Aramco will be financial history’s biggest IPO

It will be the mother of all initial public offerings (IPO), unquestionably the biggest financial deal in history. Saudi Aramco is a $2 trillion colossus, the largest oil and gas producer on earth, owner of one fifth of the kingdom’s oil reserves. Saudi Aramco financed the epic transformation of Saudi Arabia into the powerbroker of Opec, the biggest economy in the Arab world and the geopolitical future of the Middle East. Saudi Aramco pumps more crude oil than Exxon Mobil, Shell, BP and Chevron combined. If the Saudi Arabian government privatises Saudi Aramco to create the world’s largest sovereign wealth fund, when it sells five per cent of the company in 2017 on the international financial markets.
The privatisation IPO of Saudi Aramco is central to Deputy Crown Prince Mohammed bin Salman’s Vision 2030 strategy, which is nothing less than a blueprint for the kingdom’s post Oil Age economy. Alibaba’s IPO in New York and Shanghai raised $25 billion but the Saudi Aramco IPO will raise at least $100 billion. The crash in crude oil prices since 2014 and the geopolitical crises in the Arab world since 2011 have only intensified the need for the Saudi government to boost its economic growth rate, diversify its non-oil consumer services and industrial base and attract foreign capital to the kingdom. Not since the reign of the late King Faisal bin Abdul Aziz, which coincided with the black gold bonanza of the early 1970s just after the Arab-Israeli war in the Sinai and the Golan Heights, has the economic momentum of the kingdom portend change on such seismic a scale. Saudi Arabia’s economic transformation creates once in a lifetime investment opportunities for prescient investors.
The IPO of Saudi Aramco will transform not only the public finances of the kingdom but also its financial governance and its oil and gas industry. Since the shares will be placed with institutional investors in New York, London and Hong Kong, Saudi Arabia will disclose audited financials and output data to the global capital markets, as is the norm with mega privatisation IPO deals. A syndicate of international banks would share the biggest equity underwriting fee jackpot in the history of Wall Street, the City of London and Hong Kong.
The IPO of Saudi Aramco would be a milestone moment in the history of postwar finance, an event as transformational as Sir Sigmund Warburg’s eurobond new issue for Italy’s Autostrade or the evolution of the Shariah-compliant (sukuk) debt markets in the 1990s. Ever since Chevron geologists first struck oil in a Dammam salt dome in 1937, Saudi Aramco has been the financial umbilical cord of the kingdom, generating for 90 per cent of budget revenues.
It is still unclear if Saudi Arabia will privatise Aramco’s upstream assets or just sell stakes in its vast refining or petrochemical complexes. It is also unclear how a privatised Saudi Aramco will impact the Saudi government’s output or pricing strategies in the global oil market or impact its relations with Opec. If Saudi Aramco is public, I doubt if the kingdom will ever play the role of Opec’s “swing producer” or the “central bank of black gold”, since output cuts are incompatible with revenues maximisation. This alone means a shift in the nodal points of world economics and politics.
As happened just before Opec’s Doha meeting, Brent and West Texas crude prices have risen on hopes for an oil deal at Algiers next month. I believe that it is unlikely that Saudi Arabia and Iran (let alone Iraq or Russia) will agree to any oil output freeze as wars rage in Syria, Yemen and Ukraine/Crimea. Iran has ruled out any output ceilings. Nigeria is desperate for petrocurrency revenues after the botched naira devaluation. Saudi Arabia has ruled out a unilateral output cut. Iraq is at war with Daesh. Libya has just returned to the international oil market. Venezuela is bankrupt. A disappointment in Algiers will be hugely bearish for crude oil prices. — business@khaleejtimes.com