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Saudi Arabia is considering changing the way it taxes Aramco, the state oil giant, in a bid to boost oil revenues in case oil prices rise. Bloomberg quotes sources close to the government who say that Aramco proposed the change, which will see taxes start at 20 percent and rise gradually to reflect significant increases in oil prices.
It is possible that Riyadh will choose to leave things as they are, however, as higher royalty taxes could put off potential investors in Aramco: the company is preparing to list 5 percent of its shares next year and Saudi estimates peg the value of the shares at as much as US$100 billion, with the entire company worth US$2 trillion.
External analysts, however, caution that US$1 trillion for the whole of Aramco is a much more realistic estimate. Besides, analysts note, previous IPOs of national oil companies have resulted in lower valuations than what was expected based on their reserve base.
The listing of Aramco’s shares will most likely take place on the London Stock Exchange, according to source who last week spoke to Reuters. New York was also an option, but the company’s advisors are worried that a law passed after the 9/11 attacks exposes Saudi nationals to prosecution in the United States.
As part of efforts to make the IPO more attractive, Riyadh earlier cut the income tax for Aramco from 85 percent to 50 percent. Aramco supplies about 70 percent of Saudi Arabia’s government revenue, as per 2017 estimates. Thanks to a price improvement following the December agreement of OPEC with Russia and 11 other producers to cut oil production, the budget deficit of the Kingdom will this year shrink to 9.3 percent from late year’s 17.2 percent of GDP, but sustainable measures are necessary to protect the budget from the effects of a repeat of the 2014 price crash.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.