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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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The Only Way For The Aramco IPO Is Downstream

The Aramco IPO fog has been partly cleared up, after Amin Nasser, Aramco’s CEO, opened up to the press during a meeting at the World Economic Forum (WEF) in Davos, Switzerland. 

What some already expected has now become clear, Aramco’s much anticipated Initial Public Offering (IPO), will be mainly targeting downstream assets. Even though Nasser did not explicitly state this, looking at remarks made previously by Saudi Minister of Energy Khalid Al Falih, the picture is clear. As Al Falih clearly stated, the only one having ownership rights of Saudi crude oil and gas reserves in the Kingdom is Saudi Aramco, no other player will be involved.

During a private meeting in Davos, Nasser indicated to mainstream Saudi news outlet Arab News that the Aramco IPO will be held in 2021, which is several years later than was expected after the announcement by Saudi Crown Prince Mohammed bin Salman. Originally, the IPO was expected at the end of 2019, but the new date is more feasible and practical for a couple of reasons.

Ongoing diversification efforts of Aramco the last years, as shown by its multi-billion downstream spending spree the last months in Asia (especially Pakistan and South Korea) have put the IPO on hold. At the same time, Aramco is fully engaged in setting up external financing for the slated SABIC acquisition, which would make it in one go the world’s largest downstream company. For the Kingdom, a downstream IPO would not only remove transparancy issues with regards to commercial operations of Aramco, price settings and reserve questions, but would also make it easier to involve foreign partners. Downstream assets also could and will include international assets, partly to support higher interest of investments funds and sovereign wealth funds. Related: Oil Prices Rise As Saudis Pledge Deeper Cuts

Nasser still did not refer to a full-downstream IPO, but the signals are clear. The Kingdom has changed tax rules, made a new concession agreement, changed Aramco into a joint stock company, and introduced a lot of fiscal reforms to facilitate a listing, but skepticism about the transparency of the Saudi “national oil company” still exists. The first next step still is the acquisition of SABIC, and the financing of this $70 billion deal. Advisors have already been contracted, while the Saudi sovereign wealth fund PIF, the main shareholder of SABIC, is positive on the sale.

At the same time, as stated above, Saudi minister of Energy Khalid Al Falih has reiterated that Aramco will retain exclusive rights to develop Saudi Arabia’s oil reserves. Al Falih said “there is no intention whatsoever to chip away at Aramco’s exclusivity and its concession”. This is seen by some investors as a very large risk, even if third party assessments have now shown full reserves of the company. Still, for Riyadh, the position of Aramco and ownership of the oil reserves, is of national security. Saudi Arabia’s current geopolitical position, and the growing investment attractiveness, is still directly linked to the company’s oil reserves. As shown by current developments, the oil giant is focusing on downstream JVs, even within the Kingdom, but there’s no eagerness in upstream JVs. Security of the Kingdom, and its Royal Family, Al Saud, depends 100% on the oil revenue base. With total reserves audited at a total of 268.5 billion barrels, no moves are to be expected to change this situation. Without full transparency in reserves and commercial pricing decisions (as Aramco is still to be considered a NATIONAL oil company), the only way for an IPO is downstream.

Riyadh also will need to have the full ownership of oil and gas reserves in the Kingdom to leverage the latter for its multi-billion or even trillion investment schemes being presented. Without this, no major diversification can be executed and the position of the ruling royal family will also be directly affected. A cash machine like Aramco’s upstream department is simply too valuable to be offered to the markets.

By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on January 30 2019 said:
    The original IPO of Saudi Aramco which was launched in 2016 by Saudi Crown Prince Mohammed bin Salman as part of Saudi Vision 2030 and covered all assets of Saudi Aramco is dead and buried. Saudi King Salman ordered its withdrawal because of risk of American litigation related to the 9/11 destruction of the World Trade Centre in New York and question marks about the true size of Saudi proven oil reserves.

    However, a downstream IPO (overwhelmingly petrochemicals) is no problem since would-be-investors could see the physical assets but they can’t see the proven oil reserves except to take Saudi Arabia’s word for it and here is the rub.

    The claim that an independent audit has confirmed Saudi proven reserves is false.
    The Audit can neither be independent nor unbiased since some of the companies that conducted the audit (DeGolyer, MacNaughton, and Baker Hughes’ Gaffney, Cline, and Associates) have or have had service contracts with Saudi Aramco, so it can’t truly be classified as an independent audit.

    My calculation of Saudi reserves based on Saudi production since the discovery of oil in 1938 till now (for which we have figures) and a deduction of an annual depletion rate of Saudi aging fields averaging 5%-7% for the same period, gives a figure of 70-74 bb of remaining reserves. My figures are more or less in line with those of other experts.

    The fact that Saudi Arabia’s proven reserves remained virtually constant year after year despite sizeable annual production and a lack of major new discoveries since 1965 is due to the Saudis increasing the oil recovery factor (R/F) to offset the annual production. The Saudis have been declaring an R/F of 52% or even higher when the global average is 34%-35%.

    By planning to acquire SABIC, Saudi Aramco could emerge as the world’s largest petrochemical producer and exporter. The Petrochemical industry is one of the fastest growing sectors of the global oil industry. In 2018 it accounted for 13% or 13 million barrels a day (mbd) of the global oil consumption and this is projected to rise to 16% by 2030. The strategy fits well with the diversification of the Saudi economy, enables Saudi Arabia to add value to its exports and also ensures a growing market share for its oil.

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

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