Syed Rashid Husain
A major news rocked the energy world last Thursday. On January 4, Saudi Arabia’s Deputy Crown Prince Muhammad Bin Salman told The Economist that Saudi Arabia was considering the possibility of floating shares in Saudi Aramco – the 100 percent publicly held Saudi Arabia Oil Company.
This was bombshell, a stunning revelation and it made breaking news – all around.
The Saudi deputy crown prince, minister of defense and head of the newly formed Saudi Council of Economic and Development Affairs also asserted during the course of the interview that a decision on the subject will be taken over the next few months. Things are moving at a fast pace. The prince has reportedly held two high-level meetings recently on the possibility of floating Saudi Aramco shares, Economist reported.
“Personally I’m enthusiastic about this step,” he added. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco.”
Officials say options under preliminary consideration range from listing some of Aramco’s petrochemical and other “downstream” firms, to selling shares in the parent company, which includes the core business of producing crude.
Saudi Aramco, the publicly held Saudi company, the world’s largest and the most integrated oil company, producing some 12 percent of the total, could soon be listed on the capital markets. This has been breaking news – all around. And it was not without reason.
After all, one in every eight barrels of oil that is produced around the world today comes from Saudi Aramco, and over the next 24 hours, as in the last 24 hours, the company would provide more than 9 million barrels of oil to the global energy market.
Saudi Aramco is also the only producer in the energy world today with sizable spare crude oil production capacity, playing a critical role in helping to stabilize markets and reduce volatility- in times of need. Saudi Aramco’s ability to make up for production shortfalls elsewhere around the world has been proven repeatedly over the years. Indeed, no one else has the capacity or capabilities that Aramco has.
Aramco also has the largest proven reserves, any oil company in the world could boast off, pumping around 10 million barrels a day and has the capacity to churn out 12 million barrels a day – indeed if and when required. Aramco said in 2015 that it had proven reserves of over 261 billion barrels of crude oil and condensate. It pumps more oil than the whole of America, about 10.2 million barrels a day, giving it unparalleled sway over prices.
By contrast, Exxon Mobil Corp., the largest non-state-controlled, private oil company, had proven reserves of 25.3 billion barrels of oil equivalent in 2014. The Irving, Texas based company is estimated today to be worth $323 billion.
And already speculations are being made all around about the real worth of Saudi Aramco. Officials quoted by The Economist say analysts have estimated that a full listing of Aramco would be worth more than $1 trillion. A Financial Times report said Saudi Aramco could be worth as much as $3 trillion.
An initial public offering of only a small slice of what is widely considered one of the world’s most valuable companies could definitely raise billions of dollars. That would bolster government revenues at a time when global oil prices continue to slide, hitting in the process, lows not seen over a decade.
BBC quoted Fadel Gheit, analyst for Oppenheimer & Co, saying; an Aramco flotation "makes a lot of sense". Even if, say, 20 percent of Aramco was sold, it would fund Saudi Arabia's budget for a year. According to The Economist, Aramco would be selling "perhaps 5 percent" of the company to investors. Five percent of, say, $1.5 trillion is still $75 billion – at a point in time – when the country is faced with budgetary deficits – courtesy the dwindling oil markets.
Aramco thus dwarfs the companies listed on the global capital markets – and by a significant margin. In sharp contrast to Aramco’s valuation, currently the world's most valuable listed company Apple is worth only about $543 billion.
Confirming the share flotation possibility, Saudi Aramco said, it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the company’s shares and/or the listing of a bundle of its downstream subsidiaries.
Once the study of these various options is complete, the findings will be presented to the company’s Board of Directors which will make its recommendations to the Saudi Aramco Supreme Council.
Aramco said the proposal was 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.
Faced with major choices, Saudi Arabia is on a move – bringing about monumental structural changes in Saudi economic sector. Mid-night is literally being burned in Riyadh. In the wide ranging interview to the Economist last week, the prince pointed out; the economic plans include gradually eliminating subsidies on electricity, water and housing; seeking private-sector provision in health care and education; introducing a 5 percent value-added tax on non-essential goods; and studying the complete or partial privatization of over two dozen agencies, including the national airline and telecom firm.
And Aramco could possibly be on the list too!
The days of resource nationalism is past its prime. The world has changed. The global energy scenario has altered and national priorities, in sync with changing times, have also registered a major metamorphosis – in real sense. A transition is in making – all around.
Saudi Arabia is no exception to this constantly changing global scenario. If it fails to adapt to the changing times and the evolving global horizon, the overall structure would weaken. It definitely needs to avoid that.
Pragmatism seems to have taken over Riyadh these days!
