Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

I know Saudi Arabia has been cozying up to Russia recently, but a Potemkin IPO of Saudi Aramco would be taking things a bit too far.

After rumors of a delay to the international stock-market debut of Saudi Arabian Oil Co. surfaced last month, more appeared on Friday afternoon.

However, another path Saudi Arabia is considering is to sell a stake in Aramco privately to a handful of foreign, sovereign investors, the Financial Times first reported. This could involve straight equity or possibly a convertible bond, according to Bloomberg News, alongside a domestic listing. An international listing might follow at some point.

Riyadh insists the IPO is on track. But if the private option is being considered, then it would represent a stunning retreat.

Selling shares in Aramco is meant to raise billions for a government that could certainly use it, but this was never just about the money. Besides prestige, a national oil champion with a value -- as Riyadh hoped -- in the trillions of dollars on every trading screen in the world was to be the cornerstone of a public investment fund designed to help pull Saudi Arabia's economy into the 21st century. Back in April 2016, then deputy-crown prince Mohammed bin Salman -- he's moved up in the world since -- told Bloomberg Businessweek in an interview that the plan would:

Technically make investments the source of Saudi government revenue, not oil ... So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.

An IPO of this size would be a colossal undertaking even without that baggage. What complicates it further is that Riyadh has been talking up the value of Aramco even as its continued efforts to gin up the price of the barrels underpinning that valuation haven't met with resounding success as yet.

Faced with possible embarrassment at a potentially volatile juncture in Saudi Arabia's history, doing a private deal must look appealing in several respects. It would offer a way of raising billions but without having to put an exact number on it publicly. Moreover, Saudi Arabia could use it as an opportunity to engage in some financial diplomacy with -- surely top of any shortlist -- the likes of China and India. As a bonus, Riyadh could avoid the thorny issue of publishing regular assessments of the country's proved oil reserves, as well as political friction or potential litigation in New York or London.

The problem is that, like the proverbial Russian hamlet, this would be a poor excuse for a sale and a sign of weakness.

The whole point of the IPO, despite the challenges transparency presents to a government like Saudi Arabia's, is that it is public. Even a listed stake of just 5 percent would offer a minute-to-minute reminder of Aramco's shift further toward a more commercial entity.

More importantly, it would provide the essential validation for that public investment fund; a benchmark valuation of its number-one holding established in the deepest pools of equity capital on the planet (Saudi Arabia's domestic exchange is roughly 11 percent the size of London's and 2 percent of the New York Stock Exchange).

A valuation agreed around a table with some sovereign funds just isn't the same. When Rosneft PJSC was floated in London in 2006, its reliance on strategic investors such as BP Plc and state-owned national oil companies from Malaysia and China to take large slugs of the stock was viewed at the time as a sign of lackluster demand rather than having rich friends. Performance since then hasn't been terribly inspiring:

Cautionary Tale
Rosneft's valuation has drifted mostly sideways and down since listing in London just over a decade ago
Source: Bloomberg

And don't forget, Rosneft listed close to oil's all-time peak, when Beijing, along with many others, was concerned chiefly with how it would secure access to scarce supply. Today, officials in China and India know Saudi Arabia will do all it can to send its barrels east, because that's where all the growth is; and there are plenty of competitors out there waiting to supplant them. Riyadh need only look to the low multiple paid in the recent purchase of a 14 percent stake in Rosneft by CEFC China Energy Co. for just how hard a bargain the Chinese can strike with national oil companies these days.

A Potemkin IPO would risk the worst of all worlds: fewer dollars, a lower valuation (even if kept secret), and a weakened public investment fund. The loss of face might be marginally less than a public market cap below the unrealistic sums that have been thrown around to date; but maybe not.

For those watching from the outside, signs of trouble in the Aramco IPO can also be read as signs of trouble in the Saudi Arabian reform plan overall; a reminder of the rising potential for disruption in the Middle East.

If that's potentially bullish for oil -- in the worst possible way -- then consider the flip-side. If the IPO option is much delayed or shelved altogether, then the effective put it underwrites in today's oil market might go the same way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at

To contact the editor responsible for this story:
Mark Gongloff at