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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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Saudi Aramco IPO Under Pressure, As 9/11 Lawsuits And Oil Prices Hit

Ara

Saudi Aramco’s IPO future looks a bit more bleak than was expected. U.S. lawsuits by American insurance companies and the continuing threat of low oil prices are pushing Saudi Arabia into a corner.

On 23rd of March, a long list of U.S. based insurance companies, including Safeco, Wausau and many Lloyd’s syndicates, have joined hundreds of families of 9/11 victims in filing lawsuits in the U.S. District Court of Manhattan. The parties are slated to be seeking more than $2 billion in damages. Some reports even state financial damages of up to $11 billion, but no confirmation until now has been given. Families of 9/11 victims and insurers are claiming that the attacks by Osama Bin Laden’s Al Qaeda are “an act of international terrorism”, that falls under the Justice Against Sponsors of Terrorism Act (JASTA), which was approved by the U.S. Congress in September 2016. As the main party in this law suit, the victims and insurers are claiming that Saudi Arabia and a number of its charities have supported the Al Qaeda organization via financial and material support, enabling the latter to carry out the attacks. Former U.S. president Obama even tried to block JASTA via a veto, but Congress was able to override the veto. 

The impact of the JASTA lawsuits could be much larger for U.S.-Saudi relations than currently has been assessed. The still fragile relationship between the Kingdom and Washington, largely due to 8 years of Obama’s strategy in the Middle East, where Washington has been on a confrontation course with Saudi Arabia, Egypt and several other main Arab allies with regards to the Arab Spring and Syria. Saudi Arabia’s minister of foreign affairs Al Jubeir and Deputy Crown Prince Mohammed Bin Salman (MBS) recently visited the U.S. in an attempt to revamp the bilateral cooperation. Officially the strategic relationship between Riyadh and Washington has improved significantly, as Mohammed bin Salman and Trump seem to have been cozying up. On the surface, the Trump Administration has been willing to reset relations with Saudi Arabia. Main driver for this seems however to be the offer made by the Kingdom to instigate a $200 billion investment program, as MBS openly stated during his visit to Washington earlier this month.

Saudi officials have called it a "historical turning point" in U.S.-Saudi relations, but facts on the ground show that there are more threats to this relationship than positive developments. During all meetings, the impact and possible threat of JASTA has been on the table, but no real measures have been taken it seems. Looking at upcoming Saudi Aramco IPO and its listing on the New York Stock Exchange (NYSE), a continuation of JASTA law suits could be seen as a potential financial threat for Saudi Arabia.

The JASTA lawsuits have come at the same time that Saudi minister of foreign affairs Al Jubeir stated in the press that Saudi Arabia is having "serious discussions" with the New York Stock Exchange about having the NYSE as one of the exchanges for state oil giant Saudi Aramco's IPO. He reiterated on Friday, March 24, that “our objective is to try to complete the IPO sometime in 2018. There are serious discussions with the New York Stock Exchange about having the NYSE be one of the exchanges for the Aramco IPO and I believe the decision will be made on the financial merits". Looking however at the lawsuits, this could become doubtful soon. For U.S. investors and Washington pundits, the threat is also real as Aramco and MBS could decide not to list it on NYSE but choose major listings in London (LSE), Hong Kong or Tokyo. Such a decision could be another major slap in the face to Trump, as part of his ongoing economic strategy would be increased investments in the U.S. infrastructure sector. Saudi Arabia, via MBS, has been promising vast investments in these sectors, in addition to Saudi high-tech investments already done or projected. The lawsuits against the Kingdom currently pursued will not be taken lightly by Saudi royalty. Possible reactions could be a reconsideration of existing and future investments of Aramco, SABIC, Saudi’s SWF Public Investment Fund (which will be having revenues of Aramco IPO) and others. Related: 4 Factors Driving Oil Prices This Summer

At the same time that lawsuits are threatening Saudi assets in the U.S., and possibly the IPO position of NYSE, Saudi officials will be worried about the impact of the “2nd shale revolution” in the U.S. and the effects of the OPEC and non-OPEC export cuts. Global crude oil prices are again showing a roller-coaster ride, prices are very volatile, based on emotions and a lack of confidence in OPEC and non-OPEC producers. Last weekend’s joint committee meeting of OPEC and non-OPEC members in Kuwait reviewed the impact of the December 2016 agreement to cut their combined output by almost 1.8 million barrels per day (bpd) in the first six month of 2017. The original deal was to last six months, with the possibility of a six-month extension. No decision has been taken during the Kuwait meeting. Officials now stated that the committee had requested a technical group and for the OPEC Secretariat to "review the oil market conditions and revert ... in April, 2017 regarding the extension of the voluntary production adjustments". The latter is seen by the market as not enough to stabilize crude oil prices. A potential further liquidation of long positions is to be expected, if no other signs of improvement are seen soon. As Kuwait’s minister of oil Essam Al Marzouqi stated, “unless we have conformity with everybody, we cannot go ahead with the extension of the deal”. Others reiterated however that the data in the market shows that there is a high level of conformity by members (OPEC and non-OPEC) to participate fully with the December 2016 decision.

