Saudi Arabia undertakes major restructuring at Energy Ministry
In announcing a major ministry restructuring and a surprise replacement of the chairman of Saudi Arabia’s state crown jewel, Riyadh is telegraphing a course correction for Saudi Aramco ahead of its initial public offering and for jump-starting investment in the kingdom’s nascent industrial and mineral resource sectors.
The moves leave Saudi Oil Minister Khalid al-Falih with a much-reduced portfolio focusing largely on Saudi oil policy and the country’s decision-making role in OPEC as Riyadh presses for higher crude prices to satisfy budgetary needs and bolster Aramco’s valuation with an eye to the initial public offering (IPO).
Saudi King Salman bin Abdulaziz Al Saud issued royal decrees August 30 that included dividing the Energy, Industry and Mineral Resources Ministry previously overseen by Falih into two ministries — the Energy Ministry over which Falih would be responsible and the Industry and Mineral Resources Ministry, for which King Salman chose Saudi private sector investor and businessman Bandar Alkhorayef to lead. The ministries are to be separated effective January 1.
It became public September 2 that Falih was to be immediately replaced as chairman of Aramco by Yasir al-Rumayyan, governor of the Public Investment Fund (PIF), the kingdom’s sovereign wealth fund and the primary investment vehicle for the Gulf country’s planned economic transformation. The PIF chief is said to be a close ally of Saudi Crown Prince Mohammed bin Salman bin Abdulaziz.
The split into two ministries comes three years after the Saudi government merged the Saudi Energy and Mineral Resources Ministry with the Industry Ministry, with Falih replacing long-serving Oil Minister Ali al-Naimi to lead the new ministry.
Falih, who had served at Aramco for three decades and was named its chairman in 2015, was charged in May 2016 with overseeing a greatly expanded ministry that included not only oil, natural gas and petrochemicals but also the electricity and industrial sectors.
That ministerial restructuring was perceived as an integral component of Saudi Vision 2030, the kingdom’s economic revamping programme that is the brainchild of Crown Prince Mohammed, to build up domestic industry and make strategic investments to move Saudi Arabia away from an economy heavily dependent on oil revenues.
There had reportedly been growing frustration with Falih and the ministry’s pace in pushing the IPO process along and pursuing opportunities for developing the kingdom’s non-oil sectors. For example, Riyadh had high hopes for quickly opening the country’s mining sector to foreign and domestic investment as part of Vision 2030 but movement on that front has been tepid. In March, Falih estimated that the kingdom’s mining sector held $1.3 trillion worth of assets.
At the centrepiece of Saudi Vision 2030 is the sale of up to 5% of Aramco, with the proceeds to be directed into the PIF.
Progress on the IPO has seen significant delays over the past three years associated with financial and oil reserve transparency issues as well as the company’s anticipated valuation and settling on the right foreign bourse for listing that will be in addition to the share flotation on the kingdom’s domestic exchange, the Tadawul.
The Saudi government is said to be inflexible on supporting a valuation of Aramco lower than $2 trillion, which would translate into as much as $100 billion in proceeds flowing into the PIF. However, financial and industry trackers say that valuation is too high and could be challenging to attain, especially during a global economic downturn with lower sustained oil prices.
Momentum on the IPO picked up following Aramco’s release of financial and statistical data as part of the prospectus for the company’s recent international bond sale, which was heavily oversubscribed. The prospectus revealed that Aramco was the most profitable company in the world in 2018.
Reports suggest that King Salman’s government is considering floating shares on the Tadawul as early as the end of this year, with a second listing, possibly on the Tokyo Stock Exchange, in 2020 or 2021.
Political and legal factors seemingly are making Riyadh rule out the London, New York and Hong Kong exchanges.
The sale of shares on the Saudi bourse may be limited because of the fears of a large flotation overwhelming the relatively small exchange but the recent inclusion of the Tadawul in FTSE Russell and MSCI emerging market indices is helping secure liquidity for Aramco’s domestic listing.
Falih gave a positive spin to losing his Aramco role, tweeting on September 2 that making Rumayyan, who was already a board member, chairman of the state energy firm is “an important step to prepare the company for the IPO.”
The decision to remove Falih from his leadership role at Aramco in part may have been driven by Riyadh’s need to officially separate the Energy Ministry from the state firm to reassure nervous IPO investors — and avoid potential litigation — that there would be no conflict of interest now that one official is involved in overseeing the Gulf country’s oil policy and OPEC decision-making and another is responsible for managing Saudi Aramco.