Energy

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.

Prince Mohammad bin Salman of Saudi Arabia displays an Elon Musk-like affinity for ludicrous challenges and grandiose promises. With his latest announcement, though, he's edging into Peter Thiel territory: floating cities.

The prince wasn't talking about seasteading on Thursday. Instead, he said that NEOM, the futuristic megalopolis he plans to build in northwestern Saudi Arabia, unveiled earlier this week, will sell shares in itself at some point. "It’s as if you float the city of New York,” he said in an interview with Reuters.

Living, as we are, in this brave new world with things like initial coin offerings, why not raise the idea of an initial city offering?

Here's why: It highlights a couple of big issues dogging a more-important, if less-esoteric, initial public offering Saudi Arabia is planning.

The linchpin of the prince's plan to raise a giant sovereign wealth fund and use that to help wean his country off its oil dependency is the IPO of Saudi Arabian Oil Co., or Saudi Aramco.

While any leader trying to push his country in a radically different direction must draw on reserves of hyperbole, the prince's earlier pronouncements of Aramco being worth $2 trillion and not caring about the price of oil have queered the pitch. Hence, while the government insists the IPO is on track, there is now also talk of selling a stake to China first -- although this would represent a big capitulation on Riyadh's part.

NEOM, as I wrote here, represents another triumph of rhetoric over pragmatism. Talk of selling shares in it at some point -- "it might be after 2030" -- compounds the air of fantasy (old-fashioned muni bonds just aren't shiny enough, I guess). So does the prince's expectation that NEOM can be run like a business without the usual concerns other cities grapple with because, along with companies, they tend to be inhabited by that frequently irrational species known as human beings. 

It also serves to remind any potential investor in Aramco of its biggest risk factor (apart from oil prices). Anyone buying shares in the oil company would also be buying a stake in that other risky venture known as the Saudi Arabian reform project.

In that respect, Aramco shares some uncomfortable parallels with NEOM. The latter is an economic, political, and diplomatic project wholly owned by the government yet being pitched as a strictly commercial venture. Aramco is a commercial venture -- but it also happens to be the beating heart of Saudi Arabia's political economy and diplomacy and is also wholly owned by the government.

A successful international IPO of Aramco rests largely on convincing investors that the commercial aspect of the company can be distanced from its other role as a national champion. Not doing so would likely mean a relatively poor valuation, like that of Russia's Rosneft Oil Co. PJSC or Brazil's Petroleo Brasileiro SA.

The State They're In
The combined market cap of Russia's and Brazil's national oil champions has collapsed to $125 billion -- less than the value of BP
Source: Bloomberg

To believe in Saudi Arabia's future, and thereby Aramco's value, there needs to be credibility about reform plans and the ability to pull them off. The broad outlines of what the prince hopes to do, in terms of diversifying the economy and getting more of his people into productive private-sector jobs rather than the state bureaucracy, are encouraging.

But NEOM, which somehow combines futuristic fantasy with the all-too familiar blueprint of a grand, top-down infrastructure boondoggle, undercuts all this. Musk and Thiel may set outlandish goals, but they have already done enough to convince a critical mass of investors and lenders to back them. Saudi Arabia isn't there yet.

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 ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net