For Saudi Arabia, Aramco, deputy crown prince Mohammed Bin Salman, and minister of oil Khalid Al Falih, the signs are however put on red-orange. The threats of higher crude price volatility, combined with increased U.S. shale oil and a production increase of Iran, Iraq, Libya and others, doesn’t bode well for a full success of the intended Aramco IPO at the start of 2018. The overall picture of Saudi Arabia looks gloomy, if you believe the international media. As Saudi Arabia is heavily reliant on hydrocarbon revenues, its government income has fallen by around 64 percent. Saudi’s Department of Finance reported in the Saudi Arabia 2017 budget, that revenues have fallen to around SR329 billion at the end of 2016, 64 percent lower than in 2014. Hydrocarbon income as a percentage of the Saudi’s government budget has shrunk to 62.3 percent in 2016, in comparison to 87.9 percent in 2014. The Saudi government had to enter the international financial markets during that time to borrow money to fund expenses. This has caused it to incur hefty budget deficits. On March 22, Fitch Ratings shocked the market when it downgraded Saudi Arabia’s long-term foreign and local currency issuer default ratings to “A+” and a stable outlook. As Fitch stated, the downgrade reflects “the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform program can be implemented”. Related: Will The Oil Price Slide Lead To A Credit Crunch For U.S. Drillers?

The impact of the Saudi-led OPEC crude oil production cut has hit the Kingdom severely. Saudi’s cut commitment already has been put in place, taking 486,000 bpd of crude out of the market. The financial impact is clear, but when looking at current market developments could even be harsher than expected. In contrast to what was expected, overall crude prices have shown a tendency to decline even further. For Saudi’s economic positon the current situation is a nightmare scenario. Not only as government revenues are directly hit, but the possible value of the Aramco IPO will be also under pressure. It will be clear that crude oil prices hovering between $55-65 per barrel will attract a higher interest of institutional investors than at current price levels. The targeted $100-200 billion for the 5 percent stake of Aramco now seems to be farfetched. A much lower result will not only put pressure on the Saudi Vision 2030 plans, but also will possibly be a threat to the liberal economic ideas and strategies currently proponed by Mohammed Bin Salman.

Still, Saudi rulers seem already to be taking precautionary measures to mitigate the possible onslaught of shale oil, lower oil prices and a lower than expected Aramco IPO outcome. The Asia Tour of Saudi King Salman should be seen as a major offensive to increase the position of the Kingdom worldwide, largely by increasing Saud investments and asset portfolio’s in its future markets, China, India, Malaysia and Indonesia. In addition to confirm Saudi Arabia’s commitment to these major economic giants, another issue is also supported. As possible legal issues could block a full listing of Aramco on NYSE, Asian financial centers have become very attractive. The Kingdom’s willingness to sign multibillion agreements with all, as consolidation of already existing economic relations, largely downstream, is also an instrument to seek possible listings in Hong Kong or Tokyo. Discussions on the latter have been held in China and Japan, the Saudi ministry of foreign affairs stated. Some others have stated that European financial centers are also still on the short-list, especially London (LSE) and Frankfurt. If NYSE will be seen as a possible threat to Saudi interests, Asia and Europe could be targeted in full, while another part will be listed on the Saudi stock exchange TADAWUL.

By Cyril Widdershoven for Oilprice.com

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  • Something2Ponder on March 29 2017 said:
    The other fact few, if any "main stream media" are taking into account is the exorbitant royalties and taxes paid by ARAMCO. 20% Royalties and a CRHUSHING 85% tax rate!! What investor is going to overlook these two factors when evaluating any potential ROI related to the IPO? Lastly, let's assume KSA finds investors "stupid" enough to overlook the aforementioned, are those investors also gullible enough to not realize a scenario wherein KSA could manipulate prices higher for purposes of a successful IPO (after all, that is what seemingly every story openly eludes to) only to follow that up with once again flooding the market with crude which would drive the price of oil ever lower? Why WOULDN'T KSA do that? Once the stock tanks (after the IPO), KSA could repurchase those shares for pennies on the Dollar. Who is asking these question? I am, but I can't be all alone in doing so; can I?
  • cyril widdershoven on March 29 2017 said:
    Dear Something2Ponder, all your comments are taken into account. As news shows today, Saudi is recognizing the tax issue and has come up with a severe change to this. Still, you are right, it is still a NOC, not an IOC, maybe in future a NIOC, but there are always going to be issues that are political or national security related. Still, feel the interest will be there, maybe largely from institutional investors, other socalled NOCs or SWFs. The stock price/buy-back issue will be on the table, am sure, as this will be on the mainstream financial investors brains. Still, it is a precedent, never happened, new rules will be put in place and market will act accordingly. Asians, Russians, GCC SWFs and maybe even IOCs with cash filled bankaccounts will be happy to open a door to Saudi.

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