Fears over Aramco IPO justified: government to control wells

15 May 2017
09 May 2017, Week 18, Issue 624

Riyadh retaining full control of Saudi oil and gas reserves may dampen spirits ahead of IPO. Simon Watkins investigates

What: New shareholders will have no influence in Saudi Aramco’s decision-making.

Why: The oil industry is pivotal to the Saudi economy and Riyadh has no intention of allowing foreign stakeholders to dictate production levels.

What next: The news is likely to mute some of the optimism around the company’s IPO, while Aramco’s non-core activities may be seen as a distraction for would-be investors.

A key concern weighing on international investors taking part in Saudi Aramco’s planned initial public offering (IPO) is the degree of government involvement in the company’s operations.

These fears were vindicated last week by the architect of Saudi Arabia’s new economic paradigm, Deputy Crown Prince Mohammed bin Salman. He said that although the IPO would include Aramco’s ‘concession’ – Saudi hydrocarbons reserves – the actual wells “will still be owned by the government ... this is the same as before, and there are no changes to that”.

The Kingdom’s oil and gas deposits represent nearly 20% of total global reserves.

“In practical terms, as we feared, this means that all decisions on the amount of oil and gas to be produced by Aramco will be determined exclusively by the Saudi government. New shareholders will have no say, which will not play well at all with the international investment community,” Sam Barden, CEO of specialist Middle Eastern energy consultancy and trading firm SBI Markets, told NewsBase Intelligence (NBI) last week. “It also means that any dividend returns for investors will be entirely dependent on the geopolitical agenda of the Saudis. So if, for example, Saudi decided to attack the shale industry again then profits would plummet, and dividend returns with them, not to mention the overall valuation of the firm, and investor capital gains with it,” he said.

“At least as bad is that Aramco will continue to be used as a vehicle for Riyadh’s broader geopolitical aims, such as [its] being used to funnel money into the Kingdom’s regional military conflicts. This not only has enormously damaging potential for profits but also to the reputations of firms who might be investing in a firm that is being used to funnel money into, for example, the Yemen conflict,” he added.

There is precedent in this regard, of course, with Aramco being at the wrong end, from the investor perspective, of a number of government-led socially oriented projects under the broad remit of the ‘Vision 2030 Plan’.

For example, Aramco has been forced into getting involved in big industrial projects that are too big for the private sector that have little or nothing to do with its core businesses of oil, gas and petrochemicals production.

These have included developing a US$5 billion ship repair and building complex on the east coast, working with General Electric on a US$400 million forging and casting venture, building industrial cities, stadia and cultural centres, and creating the King Abdullah University of Science and Technology.

“Foreign investors are not interested in Saudi Arabia’s social problems; they’d be buying into a business and they’d want transparency, accounting and operational efficiency to international standards,” said Barden.

Such operational opacity is a key reason why it is unlikely that Aramco will seek a primary listing – alongside that planned on Saudi’s own Tadawul Stock Exchange – in the US.

“Nobody outside the Saudi government and Aramco really knows what Aramco is used for,” said Barden, “and, in fact, in the US, there are serious questions about what the Saudis get up to as well,” he added.

In this respect, a senior hedge fund manager from New York told NBI last week that ongoing questions – and legal issues – were acting as a deterrent for the Saudis to primarily list Aramco in New York. In this respect, he said, such a high-profile offering would likely add fuel to an already smouldering political fire that surrounds the 9/11 attack on the World Trade Centre.

Although Saudi has denied long-standing suspicions that elements linked to Riyadh backed the hijackers who attacked the US in 2001, 15 of the 19 hijackers were Saudi nationals. On September 28, 2016 the US Congress overrode President Barack Obama’s veto of the Justice Against Sponsors of Terrorism Act (JASTA), making it possible for victims’ families to sue the government of Saudi Arabia.

As it stands, there seven major lawsuits alleging Saudi government support and funding for the 9/11 attack have landed in federal courts in the six months.

“The impression I get, having met with the Saudis a number of times since then, is that they think such a high-profile listing in New York would attract a whole load of negative attention and that they would prefer to list in London and somewhere in Asia – probably Hong Kong or Singapore – in addition to the domestic listing,” the hedge fund source concluded.

Edited by

Ian Simm

Editor

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