Opinion

Remaking Saudi Arabia for Aramco’s IPO


Rumours are swirling that the world's largest IPO ever, might just slip a few months into 2019. Though Saudi Finance Minister Mohammed al-Jadaan told investors just recently on the 25th of September that the IPO of Saudi state oil giant Aramco will proceed as planned in 2018. Saudi Aramco said in a statement that the IPO remains ‘on track', underlining that it was committed to ensuring high standards.

However, there are a few big questions that have not been answered. The question of where Aramco will list has still yet to be answered. It will float on the domestic stock exchange in Riyadh, that is certain, but an IPO this size needs a major international exchange. The options for that would be either London or New York. Neither has been selected yet. It appears that Aramco will only formally announce this in late October, when a big investment conference in Riyadh is scheduled.

Once it is confirmed where Aramco will float, then the rest of the preparatory work can continue – having been contingent on this choice. It is a tight timeframe; 12 months is a short span to iron out all details and kinks, which is why the IPO may very well slip into the early months of 2019. But meanwhile, Aramco is taking steps to restructure itself into a contemporary supermajor, instead of the state entity it has always operated as.

In the past few months, Aramco has struck strategic partnerships with several key countries as it moves from simply selling crude, to ensuring its crude has place and space in a competitive world. It is deploying new technology in the Rub al Khalid – the vast Empty Quarter – that could help shore up and increase crude reserves. It has taken full ownership of Motiva in the US, home to the largest refinery in America. Mega-refinery partnerships have been signed in China, India and Malaysia – ensuring captive demand. And just last week, Aramco announced that would be buying and selling non-Saudi crude for the first time even.

That will form the lynchpin of an expanded trading business, which will put crude marketing and refined product trading under the same management. Currently, both are separate. Crude selling is crude selling, done in Singapore and Dahran. And refined products, which already includes non-Saudi fuels, is done out of London. Combining the two under one structure is a shift in policy for Aramco, approximating the arrangement of something like ExxonMobil, PetroChina or Glencore. Trading of Saudi crude will still be a priority, but expanding coverage will help Saudi Trading – set to be based in Singapore – cover its supply chain more efficiently to plug in gaps as they appear, as well as become a strong profit driver in its own right. This would be unthinkable five years ago. But to appeal to international investors, Aramco has to show them that its businesses are on part with the biggest international companies. 

At home, Saudi Arabia is also planning to phase out subsidies for gasoline and jet fuel, which would lit them up by almost 80% to international levels. Prices for gasoil and fuel oil – both heavily used in power generation, particularly in summer – will be reformed, at a more gradual pace. Saudi Arabia also plans to introduce value-added tax (VAT), scheduled to be implemented at the start of 2018. Details of the Citizen's Account, a household allowance scheme intended to reduce the impact of austerity policies on low and middle-income Saudi families would be announced in the coming weeks. While this is mainly focused on balancing the government's budget, it has a knock-on effect on Aramco. Previously, Aramco only had to answer to the Saudi King when it came to diverting funds from the company to balance out the rest of the economy. As a publicly traded company, this will come under intense scrutiny. By removing subsidies, it removes a drain on the Aramco coffers, which is a necessary change for a publicly-traded company. Too long has the country been dependent on Saudi Aramco as the national bank account. This IPO is a chance to restructure and rejuvenate the entire economy, making it leaner, fitter and more competitive.

All of this makes a delay in the IPO more and more likely. This isn't just a simple floating of shares. This is an attempt to remake the world's most valuable company and an entire country to be more dynamic economically and modern. In that context, waiting a few more months to ensure every checkbox is ticked is far, far better in the long run.



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