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Saudi Aramco IPO May Not Happen If Oil Prices Rise

Aramco Oil

Apart from trying (and managing) to talk up oil markets in recent months, Saudi Arabia has been stoking investment banks as well with the plan to sell 5 percent of its most valuable asset and possibly the world’s most valuable company, Saudi Aramco.

The initial public offering (IPO) of shares in the state-run oil company, which Saudi officials claim is worth US$2 trillion, is now in the plans for 2018. Proceeds from the possible listing would go to diversify the Saudi economy away from oil.

But as 2017 begins, with oil prices in the US$50s compared to US$30s in January last year, Saudi officials may not see Aramco’s share sale as urgent as they did in early 2016 when they announced the plans for an IPO.

The Saudis expect the kingdom’s oil revenues to jump this year compared to last year. Then incoming U.S. President Donald Trump as well as recently passed U.S. legislation concerning Saudi Arabia may make Saudi officials reassess plans and take the IPO on other stock markets rather than on the NYSE.

In addition, a stake sale of Aramco would mean the Saudis sharing part of (even a small one) of oil proceeds with new shareholders. Last but surely not least, an IPO on any stock market would require Saudi Aramco to make financial and production figures public and let independent third parties look into its books and possibly the most guarded secret of Saudi Arabia – how much oil does it really have and how much it can pump?

At the end of December, Saudi Arabia announced some economic figures for 2016 and projections for 2017 in its budget plan for this year. In nominal figures, the Saudis managed to cut their budget deficit last year compared to 2015, but did not provide a percentage for how these billions of Saudi riyals stack up as percentage of GDP.

Total national debt last year was 12.3 percent of the projected GDP in fixed prices for 2016. Looking ahead to this year, Saudi Arabia expects total revenues to rise by 31 percent, with oil revenues seen 46 percent higher than in 2016. Non-oil revenues are estimated to increase by 6.5 percent on the year in 2017. Still, oil revenues are more than twice non-oil proceeds. Related: Will 2017 Be Musk’s Most Important Year?

“As the Kingdom’s economy is strongly connected to oil, the decrease in oil prices over the past two years has led to a significant deficit in the government’s budget and has impacted the Kingdom’s credit rating,” the overview in the budget plan for 2017 reads.

Now that oil prices have recovered - especially from the January and February lows of last year - markets are waiting to see if OPEC, whose de facto leader is Saudi Arabia, will deliver on promised cuts.

Most expectations hover around the US$50-60 projections for oil prices this year, which may help the Saudis get more oil revenues and make Aramco’s share sale less urgent than it would have been a year ago.

According to a Reuters Breaking views calculation, a sustained 20-percent annual rise in average oil prices could be worth at least $23 billion in additional revenues for Saudi Arabia.

Then there’s the Trump factor and the U.S. legislation that allowed the victims of 9/11 families to sue Saudi Arabia for its supposed role in the terrorist attack to consider. If some Saudi officials were really willing to review the NYSE option for listing Aramco shares, they would have to assess all political and financial aspects of such a move. Related: Oil Major Shell Plans To Shrink As Oil Rebounds

Next, the IPO process itself in which investors and investment banks would have to look into how much Aramco is really worth may require the Saudis revealing how much oil reserves they really have. Aramco itself says that crude oil and condensate reserves are 261.1 billion barrels, but this figure has not been revised since the 1980s.

In an interview with the Financial Times in November 2016, Saudi Arabia’s energy minister and Aramco chairman, Khalid al-Falih, said:

“Everything that Saudi Aramco has, that will be shared, that will be verified by independent third parties, reserves . . . costs [and] profitability indicators”.

However, with oil prices higher than US$50 and Saudis’ expectations of a 46-percent rise in oil revenues this year, the start of preparations for an Aramco IPO may not be worth sharing oil secrets with the world and revenues with shareholders.

By Tsvetana Paraskova for Oilprice.com

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