London’s last chance to win $2 trillion Aramco prize

Crown Prince Mohammed's visit gives UK Prime Minister Theresa May a final opportunity to have London Stock Exchange chosen as venue for huge sale

Saudi Crown Prince Mohammed bin Salman with British Prime Minister Theresa May on the steps of Number 10 Downing Street / Getty

London is running out of time to win a share of the greatest prize in oil.

Saudi Arabia must decide soon where to list its crown jewel state oil company Aramco, if it’s to meet the schedule for an initial public offering (IPO) in 2018. The London Stock Exchange (LSE) is a front-runner to play host to the world’s largest single producer of crude but faces stiff competition from New York and Hong Kong.

The pressure will be on the government of Prime Minister Theresa May to woo Saudi Arabia's Crown Prince Mohammed bin Salman during his current visit to the UK. Capturing the listing, which could value Saudi Aramco at $2 trillion, would bolster London’s importance as a global financial centre at a time when the Brexit decision to leave the European Union has seen its status challenged.

As part of the UK's charm offensive, the government agreed to a $2 billion loan guarantee for Aramco and the Financial Conduct Authority may alter its listing rules on ownership of state companies for the IPO on the London Stock Exchange.

Mrs May and her embattled government – which holds a narrow parliamentary majority – will have the first opportunity at persuading Prince Mohammed to list Aramco in London before he heads later this month to the US, where New York is also vying for the prize.

Although the US has deeper capital markets, its pitch is hampered by the risk of lawsuits as a result of controversial legislation and potentially impinge on kingdom's sovereignty. A New York listing, with its greater disclosure requirements, would also bring closer scrutiny to Aramco’s estimates of proven energy reserves and future oil prices, as well as its demand forecasts, all of which play a major role in the company’s valuation.

The kingdom has stated it has proven crude oil and condensate reserves of 261 billion barrels, the world’s largest and about 15 per cent of the global share. Aramco has commissioned a third-party audit of its reserves in advance of the IPO.

A Hong Kong listing would provide the attraction of closer access to growing Asian capital, although it is a less mature market and stands as just the world’s sixth-largest exchange. The NYSE is biggest, while the LSE is third-largest.

Meanwhile, the City of London sent some of its most senior executives to Saudi Arabia at the end of last year as it intensified efforts to attract the IPO. Mrs May visited Riyadh in November, saying after her visit that London is “extremely well placed” to secure the Aramco float.

The Aramco IPO is the cornerstone of Vision 2030, the economic brainchild of Prince Mohammed. The aim of the plan is to reduce the kingdom’s reliance on oil revenues by diversifying its economy.

To that end, Saudi Arabia has been keen to attract foreign investment, and the UK and the US visits are as much a Riyadh roadshow as they are about burnishing bilateral ties.

The revenue raised from the Aramco listing is crucial to seeing that plan through.

At the kingdom's desired $2tn valuation, a public offering of 5 per cent of Aramco’s shares could net the kingdom $100bn.

That in some part is a driving motivation behind Saudi Arabia’s eagerness to cement Opec’s cooperation with Russia in managing the oil supplies beyond the expiration of their production cut agreement at the end of the year, to provide a smoother market to attract investors.

Saudi Arabia pumped 9.98 million barrels per day in February, according to the latest S&P Global Platts Opec survey, and has averaged 9.97 million bpd since the Opec production cut agreement with allies went into force in January 2017, well below its quota of 10.06 million bpd, demonstrating its commitment to the deal.

No announcements on the fate of the Aramco listing is likely forthcoming during this visit, for which Prince Mohammed is accompanied by energy minister Khalid Al Falih and Aramco CEO Amin Al Nasser.

Both Mr Al Falih and Mr Al Nasser have been tight-lipped about when and where the international listing might take place, but they have emphatically declared that the IPO is ready to go - once the political green light is given.

"This is a shareholder decision," Mr Al Nasser said Tuesday at the CERAWeek conference in Houston, referring to the Saudi government. "It's up to the shareholders to decide."

The fate of where Saudi Aramco lists may offer further clues as to what sort of oil company it wants to be.

Herman Wang is the Opec lead writer at S&P Global Platts