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Business

Saudi Aramco hints at coming IPO

State-owned Saudi Aramco, the world's biggest oil company, is considering selling a small minority of its shares to private investors. It's part of a wider drive to part-privatize Saudi state-owned companies.

From its headquarters in Dharan on Friday, the giant Saudi Arabian oil company released a statement confirming that it was considering listing the company on stock exchanges and selling some shares - though experts expect that only a small portion of the company, perhaps 5 percent, might be auctioned off.

The company "has been studying various options to allow broad public participation in its equity," the statement said. This could involve listing "an appropriate percentage of the company's shares and/or... [shares in] a bundle of downstream subsidiaries."

A decision will be made after several more months of study, the company indicated.

Saudi Aramco claims oil reserves of about 260 billion barrels, 10 times more than ExxonMobil, the world's largest private oil company. Aramco produces one in every eight barrels of the world's oil supply, at a daily production rate of about 9.5 million barrels.

In recent years, the company has integrated chemicals factories into six of its refineries, to diversify away from over-reliance on crude oil exports. It operates 11 research centers and technology offices globally, including one in Beijing. More than 60 percent of the company's crude oil sales are to China or other Far Eastern countries.

Angela Merkel & Salman bin Abdulaziz Al Saud King of Saudi-Arabia

German Chancellor Angela Merkel met with King Salman and his son, Deputy Crown Prince MbS, in Antalya, Turkey during the G20 meeting in November last year

Economic reforms

Aramco's share-sales proposal was in line with a number of other recent economic reforms indicating the Kingdom of Saudi Arabia (KSA) is looking to diversify its economy and make it somewhat less state-centric.

KSA's government has taken long-overdue steps to modestly reduce wasteful subsidies to the public, and it has begun to diversify government revenues away from near-total reliance on oil and gas revenues. That's an important priority in light of low oil prices that have left KSA's government with a $98 billion (90 billion euros) for 2015, with a further $87-billion deficit projected for 2016.

In the last week of 2015, KSA announced an increase in the domestic retail gasoline price - still ultra-low by world standards - to 90 from 60 halalas per liter for premium gasoline (from about 16 cents to 24 cents per liter). Modest increases in the prices of electricity and water were also proclaimed.

To date, KSA's enormous oil revenues allowed it the luxury of not levying taxes, and it will continue a policy of not levying income or wealth taxes. But the government has signaled a plan to introduce a value-added tax of around 5 percent, probably in 2017.

Privatizations

According to Friday's Aramco statement, "This proposal [to list some of the company's shares on public markets] is consistent with the broad and progressive direction pursued by the kingdom for reforms, including privatization in various sectors of the Saudi economy and deregulation of markets, which the company strongly supports."

The kingdom's new policy is to sell some shares in all major state-owned firms, so the Aramco announcement was not a surprise, though it's nonetheless big news: Aramco is the biggest and most important such part-privatization the country could undertake. The company is the foundation of Saudi Arabia's economy and one of the most valuable companies in the world, due to its huge reserves of cheap-to-produce mineral oil.

Saudi Arabian Defense Minister Mohammad bin Salman

In his role as Defense Minister, Mohammad bin Salman has overseen the launch in March 2015 of a controversial and bloody war on the Shiite Houthi tribe in Yemen, which has got bogged down

The Prince of Saudi Aramco

Saudi Aramco's statement came a day after publication of an interview of Deputy Crown Prince Mohammad bin Salman (MbS) in "The Economist" magazine, in which he said a share offer was being considered.

MbS, who is 30 years old, is the son of Salman bin Abdulaziz al Saud, the 80-year-old King of Saudi Arabia, who took the throne a year ago, in January 2015. King Salman immediately moved to thrust MbS, his favorite son, into various high offices - including those of second deputy Prime Minister and Minister of Defense - in a clear bid to position him to eventually become King.

On King Salman's orders, MbS was made chairman of Saudi Aramco's Supreme Council, Secretary General of the Royal Court, Minister of State, and chair of the newly established Council for Economic and Development Affairs, putting him in charge of KSA's economy.

In effect, King Salman put MbS in charge of ruling the country. He has pursued controversial policies, including sending the Saudi armed forces to war in Yemen and engaging in high-risk proxy conflicts with Iran, a country Saudi leaders see as their competitors in a contest for regional hegemony.

King Salman, born in 1935, was reportedly the 25th son of Ibn Saud, the founder of KSA; he is one of seven full brothers, the Sudairi Seven, who have long dominated KSA's affairs. If MbS becomes King after Salman dies, it will be the first time the line of succession passes to the generation of Ibn Saud's grandsons.

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Transparency?

It is not clear whether the main purpose of selling some shares in Saudi Aramco is really about raising money - the kingdom has various ways of achieving that objective, including taking steps to engineering a rise in oil prices with OPEC, a cartel of oil-producing countries, by means of a coordinated reduction in oil output. For now, however, KSA appears to have no intention of doing that, probably for geopolitical reasons.

MbS told "The Economist," concerning the proposal to sell some shares in Saudi Aramco: "Personally I'm enthusiastic about this step. I believe it is in the interest of the Saudi market, and... of Aramco, and... of more transparency, and to counter corruption, if any, that may be circling around Aramco."

The deputy crown prince also said KSA will aim to further diversify into non-oil industries, including uranium mining and religious tourism, among others.

In geopolitical terms, analysts see part-privatizations of KSA state companies as a move that would provide powerful financial interests in the rest of the world a stake in the stability of KSA's institutions - and hence of its ruling family.

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