The initial public offering of Saudi Arabia’s energy major Aramco is still a part of the Kingdom’s plans, Oil Minister Khalid al-Falih said, following reports yesterday citing industry sources as saying that the IPO had been canceled.
Arab News quoted Al-Falih as saying, “The Government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum. This timing will depend on multiple factors, including favorable market conditions, and a downstream acquisition which the Company will pursue in the next few months, as directed by its Board of Directors.”
Industry sources had told Reuters a day earlier that Aramco had disbanded its group of financial advisors and had turned its attention to another deal: the acquisition of “a strategic stake” in industrial conglomerate Sabic. Earlier reports said plans were for Aramco to buy 70 percent in Sabic, paying for it between US$50 and US$70 billion to the Saudi sovereign wealth fund. In other words, US$50-70 billion would come out of one Saudi state pocket—Aramco—and go into the other one that is the sovereign wealth fund, PIF.
When these reports first emerged, there were suggestions that the Aramco listing might be suspended due to the lack of what Al-Falih called optimum conditions. The listing that was initially supposed to be both at home and abroad has been delayed several times with Aramco slow to achieve the transparency levels required for a listing on any of the world’s largest bourses, and necessary to spark investor interest. Related: Energy Is A Breaking Point In NAFTA Deal
This investor interest, too, has been more reluctant than Riyadh may have expected, as people become more careful with the oil industry after the 2014 price collapse. Oil prices have also been a problem. Despite an improvement brought about by the production cut agreement from 2016, prices never stayed as high as Saudi Arabia needed them to in order to make the Aramco IPO a success, as large consumers such as India and the United States complained about prices at the pump, pressuring OPEC to do something about it.
Al-Falih’s assurances that Aramco has completed its preparation for the listing may be true in part or wholly, but the fact remains that conditions are not optimum, and it’s anyone’s guess when—if ever—they will become optimum for the IPO to take place.
By Irina Slav for Oilprice.com
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As annual Brent crude oil prices approximately doubled from $25 in 2002 to $55 in 2005, Saudi net exports (total petroleum liquids, BP data base) rose from 7.1 million bpd to 8.7 million bpd, a 6.8%/year rate of increase.
As annual Brent crude oil prices doubled again, from $55 in 2005 to an average of $110 for 2011 to 2013 inclusive, Saudi net exports averaged 8.0 million bpd (11% below the 2005 level), and so far Saudi annual net exports have been below their 2005 level for 12 years, through 2017.
Furthermore, if we extrapolate the 2005 to 2017 rate of decline in the Saudi ratio of production to consumption (what I call the Export Capacity Index, or ECI Ratio), it suggests that the Saudis have already shipped more than half of their total post-2005 supply of Cumulative Net Exports of oil (CNE).
At an ECI Ratio of 1.0, production = consumption and net exports = zero. Saudi Arabia’s ECI Ratio fell from 5.0 in 2005 to 3.1 in 2017. Note that when Saudi Arabia’s inevitable production decline kicks in, the rate of decline in their ECI Ratio will really accelerate.
The first is risk of American litigation. The IPO or any Saudi investments or funds in the United States could have been at risk by the legislation passed by the US Senate and the US House of Representatives in May 2016 that would allow families of September 11 victims to sue the Saudi government for damages. The law removes the sovereign immunity, preventing lawsuits against countries whose citizens were found to be involved in the attacks. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen.
The second reason is that no investor would have considered buying into the IPO without independent auditing of Saudi proven oil reserves. Saudi Arabia claims proven reserves of 266 billion barrels (bb) when my own research and others’ has shown them to be in the range of 74-80 bb.
A third reason is that rising oil prices have obviated the need for Saudi Arabia to sell 5% of Saudi Aramco.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London