Saudi Minister of Energy, Industry and Mineral Resources, Khalid Falih, stated to the press yesterday that the IPO has NOT been cancelled but partly delayed. Falih reiterated that the Kingdom is “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". This news should not have come as a surprise to international investors and media pundits, as after news emerged that Aramco is discussing the acquisition of a 70% stake in the world’s largest downstream company SABIC, currently held by SWF Public Investment Fund, officials already stated that a delay was imminent. Still, it seems that the Aramco IPO needs to be making headlines on a regular basis, even without a basis. As a Dutch saying states “in the Summer Season any development hits the headlines of international media”. The planned floatation of Aramco is still there, however, changes to the possible stakes to be divested could be changing. As already stated before (here) Aramco is looking at a larger footprint in downstream, not only via direct investments in new projects worldwide but additionally by acquiring competitors. SABIC, a former spinoff of the oil giant, has been since years a “thorn in the eye” of the Saudi oil producer. The international expansion of SABIC and ongoing diversification of its product range has become an interesting target in the eyes of Aramco officials. Still, the latter was always put on ice as other opportunities were more suited in the eyes of the power brokers.
Since the announcement of the Aramco IPO by Saudi Crown Prince Mohammed bin Salman, the world has been watching with increased skepticism. The enormous financial and legal hurdles that the largest national oil company in the world was facing to be able target listings in New York, London or Hong Kong, seemed from the start already unsurmountable. Still, MBS and Khalid Al Falih had set out the course, a cancellation out of the question. A multitude of US and European advisors have been making a hefty sum of money the last years, without real results in the end. The underlying factors not solved are still the same. Aramco’s listing would need total transparency on its reserve potential, production strategy, legal and government structures. These issues are almost not reachable, as Saudi Aramco is Saudi Arabia. The Kingdom’s future and attractiveness for investors or operators depends still on the Saudi position of being the world’s swing oil producer, holding an almost indefinite reserve potential. Insights in the real production and reserve capacity, or more ‘dangerous’, the real situation of its fields, could be a security risk of unknown proportions. The latter has become clear to all, also to Saudi’s leadership.
The last year the IPO has become a discussion point, especially within the Saudi ruling elite. If Aramco would not have been the main revenue backbone of the Kingdom, the IPO would have been put to sleep without any problem, as the main reason to announce an IPO, a possible huge influx of foreign direct investments and revenues, is not anymore the main driver. Higher crude oil prices, increased downstream profit margins, and a steady influx of FDI, has partly removed the necessity. The listing on the FTSE and MSCI Emerging Markets Index also has been ‘undermining’ the need for the 5% Aramco IPO listing. MBS’ move to announce the IPO plans however has been one of the main reasons for this increased investors’ confidence in the Kingdom.
The coming months the Saudi leadership will make it most probably clear that the original plans for a 5% Aramco listing will be slightly changed. A successful acquisition of SABIC, expected to cost around $70 billion, will establish a very strong Aramco downstream entity. The latter, when looking at current developments, could be set for an Aramco IPO 2.0, which would bring the downstream entity to the market. The total listing will not be bringing the targeted $150-200 billion, as stated by the 5% Aramco IPO, but still could fetch around $100 billion or more. If successful, and why not, Saudi’s leadership could still declare the Aramco IPO to be a success, without having to open up their books on oil and gas reserves, or have any financial institution ask difficult question about Aramco’s production and export strategies for the coming years. A downstream IPO would keep all of these issues behind closed doors of the Royal Palace in Riyadh and the office doors of Khalid Al Falih.
At the same time, Saudi Crown Prince Mohammed bin Salman’s internal position in the still ongoing royal power battle for the Crown is not undermined. MBS has been putting his neck out when mentioning that Aramco will be partly privatized. The latter, at that time, was the precursor for the other plans mentioned in Saudi Vision 2030. The success of several privatization projects, combined with higher oil revenues, is clearly supporting MBS’ future. The cancellation of the Aramco IPO however would put the Crown Prince in imminent danger. A failure at present can straight away be the first step towards a renewed royal power struggle, as opposition still remains.
When looking at the overall situation in Saudi Arabia, based on current effects of Saudi Vision 2030, Aramco IPO, and the immense amount of privatization and Giga Projects presented, maybe it is time to reassess the future options to be targeted. The changes already visible in the Aramco IPO approach could be used as a sign to reassess the overall investment strategies in place for Saudi Vision 2030.
The Kingdom has been hitting the headlines of global media outlets, not only by Aramco or OPEC. The presentation of the high-profile Giga Projects Qiddiya, Red Sea Islands and NEOM, has been given food for discussion and optimism about changes in the Kingdom. Investors will be flocking again in October to the Future Investment Initiative 2018, “Davos in the Desert 2.0”. Interest is still there to invest and operate in the new Saudi Arabia. However, the current project scope presented is not going to hit the main raw nerve of young Saudi men and women. The multibillion Giga Project investments are not going to bring a sustainable environment in which enough jobs are created to counter the high unemployment levels. As indicated in Saudi Vision 2030 around 5 million new jobs are needed the next decade and a half. Privatization of existing companies or organizations are also not going to bring the hard needed positions. Change is needed, as the IPO also has shown.
At present, part of the Saudi society is still working from a Dutch Disease 2.0 approach. When oil prices were hitting rock-bottom, the need to remove subsidies and other government revenue disbursement techniques were clear. Investments were targeted to bring money to the Kingdom. Since the last year, after crude oil has been hovering again between $70-80 per barrel, investments strategies have changed again. In stark contrast to what Saudi Vision 2030 stipulated, more investments in Saudi Arabia to build up opportunities for Saudis, it now again seems that investments abroad have become the rule again. The Saudi sovereign wealth fund PIF, explicitly asked to support Vision 2030, has been very active abroad. The need for jobs is however in Kingdom, not in the USA, Europe or Asia. The only way to act is clear. Invest all in the setting up of Small and Medium Enterprises (SMEs), the main backbone of most developed economies, and main provider of income and jobs to the population. First approach at present should be establish an investment strategy to build and promote Saudi based SMEs, before engaging abroad or targeting only high-tech sectors such as AI or IOT. The latter sectors are needed, but will never bring a real sustainable amount of jobs needed in the coming years. Other options are needed, otherwise Vision 2030 will only be a high profile media project, bringing Giga Projects but no real job creation.
Any change or strategy is facing obstacles and hurdles, Saudi Vision 2030 and Aramco’s IPO are not strange ducks in this pond. Hopefully Saudi officials and royals will understand that job creation has always been the main supporter for stability. Put all in place to address the needs and dreams of the young, the rest will come after. Without job security and future opportunities, MBS could betting on the wrong horse!