Saudi Arabia’s IPO Challenge

by Theodore Karasik and Emmaline Ivy Johnson

In recent weeks Saudi Arabia’s plan to grow the kingdom’s private sector has garnered much attention in the international press. Determined to save Saudi Arabia from its “addiction” to oil, Deputy Crown Prince Mohammed bin Salman (MBS) recently announced Vision 2030, a strategic initiative that opens a portion of the kingdom’s state-owned oil giant—Aramco—to outside investors. Aramco, the world’s most valuable company, accounts for nine-tenths of national revenue, and state control is vital to the survival of the Al Saud ruling family. Only a small portion of shares, about 5 percent, will be open to prevent investors from seizing too much control. However, the IPO raises sensitive questions about transparency in the kingdom.

The small IPO percentage will bring in extra income before alternative forms of energy enter the global energy market. Given that low oil prices have strained the kingdom and put Saudi Arabia under growing financial pressures, officials in Riyadh are wise to look to alternative sources of revenue. But Cyrus Sanati argues that the kingdom is not hemorrhaging enough for what he sees as a drastic measure. According to MBS, “If 1 percent of Aramco is offered to the market, just 1 percent, it will be the biggest IPO on earth.”

It is difficult, however, to determine the accuracy of such claims because Aramco is one of the world’s most secretive companies. The Economist reports that the company holds a fleet of jets, sports stadiums, and a large hospital facility all while failing to publish earnings reports. This widespread corporate involvement in various sectors is normal for an Arabian Peninsula conglomerate. But without these reports no one is quite certain how much oil Aramco produces and subsequently earns. Without a single earnings report, Aramco’s production claims could be inflated. With an IPO on the horizon, Aramco would have to air its finances in full to the world.

General Electric Co. (GE) and other companies with a history in Saudi Arabia have high stakes in Vision 2030. The Connecticut-based conglomerate is a major supporter of the plan to privatize a greater portion of the Saudi economy. GE’s initial investment of $1.4 billion, announced earlier this month, serves to strengthen the company’s position in Saudi Arabia with respect to future contracts for achieving Vision 2030. According to a statement from GE, the U.S. company will work with Saudi Arabian Industrial Investments Company (SAIIC)—a joint venture that includes Aramco—to inject $1 billion into the kingdom by the end of 2017 in an effort to help the Saudis diversify their economy away from hydrocarbon resources. At the start of this month, Aramco GE and Italy’s Cividale SpA signed a Memo of Understanding to build a $400 million “first-of-its-kind high-end forging and casting manufacturing facility” in Ras Al-Khair, intended to serve the Middle East’s energy and maritime sectors and create 2,000 Saudi jobs by 2020. However, with many investors in energy markets eyeing a brighter future in liquefied natural gas (LNG) over crude oil, the Aramco IPO may excite few foreign investors beyond GE and Cividale SpA.

Meanwhile, serious questions and concerns are rising on a number of different fronts regarding the IPO. Aramco’s Chairman Khalid al-Falih confirmed that the IPO would fulfill the “company’s long term vision of becoming the world’s leading energy and chemical enterprise.” According to Fortune, the chairman made it a point to refute MBS’ statement to the Economist that the IPO was part of an effort to increase transparency and reduce corruption. In contrast to the older generation, younger Saudis are embracing moves for greater government transparency while being careful not to suggest any “Arab Spring-type” aspirations. At the OPEC meeting earlier this month, al-Falih, who is now the de facto head of OPEC, stated that the oil ministry will still set pumping levels even after the IPO. This might not sit well with potential investors.

Importantly, the IPO has a broad impact on Saudi Arabia’s neighbors. According to a GCC official, the kingdom’s IPO threatens other GCC states and allies on two fronts: “First, other energy companies will be forced to open their books too, which, for these countries, is a national security secret. Second, countries are going to have to also come clean on proven and estimated reserves. The exact geology of major fields is also considered to be a state secret.” This sentiment is widespread in major Gulf Arab cities.

A case in point regarding sudden transparency for an oil giant is what happened with Brazil since 2010. When Petrobas went public to raise funds, experts thought this would force the Brazilian company to divulge earnings, spending, and corruption within the company. However, the value of the Brazilian giant plummeted after investors got rid of their corruption-ridden shares. Is Saudi Arabia ready to open up to the business and finance world in this way, quickly? The clock is ticking.

As the world observed with Petrobas—and as ex-Brazilian President Dilma Rousseff recently discovered—opening an IPO does not automatically mean a transparent and corruption-free company. In Saudi Arabia, a nation not known for functioning transparently, the IPO will not quickly herald a new era of openness. Opening even just 5 percent would mean that Aramco and the royal family higher-ups will have to set aside tensions with Iran and any other regional, political, or religious issues to put economic recovery first in order to move full steam ahead on Vision 2030. The Al Saud rulers depend on Aramco to maintain power in the kingdom, but Riyadh depends on a diversified economy to cover the welfare state’s huge spending bill.

To be sure, the Saudis must engage in clearer thinking on key aspects of transparency and regional impact. When MBS was asked, as a member of the 70 percent of Saudis under the age of 39, for his vision of the future, he said that he hopes for a “Saudi Arabia that is not dependent on oil, has a growing economy, and a Saudi Arabia with transparent laws.” The deputy crown prince also mentioned that he envisions a “Saudi Arabia that guarantees the participation of everyone in decision-making.” Earlier in the interview he repeatedly dodged a question about the fairness of introducing a VAT without representation. Even the younger generation in Saudi Arabia struggles with transparency.

Photo: Aramco headquarters

Theodore Karasik is the senior advisor of Gulf State Analytics (@GulfStateAnalyt) and Emmaline Ivy Johnson is a contributor to Gulf State Analytics.

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  1. Whose oil is it anyway?
    Arguably, not the sole preserve of one so-called royal family.
    This resource belongs to the people of the region, not just to one family.
    What if a change of regime were to see the resource nationalized?
    Where, then, would investors stand?
    Keep out of it, I say.

  2. Oh my- Such a good point John. But worry not, for the Royal family is supported by the people. Whether ”they” stay out of it or not… Things shall remain the same for all shareholders.

  3. The Saudis have many daunting challenges. It’s a country of contradictions, many flaws, and great vulnerabilities that were direct results of decades of wrong policies, and they have only compounded the problem with even worse policies. In the midst of all that, the Saudis have picked an unnecessary fight with Iran. Their obsession is so intense that they have made Iran out to be a far greater enemy than it is. They make up stuff about the extent and nature of Iran’s “expansionism”, imagine them to be around every corner and behind every event, and then believe their own fantasies after which they spend vast resources fighting those fantasies. Perhaps Cervantes had someone like them in mind when he wrote “Don Quixote”.

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