Aramco IPO talk has message for Saudi state firms

Is it worth US$781 billion, as McKinsey suggested in 2005? Bloomberg put the firm’s value at $2.5 trillion, while the former Saudi petroleum adviser Mohammed Al Sabban has suggested more than $10tn.

But whatever the number, the suggestion that part of the giant state oil firm Saudi Aramco might be privatised has triggered a mix of surprise, speculation and scepticism.

The deputy crown prince Mohammed bin Salman first mentioned the idea of listing a minority stake during an interview with The Economist. But investment bankers salivating over the deal, and analysts rushing to value it, should probably take a cold shower.

Aramco, originally a consortium of the four largest United States oil companies, is the bedrock of the modern Saudi state, and was fully nationalised by 1980. Since then, it has stewarded the world's largest conventional oil reserves, swaying the market with its production decisions. It produces 13.3 million barrels of oil equivalent per day, including gas.

In recent years, it has expanded its refineries and petrochemical plants, including international joint ventures. And, of course, over the past year, it has been at the forefront of the emerging Saudi strategy to keep market share and beat down competitors, even at the cost of low oil prices.

So a glance at the company makes it clear just how sensitive, and challenging, an initial public offering would be.

Even a sale of 5 per cent of Aramco would certainly beat Alibaba’s record of $25 billion for the largest IPO to date. This would overwhelm the local Saudi market, and to get a fair valuation, the company would surely need a dual listing in London or New York.

But that would raise touchy issues over the ownership of the country’s patrimony, and require Aramco to disclose closely-guarded secrets – its oil and gas reserves, cost base and financial statements.

Anyway it is impossible to say today what Aramco is worth. Instead of applying for its budget to the Saudi treasury, as a listed entity it would need to be taxed under some predictable scheme, allowing it funds for investment and a reasonable return on capital. It has 12 times the reserves of ExxonMobil, whose $347bn enterprise value makes it the world’s largest publicly-traded oil company, but its production is only a little more than three times as much.

Saudi Aramco has a national development mission. The sad fate of Brazil’s Petrobras, mired in corruption and debt, shows how things can go wrong when state and commercial objectives collide. But Prince Mohammed did mention greater transparency as one benefit of a listing.

Floating a downstream unit, not involved in petroleum production, seems far less thorny. Aramco already has one listed entity, the PetroRabigh refining and petrochemical joint venture, of which 25 per cent was sold to domestic investors in 2008. Downstream assets would be easier to value, more digestible in size, and not involve any sensitive disclosures. The process of floating a downstream subsidiary would be a rehearsal for a future listing of Aramco, if and when that became desirable.

If the Saudis want to attract overseas investment and technology into their upstream, and benchmark Aramco’s performance, there are more straightforward and traditional ways to do it. As Abu Dhabi, Iraq and now Iran have all done recently, they could simply offer contracts to develop selected fields – perhaps gas or more marginal oil – to international companies.

Such was the early 2000s Master Gas Initiative, launched during another period of cheap oil, which foundered in the face of Aramco’s opposition and unreasonably strict financial terms. Such an opening would lay down the gauntlet to Saudi rivals, signal that it can survive low oil prices indefinitely, and possibly lure investment away from Iran.

Whatever the outcome, none of the kingdom’s crown jewels are untouchable any more. That, instead of speculation over valuations, may be Prince Mohammed’s most powerful and lasting message.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.

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