Riyadh faces challenges in preparing for Saudi Aramco IPO

July 16, 2017
High stakes. Logo of Saudi Aramco is seen at the 20th Middle East Oil & Gas Show and Conference (MOES 2017) in Manama, last March. (Reuters)

The government of Saudi Arabia has taken sub­stantive steps to entice potential investors to participate in the much-anticipated initial public offering (IPO) of state crown jewel Saudi Ar­amco. At the same time, Riyadh is being told that it must be far more transparent in opening its books and governance policies in advance of the limited sale of Saudi Aramco shares and warned that the king­dom’s larger economic reform plan was likely to fail to meet its ambi­tious objectives.
Questions remain about the exact valuation of Saudi Aramco, which will have a profound effect on how much the kingdom realises from its proposed sale of up to 5% of the company in 2018. The Saudi gov­ernment has put Saudi Aramco’s valuation at $2 trillion, which theo­retically would generate as much as $100 billion for the kingdom.
However, estimates by industry analysts vary widely: Energy con­sultancy Wood Mackenzie suggest­ed a valuation of $400 billion and other estimates range from $800 billion-$1.5 trillion.
Saudi Aramco has pledged to provide investors with 2015 and 2016 financial statements as well as preliminary 2017 data ahead of the IPO. The Saudi government is working to separate key aspects of Saudi Aramco’s finances from the government by assuming some li­abilities that the state energy giant has been carrying on its books for years.
One such measure involves moving long-standing debts Saudi Aramco holds from foreign govern­ments such as Jordan and Iraq onto the government’s books, while the Saudi Finance Ministry will assume payments owed to Saudi Aramco from other state enterprises, in­cluding Saudia Airlines and Saudi Electricity.
The government plans to estab­lish a mechanism by which Saudi Aramco would receive compensa­tion through tax deductions for the financial burden it bears in subsi­dising domestic fuels. In March, Saudi King Salman bin Abdulaziz Al Saud issued a decree cutting the corporate tax rate for the state oil firm from 85% to 50%, a significant step in boosting Saudi Aramco’s market value and generating higher dividends to future shareholders.
The stakes for a successful lim­ited sale of Saudi Aramco are par­ticularly high for newly minted Saudi Crown Prince Mohammed bin Salman bin Abdulaziz, who has made the IPO the linchpin of the kingdom’s economic restruc­turing and his Saudi Vision 2030 blueprint. Proceeds from the sale are to be fed into the kingdom’s sovereign wealth fund — the Pub­lic Investment Fund (PIF) — and invested in non-oil sectors at home and abroad, including public infra­structure, manufacturing and tech­nology ventures.
London-based consultancy Capi­tal Economics (CE) reported in June that expectations for Vision 2030 to fundamentally transform Saudi Arabia’s economy should be tempered, based on implementa­tion challenges and because the government will not be address­ing important factors, including non-oil exports, a radical reform in Saudi education and narrowing the wage gap between Saudi nationals and migrant workers. “The result is that Vision 2030 is likely to fall short of its lofty intentions,” CE stated.
The consultancy also noted that while Crown Prince Mohammed’s recent elevation to next in line for the Saudi throne would help ad­vance some economic reforms, the Saudi government will face resist­ance from other members of the royal family with vested interests, as well as from the religious estab­lishment, the civil service com­munity and influential merchant families.
On another front, a New York-based non-profit organisation, the National Resource Governance Institute (NRGI), recommended that Saudi Aramco disclose key fi­nancial and operational data that have traditionally been kept under wraps. NRGI said: “One weakness is its [Saudi Aramco’s] opacity — if authorities in Saudi Arabia wish to sell shares of the company in eq­uity markets, greater transparency may be necessary.”
In a June 28 NRGI study of 74 extractive sector state-owned en­terprises examined for the quality of their disclosures and corporate governance, Saudi Aramco was one of 14 firms deemed to have “failing” governance.
“Valuation of the share offering would be better informed if Saudi Aramco increased the transparen­cy of its finances and operations,” NRGI said. “The company does not publish annual reports with com­prehensive financial statements or information about rules and prac­tices governing its oil sales; the Saudi royal family is deeply inter­twined with management of the company.”
Crown Prince Mohammed said on state television in May that de­cisions about Saudi oil and gas pro­duction and investments would stay firmly in the hands of the gov­ernment after the IPO. Saudi Ara­mco is having a rare independent audit conducted of its oil reserves — a crucial component in the anal­ysis of the company’s valuation — though the firm declared in March that its recoverable crude oil and condensate reserves totalled 260.8 billion barrels at the end of 2016, largely unchanged from 2015’s 261.1 billion barrels.