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For I.P.O., Saudi Oil Company May Have to Give Up Some of Its Secrets

“Talk is cheap, implementation is difficult,” said Fadel Gheit, a senior oil company analyst at Oppenheimer & Company. “They will have to recreate books that never existed.”


Khalid A. al-Falih, Saudi Arabia’s energy minister and chairman of Saudi Aramco, speaking at a conference in Houston on Tuesday.

Melissa Phillip/Houston Chronicle, via Associated Press

As a prize, there are fewer bigger than Saudi Aramco. The Saudis plan to offer 5 percent of the company, which could raise $20 billion to $100 billion, depending on a company valuation still to be determined.

The Saudis insist on the higher values based on the country’s 266 billion barrels of oil reserves, roughly 15 percent of total global supplies, which they say provide the company with a total valuation of $2 trillion. The bankers, however, are relying on other calculations, based on various analyses of operations, costs and projections of future commodity prices. The consultants at Wood Mackenzie figure a valuation of roughly $400 billion.

The biggest banks, including JPMorgan Chase, Morgan Stanley and HSBC, are positioning themselves by advising the Saudis on how to structure the offering.

But investment bankers say the value of the company can be determined only after the Saudi government outlines the minority protections that investors will have, what taxes they will have to pay, and what Saudi Aramco’s cost structure will be. Complex assumptions must be made involving projections of oil prices and demand over the next 30 to 50 years in a world increasingly worried about climate change and susceptible to technological disruption.

Under a privatization, some combination of the government, the Saudi sovereign wealth fund and members of the royal family would have to share the profits with foreign investors. Since the government depends on the company for most of its revenue, that is a delicate issue.

Separating Saudi Aramco from the government could be as complicated as separating conjoined twins. Not only is the company’s governance tied to the management of the state’s most valuable assets — its oil, refineries, production equipment and pipelines — but it is called on to do things far removed from energy, like building hospitals and schools and financing homeownership. The company sells a substantial amount of its production domestically at sizable discounts to world prices.

The state company now pays an 85 percent tax on its profits. That rate would probably be reduced considerably to make the stock offering attractive, but that could complicate state finances at a time when the government is struggling with higher debts and lower revenue.


Workers at a Saudi Aramco complex in Jubail, Saudi Arabia, in December 2011. The Saudis have insisted that Saudi Aramco should be valued at $2 trillion, though some international oil experts have valued it far less.

Ayesha Malik

But it is not surprising that there would be hurdles in privatizing a company whose finances are tightly interwoven not only with the state but even with the royal family, including members of clans disaffected when King Salman bypassed several senior princes to consolidate power and position his own favorites for succession.

“You can imagine a lot of things going wrong,” said Amy Myers Jaffe, a Middle East energy expert at the University of California, Davis. “Maybe they are going to get a lot less money than they thought they were going to get, and that is going to be a budget problem and a failure.”

Saudi Aramco has never released the kind of financial statements that Western companies do routinely. That could be a problem if the company pushes for a New York Stock Exchange listing, as expected, since the Securities and Exchange Commission would insist on precise disclosure of proven undeveloped reserves, which must be developed within five years to remain on the books. Such decisions have been kept strictly secret by the Saudis.

Bankers say they are enthusiastic about the potential of the deal to produce a bountiful and secure dividend stream, but only as long as Saudi officials make the pragmatic decisions to structure Saudi Aramco like other public companies. They praise the company for its professional management and productivity.

“Assuming a market-related governance and tax structure,” said Osmar Abib, global co-head of oil and gas investment banking at Credit Suisse, “Saudi Aramco should produce strong cash flows given its low-cost crude production profile and substantial reserve position.”

In his talk on Tuesday, Mr. Falih acknowledged that there was still resistance to change in the kingdom and that his company still needed to work on its accounting practices to meet international stock exchange standards.

“It’s not simple, it’s really complex,” he said.

Some analysts are optimistic that solutions can be found. They note that King Salman and his favorite son, Prince Mohammed bin Salman, the deputy crown prince, are committed to the offering as the cornerstone of their Vision 2030 plan, designed to diversify and privatize the Saudi economy, from the oil sector to utilities to airports. They note that Saudi Arabia last year reversed its policy of letting global oil prices freely fall by pushing the Organization of the Petroleum Exporting Countries to cut production, in part because a higher oil price would make the offering more attractive.

“Everything is changing,” said Samer S. al-Ashgar, president of the King Abdullah Petroleum Studies and Research Center, based in Riyadh. “There is no better way to describe it than as a business culture revolution.”

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