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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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Aramco IPO Delay Fears Are All Hype

International media sources are once again falling over each other by reporting that the eagerly awaited Aramco IPO is no longer on track for 2018.

Certain rumors and interpretations are being used to substantiate that Saudi Arabia is no longer targeting a Q2 2018 Aramco IPO. Many think recent statements by Aramco CEO Amin Nasser and Saudi Minister of Energy Khalid Al-Falih are indicators that the listing is delayed. Some even wonder if the “IPO of the century” will happen at all.

Consider Al-Falih’s remarks made during the World Economic Forum (WEF) in Davos…

He stated that Aramco will be listed “when the time is right,” and reiterated that “ultimately we have to make sure that the market is ready.” Analysts assessed this normal reply as an indirect acknowledgment that the IPO has hit major hurdles, mainly caused by the ongoing discussion on where to list it and at what price. Others now say that there’s no longer a need for the IPO, as the government received a major boost from the successful OPEC production cut strategy, which significantly boosted crude oil prices.

Official figures presented by the Saudi government also show very positive financial figures and a healthy economic growth in 2018. If the main idea behind the Aramco IPO was to fill up the coffers of the Saudi government and to counter government deficits, the current assessments would hold a lot of weight. However, the Aramco IPO is meant to be more than only plugging the hole in the Saudi budget. The main driver is not for it to be a short-term cash generator but a long-term wealth generator with a lot of leverage for the total Saudi economy.

The possible revenue of the IPO, even if hitting record highs, would only be around $100–200 billion, based on a total valuation of Aramco at $2 trillion, which is 4–5 times more than Royal Dutch Shell. These figures have become the holy grail for the majority of analysts, and discussions on Aramco’s valuation and reserves have clouded the real discussion that should have been held.

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The main reason for the Aramco IPO is to attract the attention of the global financial gurus. This IPO’s leverage is enormous, as it has hit the front page of every single newspaper in the world since its conception.

The IPO’s success already has been demonstrated by the enormous influx of international financial institutions, hedge funds and SWFs. They flocked to the Riyadh Ritz Carlton for the Future Investment Initiative 2017, resulting in a boom of investment interest focused on Saudi Arabia. Since the high-level Riyadh summit, multitudes of investments have already started flowing into the kingdom, pushing Saudi Arabia to the top spot on the MSCI Emerging Markets Index in 2018.

The idea and the promotion of the Aramco IPO is among history’s best-ever marketing stunts. Without revealing even its real reserve figures, by only offering 5 percent of a still state-owned entity, Aramco has become the Saudi sword to cut out whichever chunk of the cake it wants.

Saudi’s main power player, Crown Prince Mohammed bin Salman (MBS), used the IPO discussion to put himself and the NEW Saudi Arabia on the map. Without it, nothing would have been possible, as the world — particularly its financial investors and corporates — still had a largely negative view of the kingdom and its possibilities.

MBS has used this leverage to propone other ideas, to push forward his dream of Saudi Vision 2030, and to increase his power position in the kingdom and abroad. Without the Aramco project, the world would have still been watching minor developments in Dubai or Cairo, while dreaming of entering Iran. With one stroke, the Aramco IPO, all the latter were pushed lower on the list.

To expect that the kingdom would now decide to delay or even end the IPO strategy means a total ignorance of the situation on the ground. MBS’ power position depends on the interaction between the Aramco IPO, the role of the Saudi sovereign wealth fund PIF, and the success of the giga projects like Qiddiya and NEOM. MBS must make sure that all will take place. Saudi Arabia’s king-to-be cannot rely on a high revenue stream of oil and gas to support the hard-needed economic diversification plans, which need more than $2 trillion in the coming 10–12 years. Success is needed, and only the Aramco IPO, combined with a list of other state-owned entities, will be enough to continue Saudi’s future diversification.

The road to success often isn’t easy, so it’s no surprise that the Aramco IPO still faces several major obstacles, including a struggle to find the right place(s) to list the company. Then there’s the unknown effects of injecting between $200 billion–$2 trillion into an economy of less than $500 billion. The positive and negative effects are unclear, but some have already warned for the Saudi version of the “Dutch disease.” The Saudi Capital Market Authority (CMA) has been tasked to set up assessments of the impact of such a vast amount of investments.

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Destabilization of the Saudi economy and its financial markets should be prevented, as this would constrain economic diversification efforts. The concern that the IPO is too large for the local stock market to absorb is real. The market has a capitalization of about $470 billion, meaning it could be destabilized by Aramco’s listing if other stocks are sold to raise funds for investment in the oil giant. According to Reuters, Mazen al-Sudairi, head of research at Al Rajhi Capital, said that “listing 1 percent of Aramco locally would absorb more than the government’s entire domestic borrowing last year, which totaled $14.3 billion.”

Aramco analysts should be looking at the messages coming from the MBS circles. Until now, the crown prince has never stated that the IPO will be reassessed. He and his close allies (think: Aramco’s CEO Nasser or Minister of Energy Al-Falih) know there is only one real option: to proceed with the IPO, whatever it takes. With a delay or fear in the market that the IPO is off the table, MBS could be signing his own end, too.

Success makes strong, especially in the Arab world. MBS’ current support inside of the kingdom needs a successful Aramco IPO and a continuation of the dream. Giga projects and a socio-economic restructuring of the kingdom need the influx of foreign investments. The media’s attention for the “IPO of the century” will give MBS and Saudi Arabia the leverage to reach their goals — and everyone will want to stand in the limelight next to the new “King of Arabia.”

By Cyril Widdershoven for Oilprice.com




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  • Mamdouh G Salameh on January 30 2018 said:
    There is a real possibility that Aramco IPO could be withdrawn altogether. And if the opportunity does not arise to do exactly that, then I advice the Saudi decision-makers to do so.

    The Aramco IPO was proposed as part of Saudi Arabia’s Vision 2030 with the objective of securing an estimated $100 bn from the sale of 5% of Saudi Aramco in support of Saudi diversification and the creation of a modern Saudi economy.

    The Saudi anti-corruption drive has already netted more than $106 bn according to Saudi official sources. This is bigger than the estimated value of the IPO. Moreover, the Saudi government could get more funds from a total elimination of subsidies and a peaceful settlement in Yemen.

    The recent rise in oil prices is already starting to repair the damage inflicted on the Saudi economy by the oil price crash in 2014. So financially, Saudi Arabia has no need for the IPO.

    And for those who say that the IPO investment leverage is enormous, I would say that the fact Saudi Arabia has the second largest proven oil reserves in the world is a greater leverage than the IPO and investors will always be eager to invest in Saudi Arabia if the Saudi decision makers give them the nod.

    Saudi Aramco is the jewel in the crown in the Saudi oil industry. It is a world class company in terms of technology, global reach and proven reserves. Keeping it totally under Saudi ownership enables Saudi decision-makers to decide oil policy and the freedom of global investments without any foreign interference and without any risk of litigation by the United States.

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

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