Aramco: The Idea and the Deal
Aramco: The Idea and the Deal
At the start of 2016, Saudi Crown Prince Mohammed bin Salman came up with a new idea; he told The Economist magazine that he was considering listing shares in Saudi Aramco — the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company — as part of a new plan called Saudi Vision 2030.
At the time, few took his words seriously, regarding it as marketing propaganda for the rising new political star. Nearly four years on, Saudi Aramco’s pending initial public offering (IPO) is the biggest in history, far surpassing the previous record set by Chinese company Alibaba.
In the Middle East, the idea initially raised concerns. Selling stakes in a state-owned oil company makes no sense — to many it is as if you were selling one of your own children. The region witnessed a long history of struggle for nationalization — the Saudi government itself did not fully own Aramco until 1981 after US companies were forced to sell their shares. In this part of the world, people believe that it is the state alone that should own the sea, sky and oil. Some have warned that the deal could open a window through which foreign colonialism could infiltrate, citing the nationalization of the Suez Canal and government conflicts with international oil companies in the past.
In the West, there were other concerns, including the fact that Saudi Aramco is a state-owned company and could therefore lose out, economically. In addition, at the time, many Western commentators believed that what the Saudi crown prince said was probably media propaganda because they were unable to conceive of a “third-world” government thinking outside the box. Only in the West do oil companies have a private commercial sector.
As the listing arrangements of the shares of the world's largest company moved forward, they faced a flood of uncertainty and criticism. Some critics had concerns about confidentiality, lack of information, bureaucracy, control of financial and pricing decisions, and political interference. In the last two decisive years, the government has ensured Aramco is fully prepared for the future IPO in terms of transparency and effectiveness, steps that have improved the performance and reputation of the company.
It opened Aramco — which was described as the most secretive company in the world — up, tasking international accounting firms with internal audits and other companies with the review of operations and assessment of proven oil reserves. The results confirmed that Aramco is a company that is managed to international standards of administrative efficiency. The cost for the company of producing one barrel of oil is only about $2.8, the cheapest on the market.
What about geopolitical risks? In September, Iran attacked Aramco facilities — an incident even worse than the 1991 Kuwait oil fire ignited by Iraqi forces. However, within a week, Aramco regained its market share, and within six weeks it had repaired the damaged facilities. It proved it was capable of addressing the most serious challenges.
In the beginning, many of the doubts and reservations surrounding Saudi Aramco’s potential listing were logical. But in the few weeks preceding the subscription, a campaign was launched against the IPO, linking it to human rights and environmental issues. But no one raised these issues when Exxon, Mobil, Shell or other oil companies announced they were listing their shares on the stock market, even though some of them produce oil in countries with a history of human rights issues and even though many of those companies have a less-than-ideal track record on environmental issues.
Many Saudis consider the criticism against Aramco’s IPO as politicized. At first, critics said the IPO was delayed, then when it was announced, they said that it had been hastily prepared because of the government's need for financial funding. There is no doubt that one of the objectives of the listing is to finance future government projects, but not to finance its services or budget. The controversy over Aramco's valuation is also normal in the market. The government naturally aspires to secure the best price. Whether the shares are fully subscribed or not, oil will remain a key commodity for the world until an alternative emerges or until it runs out, which is still a relatively remote prospect.
Saudi Arabia does not have to sell a single Aramco share, but the idea itself reflects a different approach to state administration. That is something that any visitor who knows Saudi Arabia will verify — the country is changing in all aspects of life.
The Kingdom has come a long way in a short time since announcing Saudi Aramco’s IPO: Saudi Arabia jumped 30 spots globally in the administrative reform of the government, according to a World Bank report; it has introduced many innovations in the role of government, the private sector, and women; it has opened the country up to tourists and foreign investors; and much more.