“The new tax rate will bring Saudi Aramco in line with international benchmarks,” Saudi Aramco’s chief executive officer, Amin H. Nasser, said in a statement.
The tax cut was announced a couple of months after intensive discussions with international bankers in Riyadh about how the offering should be structured. Bankers and independent specialists said the cut would help increase the cash flow available for dividends to future investors and also suggested that various Saudi interest groups were reaching a consensus on how to proceed with the privatization.
“It is very much a positive move,” said Jean-François Seznec, a Middle East energy specialist at the Atlantic Council’s Global Energy Center. “It means the various Saudi parties involved — the state, the public investment fund and the royal family — are negotiating with the idea of coming to a solution.”
Under a privatization, some combination of the government, the Saudi sovereign wealth fund, members of the royal family and individual Saudis would share 95 percent of profits and dividends. Dividing that pie is a delicate issue because the government depends on the company for most of its revenue and the company is involved in many social programs, like building hospitals and schools.
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Pool photo by Lintao Zhang
The Saudi finance minister, Mohammed al-Jadaan, said in a statement that the new tax code for Saudi Aramco would have no impact on government services because any tax revenue lost would be “replaced by stable dividend payments by government-owned companies and other sources of revenue, including profits resulting from investments.”
Saudi Aramco does not publicly release information about earnings or the taxes and royalties it pays the government and others. Specialists say commodity prices and sales will determine profits and payments to shareholders, including the government and the royal family, with dividends taking the place of the higher taxes. The Saudis hope that new investment through the share offering will result in a bit of growth that will increase profits.
Saudi Aramco’s ability to provide financing for the government has been sharply reduced in the last three years as world oil prices have collapsed. Even after cuts in subsidies and social programs, this year’s government budget deficit is expected to be $53 billion. The Fitch Ratings agency this month downgraded the country’s sovereign credit rating for the second time in a year, and foreign reserves are in worrisome decline.
Nevertheless, the taxation announcement was another sign that the initial public offering, which has been slow to get off the ground, may be gaining momentum. King Salman recently completed a three-week tour of Asia in which he advanced Saudi Aramco’s campaign to become a major refining and petrochemical power in China, Japan, Malaysia and Indonesia. Mounting joint investments with some of Saudi Aramco’s biggest customers should increase the value of Saudi Aramco to investors in the future, energy specialists said.
Saudi Aramco recently agreed to pay Royal Dutch Shell $2.2 billion in an arrangement splitting their United States refining and marketing business, Motiva Enterprises. That deal will put the refinery in Port Arthur, Tex. — the largest in the United States — totally under Saudi Aramco control. That should allow Saudi Arabia to expand, or at least stabilize, oil exports to the United States, which have been declining as American domestic production increases.
Energy specialists warn that the offering still faces hurdles. Saudi Aramco will need to be far more transparent to meet Securities and Exchange Commission disclosure requirements to be listed on the New York Stock Exchange, and members of the royal family may resist having shareholders from Western countries.
Failure to attract a large sum of capital for the offering would be deeply embarrassing to King Salman and his favorite son, Deputy Crown Prince Mohammed bin Salman, who is pushing the privatization as part of a sweeping reorganization of the national economy.
Mr. Seznec said that when he recently visited Saudi Arabia to lecture young middle managers at Saudi Aramco, he noticed a broad confidence that the offering would ultimately succeed.
“There is so much emphasis in the higher levels and lower levels within the kingdom that this I.P.O. will take place,” he said. “Their vision is to make Saudi Aramco like Exxon Mobil, but much bigger.”
