An initial public offering of part of Saudi Aramco could have global consequences

In a January 2016 interview, Deputy Crown Prince Mohammed bin Salman Al Saud hinted that Saudi Arabia was considering selling a stake in Saudi Aramco, the world’s largest oil producer and the central player in the country’s energy sector. The news caught many people in the energy industry by surprise and led to a scramble to try to understand exactly what this meant, and what the Kingdom might, ultimately, be considering selling.

Shortly thereafter, Saudi Aramco released a brief statement saying it was considering several options, one of which was the listing of “an appropriate percentage of the company’s shares and/or the listing of a bundle of its downstream subsidiaries”. Subsequent reports suggested that the Kingdom was willing to sell parts of its refining business but would not be open to offers for its crude oil exploration or production operations.

This was then confirmed by Khalid Al Falih, chairman of the board of directors at Saudi Aramco, at the Davos World Economic Forum in late January 2016. “The reserves would not be sold, but the company’s ability to produce from the reserves is being studied,” Al Falih said.

Strategic Sense

The eventual initial public offering (IPO) of certain Saudi Aramco assets makes sense both economically and politically for the Kingdom, bringing in funds at a time when Saudi Arabia is enduring lower energy receipts and subsequent budget cuts. Moreover, it could bring in additional expertise to the oil and gas giant, and further signal to investors that the Kingdom is serious about pushing forward with economic reforms and improved state asset transparency.

Saudi Aramco, which was founded as a subsidiary of Standard Oil of California in 1938 but fully nationalised in 1980, produces, by its own estimates, one in every eight barrels of crude oil worldwide. In 2015 the company had an average crude oil production of some 10.2m barrels per day, a record high, according to its most recent annual report. In addition to oil and gas exploration and extraction, the company has operations in refining, as well as in other downstream aspects of the petrochemicals industry.

What To Buy

The fact that a future deal for Saudi Aramco will not involve the company’s crude oil or gas reserves, which account for over 15% of all global oil deposits, is an important point. Considered a national asset, the company’s crude reserves are estimated at 261.1bn barrels. If they were to be included in a deal it would raise the value of the company to well in excess of $2trn.

As of September 2016, there had been no concrete announcement of what assets are being considered for partial listing or sale, although any partial sale of the company is expected to be of a stake of approximately 5%, according to statements made by Prince Mohammed bin Salman.

With the company seen as unlikely to sell stakes in its upstream operations, downstream businesses are being viewed as the most likely assets for an IPO, including Saudi Aramco’s refineries both overseas and in the Kingdom. Some analysts have suggested that Sadara Chemical Company, a $20bn joint venture (JV) with US-based Dow Chemical, could be another option. There is a precedent for this type of sale. PetroRabigh – a refining and petrochemical JV between Saudi Aramco and Japan’s Sumitomo Chemical – went public on the Saudi Stock Exchange in 2008, with the issue oversubscribed five-fold. Moreover, media reported in June 2016 that the company was mulling a dual listing in Saudi Arabia and on an overseas exchange such as London, New York or Hong Kong (see Capital Markets chapter). Some analysts suggest that a future deal could also open the way for the sale or IPO of other state assets.