Rashid Husain Syed is an energy analyst, commentator and consultant based in Riyadh and Toronto. For almost 25 years, he has served as vice-president of a leading Saudi trading and consulting house.
Growing budgetary deficits, plummeting oil prices – Saudi Arabia's single-product economy, almost 90-per-cent dependent on oil sales for its revenues, is facing major headwinds. The kingdom needed to do something drastic.
Last week, Riyadh moved. The family silver finally appears to be up for grabs.
From the ashes of the crude meltdown, a drastically transformed Saudi Arabia is emerging. Plans are in the works to gradually eliminate subsidies on electricity, water and housing, to seek private-sector provision of health care and education and to introduce a 5-per-cent value-added tax on non-essential goods. Meanwhile, the kingdom is studying the complete or partial privatization of more than two dozen agencies, including the national airline, the national telecom firm – and now Saudi Aramco, the state-owned oil company.
While answering a question from The Economist about the possible listing of Saudi Aramco on capital markets, Prince Mohammad bin Salman (the Saudi Deputy Crown Prince and Defence Minister, who also heads the powerful Saudi economic council) almost dropped a bombshell. "This is something that is being reviewed, and we believe a decision will be made over the next few months. Personally, I'm enthusiastic about this step. 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."
No one could have imagined it just a short time ago. Back in 1998, when then-crown prince and future king Abdullah bin Abdulaziz invited proposals for investment in the upstream energy sector from foreign oil companies, it wasn't just the oil majors who were stunned – many within Aramco itself were taken by utter surprise. The move was resisted tooth and nail. Abdullah had to retreat: When the oil majors submitted their proposals, foreign direct investment in the upstream oil sector was ruled out, underlining that Riyadh was mainly looking for foreign direct investment in downstream gas and refinery projects.
There were reasons for this reluctance. Aramco has long been part of the Saudi psyche – a source of national pride. The company is the largest and the most integrated oil company on the planet, producing about 12 per cent of the global total. One in every eight barrels of oil produced around the world comes from Aramco.
The company is also the only producer with sizable spare crude oil production capacity, playing a critical role in helping to stabilize markets and reduce volatility. It boasts the largest proven reserves in the world – more than 261 billion barrels of crude oil and condensate. By contrast, Exxon Mobil Corp., the largest non-state-controlled oil company, had proven reserves of 25.3 billion barrels of oil equivalent in 2014.
What is Aramco's real worth? Officials have been quoted as saying that a full listing would be worth more than $1-trillion (U.S.). A Financial Times report says the company could be worth as much as $3-trillion.
Aramco dwarfs other companies listed on the global capital markets. Apple, currently the world's most valuable listed company, is worth about $543-billion. Exxon Mobil, the biggest oil company listed on capital markets, is worth $323-billion.
But despite the euphoria, an Aramco listing is not a done deal, because it would come with consequences. Aramco is conservative and secretive. It has avoided any third-party audit. Some, such as the late investment banker Matt Simmons, took it as an indication that the figures being put forward by the company were questionable. To be listed on capital markets, Aramco may need to become more forthright.
Hence the question: Will Aramco really go under the hammer this time? It's a big question.
The Economist quotes officials as saying that 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.
It may not be easy, one could say with some conviction. But the signals are already interesting.