Global Analysis from the European Perspective. Preparing for the world of tomorrow

Aramco IPO: PR-freak or an act of desperation?

MohammedSalmanSaudi Arabia has effectively muffled the question of it respecting the human rights within its borders, feeding the world mass media with the news of the Saudi government considering the sale of the shares in Aramco (IPO), its pearl in the crown, the petroleum giant, which is regarded as ‘probably the world’s most valuable company’. Analysts and journalists have spent lots of time and have gone to great lengths to raise the awareness of the public of the might of this royal enterprise, which is so large that its value cannot be estimated. So the mechanism has been triggered, Prince Mohammad bin Salman touted the Saudis as reformist and progressive only to later deny the news for all practical purposes. Now it is alleged that the said IPO concerns merely the oil refining part of the business, not the oil drilling, and it was the latter that fuelled the journalists’ figments of imagination.

The medial blurb on Armaco going public only served the purpose of reminding the world public opinion of the might of Saudi Arabia, whose authorities do not wish to be associated with beheading, Wahhabism, aerial bombings of Yemen or tacit support for ISIS. The ‘White ISIS’, as the Saudis are commonly referred to by Iranians, is in trouble, and it is not only its image that is tarnished; it is also a financial trouble. And the trouble is real.

The 2015 budget deficit of Saudi Arabia is believed to have risen up to 100 billion dollars (15% GDP), evidently due to the fall in oil prices. True, the monetary reserves still amount to over 600 billion dollars, but they are dwindling at a fast pace (they amounted to 737 billion dollars in August 2014), which may force the authorities either to decrease the excessive supply of oil or to uncouple the exchange rate of the rial with that of the dollar1.

It was the first time since 2007 that the Kingdom had to issue the debt; still, the 5,3 billion dollars drawn out of from the domestic market is not enough to fill the budget gap. All the more so because the interest of one-year bonds skyrocketed from 1.1 in August up to 1.84 at the beginning of the new year. The Saudis also took a blow when Standard & Poor lowered the KSA rating from AA- to A+, two notches over the junk level2. The deficit could only be reduced if the price of oil stood at 105 dollars per barrel, and, as it is, the worth of crude oil amounts to a third of it3. With the bonds losing in value, privatization seems to be a cheaper form of shoring up the budget.

All this trouble is caused by ever smaller incomes from oil sales, and since Saudi Aramco is the only enterprise in the kingdom that extracts oil, the extent of the problems concerning the Kingdom of Saudi Arabia overlaps with that suffered by the oil giant. A reform of the oil industry that might bring in ‘more flexibility in business-based decision making in order to maintain full financial control’ was reported at the beginning of the year’4. Has the reform fallen short of the desired results?

Aramaco’s information policy is very much skimpy: only operational (not financial) data are published, which means there is no way of learning about the size of the giant’s income and, what’s even more important, by how much it is smaller as compared to the previous periods. That is why the official communique announcing the necessity of making more rational decisions speaks volumes. In his latest interview with ‘The Economist’ Prince Mohammad bin Salman went even so far as to mention that Aramco might be facing problems with corruption5. Since the basic data concerning the enterprise are classified, then the prince’s hint at bribery may imply something of importance.

Nonetheless, the global media raved about Aramco’s size, estimating its value at 10 trillion dollars6 (13% of the world GDP), while back at 2010 FT put the company’s value at barely 7 trillion7, with Professor Sheridan Titman placing that value at a ‘mere’ 3,6 trillion8, at the time when the price of the barrel amounted to $80. Irrespective of the fact whether it is two, three or ten trillion, Aramco might be ranking as the most valuable company in the world, with political factors negatively affecting its worth, though. A cursory glance at the stock exchange value of Rosneft is enough to see that the capitalization of Rosneft is a ‘trifling’ 35 billion9, despite the fact that its daily production is just three times smaller than that of Aramco.

There are other estimates that put the value of Rosneft at 60 billion10. The natural resources owned by Aramco are much bigger than those owned by Rosneft, yet not by a magnitude of 1000 or 100, but merely 6.7 times bigger (267 bn barrels to 40 bn barrels)11. Aramco holds the pride of place as a world oil refining firm. According to different sources it might rank among the four or six largest companies in this industry12, together with Exxon Mobil, Royal Dutch Shell, China Petroleum and Sinopec. Ambitious Saudis are planning on becoming the world leader in oil refining by the year 202513.

It all goes to show that the whole confusion was purposefully used by the Kingdom’s authorities to:

  1. divert attention from the recent events in the Middle East;

  2. tout their country as the one that intends reforms and the adaptation of world standards;

  3. make the world aware of who rules it over the oil market;

  4. convince the world of the advantages of investing in Aramco, i.e. of saving the Saudis’ budget.

Obviously, no one intended to relinquish power over the oil giant, which underwent a full re-nationalization process not so long ago, only in 1980. The idea of creating a joint-stock company controlling the oil refining part of Aramco was intended as a means of shoring up the budget, which is in bad shape, without a guarantee of a quick recovery. Having a part of the company go public was a signal that the debt issuance alone was not enough to satisfy the needs, even if other instances of debt issuance are to follow. It is a crafty move, for with the low prices of oil the oil refining business may fare much better than that of oil extraction. It would not be amiss to say that the bonds of the hypothetical ‘Aramco Refinery’ would be more like treasure bonds rather than a share in a company.


1 Speculators test Saudi currency as oil crisis deepens. Source The Telegraph 2015-011-20
2 Saudi Arabia reacts sharply to S&P downgrade of kingdom’s debt rating Source  The National 2015-10-31
3 Saudi Arabia plans $27bn in bond issues  Source Financial Times 2015-08-05
4 Saudi Arabia restructures oil giant Aramco Source Reuters 2015-05-04
5 Transcript: Interview with Muhammad bin Salman Source The Economist 2016-01-06
6 Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO Source Bloomberg 2016-01-08
7 Source Financial Times Paid Content
8 Most valuable companies in history, adjusted for inflation Source Yahoo 2012-11-01
9 Too Big to Value: Why Saudi Aramco Is in a League of Its Own Source Bloomberg 2015-01-07
10 Source Financial Times Paid Content
11 Saudis considering Aramco IPO Source Fuel Fix 2016-01-07
12 Saudi King Names Khalid al-Falih Aramco Chairman, Health Minister Source Source The Wall Street Journal  2015-04-29
13 In Saudi Aramco IPO, Global Refining Empire May Be the Prize Source Bloomberg 2016-01-10

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