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Osama Rizvi

Osama Rizvi

Osama is a business graduate and a student of international relations. Currently working as freelance journalist, covering commodities and geopolitics.Osama is a regular contributor at 'Modern Diplomacy'…

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Saudi Arabia’s Big Oil Gamble

Riyadh

With Mohammad bin Salman (MBS) now firmly in power in Saudi Arabia, Aramco’s IPO and fundraising to diversify the kingdom’s economy away from oil will surely become a cornerstone of Saudi policy. This carries a unique set of risks, and it’s not unreasonable to assume that the kingdom’s future heavily depends on the IPO’s success.

The relationship between Saudi Arabia, its oil company and regional geopolitics brings up some interesting questions regarding the exchange where Saudi Aramco will be listed.

The recent purge in Saudi Arabia by MBS and his Vision 2030 project mark a turning point in the kingdom’s history, a while a case can be made that a new and more prosperous Saudi Arabia lies around the corner, there are dangers. The power that Saudi Arabia has wielded in the region for decades comes from its control over oil, and it has already started to show signs of declining influence in that area.

This waning influence in oil markets brings up several interesting questions, especially when you consider the possibility of Aramco floating on the NYSE. What will happen to the country’s sovereignty if it is listed on the New York Stock Exchange? Will it enjoy the same autonomy as it does now? Will the U.S.–KSA relationship strengthen? Wouldn’t Iran feel insecure? Will Saudi Arabia continue to dominate OPEC? How will this impact regional politics? Weaning itself from oil will have wide-ranging consequences, and the U.S will undoubtedly try to capitalize on that. Saudi Arabia may pay a big price for modernization.

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Recently, oil imports to the U.S. fell to their lowest level since the 1990’s, dropping to just 1.77 million barrels. The imports peaked in November, 2005 to almost 14 million barrels. In their World Energy Outlook 2017, the IEA mentioned that the U.S. will overtake Saudi Arabia as the largest oil producer in the world by 2020. U.S. shale production recently hit a high of 9.68 million barrels per day. All of these are signs of a stronger U.S. and an increasingly vulnerable KSA. Russia is also likely to gain influence in the space, after proving resilient in the face of falling oil prices and economic sanctions.

(Click to enlarge)

The Saudi government has already slashed its tax rate from 85 percent to 50 percent in order to lure investors. The corruption crackdown seems to be another way of ensuring investors of a more transparent and open country. After the listing, Aramco will be exposed to all the rules and regulations that any other multinational encounters. One of the laws that may threaten Saudi Arabia after a U.S. listing is JASTA (Justice Against Sponsors of Terrorism Act). The act allows U.S. citizens to file lawsuits against nations that may have harmed them, opening Saudi Arabia up to lawsuits for its role in 9/11.

Another issue is how much oil Aramco can actually claim control over. In other privatizations, such as Norway’s Statoil, the state allowed foreign competitors to operate fields in the country. “International oil companies even had ownership in the Norwegian continental shelf,” a Financial Times article quotes Hans Aasmund Frisak, Statoil’s head of government relations.

An incisive research paper published in the Oxford Institute for Energy Studies addresses some of the more pressing questions about the IPO. The IPO is “intertwined” with developments in the country and cannot be isolated from the bigger plan of transforming the Saudi economy in the wake of Saudi Vision 2030. The effectiveness and efficiency of how the funds generated by the sale of Aramco will be used to produce the required profits will be central to its success. The ownership of reserves will also be a key issue as Saudi Aramco, through its IPO, “will offer investors an ownership stake in the concession”, according to the paper.

Mr. Fereydoun Barkeshli, Chairman of Vienna Energy Research Centre Vice President and founder of International Institute for Energy Studies located in Tehran and London, says “Aramco privatization will surely have impact on NOC structure and the way it will operate in the international oil market. Remember that under current contract some 27 percent of the Nigerian upstream oil production is based on production sharing with European oil companies. Nigerian National Petroleum Corporation is not fully independent in its decision marketing. The same goes for Algerian gas production. But ARAMCO will surely design a compromise solution in order to satisfy her shareholders as well as fellow OPEC members. One very important aspect is that Saudi ARAMCO IPO will ultimately change or reshape the future of oil diplomacy in the entire or a large part of the Middle East. I am sure the United Arab Emirates will follow ARAMCO. This may surprise you, but I personally believe that Iran will be enthusiastic too.”

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According to Reuters, Saudi officials claim that “production decisions are a sovereign matter that will remain with the government”. Observers are of the view that after the IPO Aramco, like any other oil company, will have to persuade investors before cutting production.

In November, Khalid Al-Falih said that “the government will make sovereign decisions on production and capacity even after a public offering of Saudi Aramco”, reported Anjli Ravli in a Financial Times article. Whether this will become a reality remains to be seen. KSA cannot retire from oil abruptly, as the kingdom’s plan to build a $20 billion plant for converting oil into chemicals shows. Saudi 2.0 will still be attached to oil, but the transition away from being a full oil state is full of dangers.

Saudi Arabia’s future depends on a smooth transition. It’s an ambitious bet from bin Salman—and one that Saudi Arabia can’t afford to lose. There’s no way of knowing if success awaits the Saudis. For now, we wait and watch.

By Osama Rizvi for Oilprice.com

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  • Mamdouh G Salameh on December 19 2017 said:
    Dear Mr Rizvi
    Saudi Arabia’s Initial Public Offering (IPO) of 5% of Saudi Aramco which is at the core of Vision 2030 will encounter three major hurdles: the estimated market value of Saudi Aramco, threat to Saudi investments in the United States and the oil price.
    Saudi Aramco is valued at $2-trillion by the Saudis. The IPO hopes to sell only 5% of the company’s assets for $100-billion. However, in the absence of an independent auditing of Saudi proven oil reserves, international estimates value Aramco far much less, probably between $1 trillion and $1.5 trillion. This makes the estimated value of the IPO between $50 bn and $75 bn and not $100 bn. As a matter of fact, Saudi Arabia does not need to sell 5% of Saudi Aramco which is the jewel in the crown in the Saudi oil industry. The war in Yemen is costing the country an estimated $72 bn/year. Stopping the war in Yemen would obviate the need for the IPO.

    An Aramco listing on the NYSE or any Saudi investments in the United States could be exposed to great risks from “the Justice Against Sponsors of Terrorism Act” (JASTA). This allows US citizens to file lawsuits against nations that may have harmed them, opening Saudi Arabia up to lawsuits for its role in 9/11 despite insistent Saudi denial of any involvement. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen. It is therefore far more prudent for Saudi Arabia to list Saudi Aramco in London or Europe.

    An oil price of $70/barrel or (even better $100) will be needed for a successful IPO. While oil prices could be projected to reach $70 during 2018 underpinned by positive global oil market fundamentals and rising global tension, a $100-price may have to wait to 2020.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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