Kostas Tsironis/Bloomberg

Saudi Aramco

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The world's most valuable company may not be Apple Inc. That crown could instead belong to Aramco, as Saudi Arabian Oil Co. is better known. The sprawling state-owned producer, sitting atop one-fifth of the globe's petroleum reserves, pumps more crude than the top four publicly traded oil companies combined. Crown Prince Mohammed bin Salman, the Saudi king’s influential son who’s driving the sale, says the company is worth in excess of $2 trillion, more than double the size of Apple. Aramco may also be the world’s most profitable company: a first glimpse at its finances showed that it churned out $33.8 billion in net income the first six months of 2017, easily outstripping the biggest U.S. firms. The Saudi government is planning a partial privatization of Aramco to create a war chest and prepare the country for the post-hydrocarbon age.

The Situation 

Among the most eye-catching facts from financial figures reviewed by Bloomberg News: Aramco is almost totally free of debt and enjoys production costs running at a fraction of the industry standard. But Saudi Arabia’s dependence on the company to finance social and military spending, as well as the lavish lifestyles of hundreds of princes, places a heavy burden on its cash flow. In a statement, Aramco called the figures “inaccurate” and said it would not comment on “speculation.” The kingdom’s original plan was to sell up to 5 percent of Aramco in 2018, but ministers now acknowledge the timing of the initial public offering may slip to 2019. The authorities are still weighing up whether to hold share sales on the Saudi bourse and one or two overseas exchanges — or restrict the offering solely to the domestic exchange. Some banks pitching for the business tentatively valued a 5 percent stake at $50 billion to $75 billion. That's short of the $100 billion-plus foreseen by the Crown Prince, but would dwarf the world record for an IPO of $25 billion by Alibaba Group Holding Ltd. in 2014. Proceeds from the Aramco sale would bulk up a sovereign wealth fund at the center of a drive to diversify the economy, a goal that’s gained urgency since the price of crude tumbled in 2014. The Crown Prince’s push to create jobs for millions of young Saudis in manufacturing, tourism and other fields is seen as crucial to the kingdom’s future, with at least half the IPO proceeds devoted to domestic investments.

The Background

Explorers from the Rockefeller family’s Standard Oil empire first struck oil in Saudi Arabia in 1938. The venture became known as Arabian American Oil and went on to discover the Ghawar field, still the world’s largest onshore deposit. In 1980, the Saudi government bought out the original shareholders, all of them forebears of Exxon Mobil Corp. or Chevron Corp, and renamed the company. Aramco has fueled decades of prosperity for Saudi Arabia, a conservative Islamic state and one of the world’s last remaining absolute monarchies. It generates almost 90 percent of government income and built the refineries, petrochemical plants and other infrastructure that form the backbone of the world’s 15th-biggest economy. Saudi Arabia has been the de facto leader of the Organization of Petroleum Exporting Countries, or OPEC, since the cartel was founded in 1960. It’s often called the “swing producer” because decisions to increase or trim Saudi output drive the price of oil. Saudi crude accounts for about 1 out of every 9 barrels of global production and can be extracted for about a third of the cost of reserves in the U.S. Over the decades, Saudi Arabia has had a hand in engineering periods of lower oil prices  — including the current slump — in a bid to maintain its share of global energy markets.

The Argument 

Prince Mohammed's plan envisions the Aramco IPO as the centerpiece of Saudi Arabia's biggest economic shakeup since the founding of the country in 1932. Although details of what exactly will be sold remain unclear, the IPO will be based on Aramco maintaining the so-called concession, which gives it the right to exploit the kingdom's oil and gas reserves. Some skeptics suggest the government might scale back the plan to make it palatable to a traditionally closed nation that may be reluctant to relinquish its hold on a national resource. Prince Mohammed said in 2017 that any decisions on the country’s oil and gas reserves and production will remain with the government after the share sale. Yet it’s still unclear how the country will preserve its historic role in world oil markets and how much influence the extensive Saudi royal family will continue to exert over its most prized asset. For the biggest oil economy, the clock is ticking. Even with the world’s shift to cleaner fuels, oil is expected to continue providing about a third of world energy for the next two decades. Aramco’s IPO will put a price tag on the future of petroleum just as Saudi Arabia is fixing its sights on the end of its own oil age

The Reference Shelf

 

    First published Aug. 17, 2016

    To contact the writers of this QuickTake:
    Anthony Dipaola in Dubai at adipaola@bloomberg.net
    Wael Mahdi in Riyadh at wmahdi@bloomberg.net

    To contact the editor responsible for this QuickTake:
    Nayla Razzouk at nrazzouk2@bloomberg.net

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