Promise of $1bn fees from Saudi Aramco IPO has London bankers in a frenzy but greater transparency is the real prize

The planned stock market flotation of Saudi Aramco is generating excitement in the City of London, with the potential to generate $1bn of fees for advisers. But the promise of transparency is the real game changer.

Saudi minister of energy, industrial and mineral resources Khalid Al Falih. Fayez Nureldine / AFP
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Just how much oil does Saudi Arabia have? Oil analysts and global energy strategists have been asking that question for generations, and now it seems we are about to find out. Ever since the formerly American-controlled Saudi Aramco was fully nationalised in the 1980s, Saudi Arabian officials have consistently been saying it has about 260 billion barrels of proven reserves. But no one has ever been able to verify that figure, and in any case it is most unlikely that, as old oilfields have run down and new ones developed, the figure would remain the same for 30 years.

But now, in what is being billed – with some justification – as the sale of the century, Saudi Arabia is expected to reveal all as it moves towards a stock exchange flotation, or IPO, of its state oil company. The valuations are astronomical: a figure of US$2 trillion is being talked about in the City of London. That is three times the size of Apple or Google, the two most valuable companies, measured by market capitalisation, the world has ever known. It is also 20 times the size of Shell, Britain’s biggest oil company, and equivalent to 50 per cent of all the companies quoted in London. A listing in London, even a secondary one, would be a major coup for the post-Brexit City.

Khalid Al Falih, Saudi Arabia’s energy minister, says he is fully prepared to publish up-to-date estimates of the oil reserves. “This is going to be the most transparent national oil company listing of all time,” he told the Financial Times. “Everything that Saudi Aramco has, that will be shared, that will be verified by independent third parties.” That would include, he added, financial statements, “reserves ... costs [and] profitability indicators”.

The stake sale is expected to amount to only 5 per cent of Aram­co’s total shares, but even that would amount to US$100 billion, which is four times what China’s Alibaba raised two years ago.

It is a long time since there has been such excitement over a new issue in London. There are reports in London of top bankers besieging the Saudi embassy seeking visas as they prepare to fly to Riyadh this week to pitch for the role of advising King Salman and his 31-year-old son, Prince Mohammed bin Salman. The last time the City enjoyed such a bonanza was Glencore, five years ago, where 23 banks were involved in the listing and shared fees of £165 million (Dh746.5m) between them. On the same basis, an Aramco listing would generate fees of $1bn.

The kingdom’s reserves are not being sold off – the state will retain its sovereign right over their management. But the verified quantity of Saudi Arabia’s proven oil reserves is of enormous importance. Aramco produces 10 per cent of the world’s oil supply and for the past 30 years world oil prices have been based partly on that 260 billion barrel figure. For decades, Saudi’s role had been as a swing producer, taking its output up or down to balance the oil price. Then in 2014, it surprised global markets by cutting its production, pumping out oil to protect its market share, and forcing the American shale oil industry to shut up shop. The result was that after four years at more than $100 per barrel, the price of oil dropped below $30 earlier this year, before staging a recovery to about $50.

Now the country is surprising the world again, this time by lifting the veil. But without disclosure there could be no IPO. Aramco’s listing is part of Saudi Arabia’s grand plan to modernise its economy, the largest in the Gulf, and reduce its dependence on oil. It comes at a time of growing concern among Opec countries at the build-up of unsold oil, particularly off the coast of the UK, which will keep prices down for some time, and increase pressure on Opec to cut production. A report last week from Wood Mackenzie, the energy consultancy, forecast that growth in demand for oil will slow to an annual average of 0.5 per cent in the next 20 years, while renewable energy output could expand almost five-fold.

Paul McConnell, the director of global trends for Wood Mac, said that, in the past month alone, 10 oil and gas companies have committed jointly $1bn on clean energy technology – initially focused on carbon capture and storage systems. Just about every oil company in the world is stepping up its investment and Aramco is doing the same. Mr Al Falih, who is also chairman of Aramco, says he hopes that as much as 30 per cent of the kingdom’s electri­city will eventually come from a mix of renewables and nuclear power. The company is in the process of building one large wind turbine in the kingdom as a “demonstration”, with more to follow.

None of those more sober thoughts will bother all those bankers flying into Riyadh this week to take part in a two-day beauty parade. The long-term future of Aramco, oil or Saudi Arabia is secondary. They just want the fees.

Ivan Fallon is a former business editor of The Sunday Times

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