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Fossil Industry Faces ‘Epochal Change’ in Saudi Aramco IPO

Seci/wikimedia commons
Seci/wikimedia commons

In what The Economist calls “a stunning revelation,” Saudi Deputy Crown Prince Muhammad bin Salman revealed last week that he was “enthusiastic” about issuing an Initial Public Offering (IPO) for state-owned Saudi Aramco, described by the magazine as the “biggest, most coveted and secretive oil company” in the world.

“Personally I’m enthusiastic about this step,” bin Salman said. “I believe it is in the interest of the Saudi market, it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco,” he added.

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“Officials say options under preliminary consideration range from listing some of Aramco’s petrochemical and other downstream firms, to selling shares in the parent company, which includes the core business of producing crude,” The Economist reports.

“Aramco is worth, officials say, ‘trillions of dollars’, making it easily the world’s biggest company. It says it has hydrocarbon reserves of 261 billion barrels, more than 10 times those of ExxonMobil, the largest private oil firm, which is worth $323 billion. It pumps more oil than the whole of America, about 10.2 million barrels a day (b/d), giving it unparalleled sway over prices.”

Bloomberg notes that Aramco “could rival Apple Inc. as the world’s biggest listed company. It is solely responsible for tapping the world’s second-largest crude reserves, with production double that of its nearest rival. The company is one of the key players in balancing the oil market, and its investment decisions have the potential to move crude prices and affect economies around the world.”

Ex-White House official Bob McNally of the Washington-based Rapidan Group called the move an “epochal change” for the fossil industry. “Saudi Arabia is getting ready to ride the oil price roller coaster, not control it,” he told Bloomberg.

The initial plan would be to open about 5% of the company’s value to private investors. While there is no prospect that foreign firms will gain full control of Aramco or its oil resources, “everything is on the table,” a Saudi official told the magazine. “We are willing to consider options we were not willing to get our heads around in the past.”

The Economist points to some of the questions that have swirled around Aramco, from the accuracy of its oil reserve estimates, to its past role in setting global oil prices, to its extensive holdings outside its main fossil fuel business. The magazine suggests a few possible reasons for Saudi Arabia to consider partial privatization, from concerns about corruption to the threat of alternative energy, “which may well challenge fossil fuels.”

In the Globe and Mail, reporter Jeffrey Jones points to the fundamental shift an IPO would represent for Aramco. Its “public financial details are virtually non-existent,” he writes. “Going public would require a level of disclosure that the 82-year-old company, nationalized in 1980, has never had to contemplate.”

And then, “once public shareholders have such details as revenues, earnings, production costs, overhead, well results, and all of the other minutiae that investors take for granted, they will demand results in line with the likes of Exxon Mobil, PetroChina, Total, and BP,” he adds. At some point, “Saudi Arabia’s traditional role in world oil markets as a swing producer—one that can turn the taps open or closed, depending on market conditions—would clash with shareholder interests.”

On Vox, Deputy Foreign Editor Jennifer Williams digs into the psychology behind recent moves by the House of Saud, most notably the execution of 47 people, including Shia cleric Nimr al-Nimr, and the decisions to end a ceasefire in Yemen and cut diplomatic ties with Iran.

The monarchy’s behaviour “might seem bizarre, contradictory, or even self-defeating,” Williams writes. “But although the regime’s reasons for making each of these moves are complex, they all fundamentally spring from the same place: the Saudi regime’s profound sense of insecurity.”