Saudi Arabia pushes for 2017 Aramco IPO

Friday 08/04/2016
Saudi and Foreign investors attend the 10th Global Competitiveness Forum on January 25, 2016, in the capital Riyadh.

London - Saudi Arabia hopes to wean itself from dependency on its oil sector by 2035 by creating the world’s larg­est sovereign wealth fund. The announcement by Deputy Crown Prince Mohammed bin Sal­man bin Abdulaziz revealed that shares sold of state oil firm Saudi Aramco will be allocated to setting up a $2 trillion Public Investment Fund (PIF).

The fund, designed to prepare the kingdom for a non-oil depend­ent economic future, will involve Aramco morphing from a state oil company into an industrial con­glomerate, with an initial public of­fering possibly as early as 2017.

“I’m trying to push for it to be in 2017,” Prince Mohammed told Bloomberg News. “Aramco will greatly benefit, not only the fund, but also the Saudi economy as a whole. By simply transferring the shares of Saudi Aramco to PIF will make PIF the largest fund on Earth.”

The prince said the measures would raise at least an extra $100 billion a year by 2020, tripling non-oil income but dismissed sugges­tions that move was to generate liquidity to meet the kingdom’s financial needs while diversifying income sources.

Prince Mohammed, who is also the kingdom’s defence minister, said the funds from Aramco’s ini­tial public offering (IPO) would be transformed to the sovereign fund, to “technically make investments the source of the Saudi govern­ment’s revenue, not oil”.

However, some industry analysts see the prospect of an Aramco IPO as not appealing as a whole and that only some aspects of the com­pany’s activities would make an at­tractive investment.

“I personally don’t think Aramco will be sold as an IPO, for a num­ber of reasons, and the simplest one being it is not profitable,” said Jaafar Altaie, managing director of Manaar Energy Group.

“If you look at Aramco’s over­head, it’s actually not profitable. As a private sector operation, if you were to sell the whole thing as an IPO, I personally would never buy shares in it. It’s an expensive operation, particularly when oil prices are at the level they are now. It might be profitable with higher oil prices, but nothing guarantees that.”

Altaie said that if Aramco were to go the IPO route, it would only sell parts, such as its down-stream op­erations and those that market oil, possibly petrol stations and pro­cessing facilities.

The proposed move is a con­scious effort by Saudi Arabia to strengthen and diversify its econo­my, which is feeling the pinch con­nected with the regional economic climate.

Saudi Arabia and other members of the Organisation of the Petro­leum Exporting Countries (OPEC) have continued pumping crude oil beyond global needs to preserve market share and weed out smaller players, including the US shale in­dustry, in the market.

Saudi Arabia cut government spending after posting a record $98 billion budget deficit in 2015. The kingdom has introduced a number of financial measures, including an increase in domestic petrol prices of more than 50%. Water, electric­ity, diesel and kerosene prices in­creased.

The austerity measures are ex­pected to save the kingdom about $7 billion annually, according to Riyadh-based Jadwa Investment. The firm said revenues from the kingdom’s hike on diesel are esti­mated at $2.75 billion and petrol levies are expected to add $2.5 bil­lion.

Saudi Aramco has crude oil re­serves of 265 billion barrels, more than 15% of all global oil deposits. It produces more than 10 million bar­rels per day, three times as much as the world’s largest listed oil com­pany, ExxonMobil, and its reserves are more than ten times larger.