A year ago Mohammed bin Salman, Saudi Arabia’s deputy crown prince and the power behind the throne, electrified the global energy industry by revealing plans to float the world’s largest oil producer.
The ambitious proposal for an initial public offering in state-owned Saudi Aramco is the centrepiece of the hard-charging 31-year-old’s vision to overhaul an economy seen as too heavily dependent on natural resources.
One year on from Prince Mohammed’s statement of intent, many key issues are still to be resolved: notably those pertaining to the precise shape of Saudi Aramco as a public company, its tax rate and dividend policy, and where it will take a stock market listing.
But Saudi officials and advisers who are scrambling to secure work on the flotation say one thing is clear: this is no ordinary IPO.
“This listing is different to every other in terms of scale, the nature of the offering, the uncertainties around it, the timeline, the process,” says one person who has discussed the IPO planning with Saudi officials. “Nothing about it is comparable.”
Saudi officials are seeking to transform Saudi Aramco into the world’s most valuable publicly traded company, which they say is worth about $2tn.
Those close to the planning say the sale of a 5 per cent stake should happen next year, although the number of shares sold could increase, and the IPO timing could slip.
Saudi Aramco declined to comment. Saudi government officials were unavailable to comment.
Advisers are fully aware the IPO plans are being driven by Prince Mohammed, the son of King Salman bin Abdul Aziz al-Saud.
They say a successful flotation is essential to the deputy crown prince’s radical efforts to wean the kingdom off oil through his Vision 2030 programme, which aims to diversify the Saudi economy and create jobs.
The slump in oil prices since 2014 unleashed a sharp economic slowdown in Saudi that has prompted criticism of the ruling royal family by the country’s citizens, and Prince Mohammed wants to use the IPO proceeds for investments in non-oil industries — from technology and manufacturing to tourism.
“The state can no longer afford to allow see-sawing [oil] prices to disrupt its ability to govern,” says Jim Krane, a Middle East energy expert.
What’s in the IPO and what’s out
Saudi Aramco is heavily entwined with the Saudi state. Although its core operations are focused on producing and refining oil, the company conducts an array of other activities on behalf of the government.
These functions have included operating hospitals, running education programmes and building sports stadiums.
But to achieve the highest possible valuation in the IPO, there is a drive under way to streamline the company that would be taken public, so that it resembles one of the large international oil groups rather than a sprawling conglomerate.
The so-called integrated western majors have an upstream division responsible for exploration and production, and a downstream unit that refines crude.
“A lot of housekeeping and spring cleaning needs to be done before any listing can happen,” says a second person familiar with Saudi Aramco’s IPO planning. “Aramco needs to present itself as a company that is focused. Anything that is not for a strategic purpose will need to be removed.”
Staff at Saudi Aramco have spent months untangling the company’s finances from those of the government, and separating its core oil operations from projects that reflect its broader role in Saudi society.
Saudi Aramco aims to exclude as many of these non-oil projects as possible from the company that floats, by establishing joint ventures and other arrangements to take responsibility for such activities.
The company is working with the government to create a project management entity that can handle development of critical infrastructure, says one person with knowledge of the matter.
Who’s in charge, tax and the dividend
Under the IPO plans, the Saudi government will remain Saudi Aramco’s controlling shareholder, having the final say over production levels and management of the kingdom’s oil reserves.
Saudi Aramco executives are keen to resolve issues around payments it makes to the state in the form of taxes and royalties, because this will heavily influence its dividend policy, and therefore the company’s IPO valuation.
Historically, Saudi Aramco’s profits have been taxed at 85 per cent, and it pays a 20 per cent royalty on its oil production to the state, say two people close to the company.
The company has discussed the case for reducing its tax rate to about 50 per cent, although this has not been finalised, and requires government approval.
Timing should be everything
Getting a flotation away in 2018 is no easy task for Khalid Al Falih, the Saudi energy minister and chairman of Saudi Aramco.
Saudi Aramco pushed last year to overhaul its accounts so that its financial reporting in 2017 could be used in its IPO regulatory filings, say several people close to the company.
But the government will need to set out a new tax regime for Saudi Aramco before it can produce its 2017 figures in this manner, and generate pro-forma accounts for the previous two years.
Meanwhile a third-party audit of the kingdom’s oil reserves — estimated at 260bn barrels by Saudi Aramco last year — has been conducted, say two people familiar with the work.
Releasing audited accounts and reserves would be an unprecedented exercise in transparency by the company. Saudi Aramco has never issued a set of financial statements, and the country’s reserves data has been questioned by experts because the figures have barely fluctuated since the 1980s.
Where will Saudi Aramco find a home?
Another big outstanding question is the location of Saudi Aramco’s stock market listing. People close to the company say a primary listing is most likely overseas, with a secondary one in Riyadh.
While New York is being considered for the primary listing, US legislation that allows families of victims of the 9/11 attacks to sue Saudi has complicated matters. London is seen as prestigious, and Asian exchanges, including Hong Kong and Tokyo, are also being discussed.
The listing, disclosure and corporate governance rules associated with these overseas exchanges could have a significant influence on which one Saudi Aramco selects.
For example, companies on the London Stock Exchange are required to have a free float of not less than 25 per cent of their shares, although the authorities can permit a listing that does not meet this threshold in certain instances.
“In order to be able to list Aramco . . . and get the sort of valuation that the Saudis are hoping for, Aramco will need to open its books and increase transparency, including with independently audited reserves, to an extent it has not previously,” says Jason Bordoff at Colombia University’s Centre on Global Energy Policy.
Additional reporting by Arash Massoudi, Simeon Kerr and Pilita Clark