi Arabia has huge oil reserves and 10 million jobs that are being occupied by non-Saudi employees that he can resort to at any time of his choosing.
We should not underestimate the strong leverage Saudi Arabia has on global oil markets. Whilst many analysts associate the current decline in oil prices with the ill-timed Saudi desire to drive shale oil producers from the market, it should be remembered that Saudi Arabia could utilise its unmatched power to unilaterally bounce oil prices back when required. If this is the case, it begs the question why Saudi Arabia then feels the need to sell assets in its jewel in the crown when it is within its power to cut production and allow OPEC to do so to absorb the glut in the market and thus giving a fillip to the oil price. Selling off equity in Saudi Aramco to random investors could erode these powers, as it will bring in outsiders as a new element into the mix.
The idea of an Aramco’s IPO, particularly with regard to selling shares in downstream assets, is not a new one. The aim of popularising these intentions is essentially to entice the appetite of foreign investors for the Saudi stock market, which has been plummeting in line with the burgeoning oil slide. This fall has continued despite the market being opened up to foreigners for the first time in June 2015. The Saudi stock market also wishes to upgrade from frontier to emerging market status by 2017. Listing Aramco is not only about raising money; it is more a bold political message that no sector is immune from privatisation.
It may be time for the Saudi Government to fast-track the pace of its economic reforms before short-sighted internal resistance rises to a level that hampers government’s prudent efforts to maintain political, economic and social stability in the oil kingdom.
Dr Mamdouh G. Salameh is an international oil economist, a consultant to the World Bank in Washington DC on oil & energy and a technical expert of the United Nations Industrial Development Organization (UNIDO) in Vienna. He is also a visiting professor of energy economics at the ESCP Europe Business School in London.
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.