Saudi Aramco’s IPO – Analysis

By Chithra Purushothaman*

Saudi Aramco, the Kingdom of Saudi Arabia’s (KSA) energy giant, with an estimated worth of $2 trillion, is preparing for its Initial Public Offer (IPO) in late 2018. It has proposed a five per cent public offering, worth around $100 billion, making it one of the biggest IPOs in history. The Saudi government hopes that the measure would provide substantial relief to the company which is grappling with declining revenues due to low international oil prices.

Thus far, attempts by the Organisation of Petroleum Exporting Countries (OPEC) to increase oil prices by cutting down production — by 1.2 million barrel per day – have not succeeded. Moreover, with the US shale oil (and gas) entering the world market, the price of oil is not expected to rise in the near future. Moreover, due to the increasing emphasis on clean energy resources amidst concerns over climate change, there is no guarantee that oil will retain its share in the global energy market going forward. This is not good news for Saudi Arabia, which owns a fifth of the world’s oil with proven reserves totalling 266 billion barrels.1

The fall in oil prices has affected Saudi Arabia’s revenue earnings. In the wake of declining oil revenues, the country’s budget deficit reached 13.6 per cent of GDP in 2016. Riyadh is trying to keep its budget balanced by cutting down on subsidies and borrowing money. These measures may not be sufficient in the long run if oil prices continue to remain low. For Saudi Arabia to balance its budget, oil prices have to be maintained at around $70-80 per barrel.

Saudi Aramco holds a privileged position in Saudi Arabia, given that oil exports account for 87 per cent of the Kingdom’s budget revenue, 90 per cent of its export earnings and 42 per cent of its GDP.2 Aramco finances social programmes like schools, hospitals, sports complexes and stadiums. It also pays 20 per cent royalty on revenues to the government.3 Hence, selling off some shares of this main revenue earner is seen as a viable solution for the Kingdom to manage its rising budget deficit.

Vision for the future

That KSA has taken cognizance of the changing dynamics of the energy market is evident from the comprehensive plan that it has developed in 2016 called ‘Saudi Vision 2030’. The Vision’s aim is to address the Kingdom’s pressing economic challenges by diversifying the economy away from its over-dependence on oil.4 The document suggests giving the private sector a greater role in the economy, by increasing its share from the current 40 per cent of GDP to 65 per cent. Further, the Vision aims to localise the work force in the oil and gas sector from the current 40 to 75 per cent; double the production of gas; set up a national gas distribution network; and build a competitive renewable energy sector based on public-private partnership. The launch of the King Salman Renewable Energy Initiative in April 2017 is the first step in this regard.

The Kingdom is aiming for a six-fold increase in non-oil revenues by 2030. At the same time, it aspires to transform Saudi Aramco from ‘an oil producing company into a global industrial conglomerate.’5 To that end, Aramco’s ownership would be transferred to a Public Investment Fund, turning the latter into the world’s largest sovereign wealth fund with its assets increasing from Saudi Arabian Riyal (SAR) 600 billion ($162 billion) to over SAR seven trillion ($1.89 trillion).

With the expected succession of Prince Mohammed bin Salman to the throne, several more changes are anticipated in the Saudi oil industry. Saudi Arabia’s earlier energy policy, which was entirely driven by the need to boost global demand for (Saudi) oil and ward off competition from non-OPEC countries, is being transformed. The IPO of Saudi Aramco is indicative of the new policy that would be at the core of any transformation.

Interestingly, the partial divestment of Aramco would also mean that the company, which has the reputation of being one of the most secretive national companies in the world, will have to disclose at least some details of its crude oil reserves, earnings and revenues to financiers interested in buying its shares. A new tax code introduced in March 2017 lowered Saudi Aramco’s tax rate to 50 per cent, as against 85 per cent earlier.6 Reports note that the tax rate is key to determining the valuation and dividend policy of the company. However, there is no clarity as yet as to where the shares of the company would be listed, although efforts are underway to make it more attractive to potential investors.

What does this mean for India?

When the news of the potential disinvestment in Saudi Aramco broke in 2016, India’s Oil and Gas Minister Dharmendra Pradhan stated that India is interested in becoming a ‘cornerstone investor’ in Aramco as and when it floats its shares.7 Besides, if Riyadh gives New Delhi a stake in the company, it would be an indication of its intention to further strengthen bilateral ties.8 Getting a stake in Aramco would also mean getting a share of profits from one of the world’s largest and most profitable companies.

On its part, Saudi Arabia is also keen to invest in India’s downstream (refinery and petrochemical) sector, which is expected to grow at an annual rate of 12 per cent. In its quest to leverage India’s growing energy market, the Kingdom has already shown interest in buying stakes in several Indian refineries, including the newly planned Indian Oil Corp (IOC)-led 1.2 million barrels per day oil refinery on the west coast, which would also be the world’s largest refinery. Both countries are planning several joint ventures in the downstream sector.

Another factor that could work in favour of India getting Aramco shares would flow from Riyadh’s strategy to give a stake to those countries that are the largest markets for its oil. Despite the falling demand for oil globally, India is expected to be one of the largest importers and consumers of oil, at least in the medium term. Hence, the strengthening of ties between the two countries, which are among the world’s largest exporters and consumers of oil, respectively, through an enhanced energy partnerships could prove to be a win-win for both India and Saudi Arabia.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India. Originally published by Institute for Defence Studies and Analyses (www.idsa.in) at http://idsa.in/idsacomments/saudi-aramco-ipo_cpurushothaman_130717

• 1. John Kemp, ‘Saudi Arabia’s oil reserves: How big are they really?’ Reuters, at http://www.reuters.com/article/us-saudi-oil-kemp-idUSKCN0ZL1X6
• 2. Central Intelligence Agency, The World Fact Book, ‘Middle East: Saudi Arabia’, at https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
• 3. Clifford Krauss, ‘Tax on Saudi Aramco oil profits is cut to prepare for IPO’, The New York Times, March 27, 2017, at https://www.nytimes.com/2017/03/27/business/energy-environment/saudi-aramco-oil-tax-rate-ipo.html
• 4. Kingdom of Saudi Arabia, Vision 2030, at http://vision2030.gov.sa/en
• 5. Ibid.
• 6. Anjli Raval, ‘Saudi government slashes tax rate for Aramco ahead of IPO’, Financial Times, March 27, 2017, at https://www.ft.com/content/63eac076-320b-3238-92c3-b39c5d371fe2?mhq5j=e2
• 7. ‘India could invest in Aramco IPO to strengthen ties’, Hindustan Times, May 23, 2017, at http://m.hindustantimes.com/business-news/india-could-invest-in-aramco-ipo-to-strengthen-ties/story-rNN0Du0Ek0UmTDF1xx5C4K.html
• 8. Dmitry Zhdannikov and Ernest Scheyder, ‘India could invest in Aramco IPO to strengthen ties’, Reuters, May 23, 2017, at http://in.reuters.com/article/india-oil-aramco-idINKBN18I2DJ