The only way for the Aramco IPO is downstream
By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk
The Aramco IPO fog has been partly cleared up, after Amin Nasser, Aramco?s CEO, opened up to the press during a meeting at the World Economic Forum (WEF) in Davos, Switzerland.
What some already expected has now become clear, Aramco?s much anticipated Initial Public Offering (IPO), will be mainly targeting downstream assets. Even though Nasser did not explicitly state this, looking at remarks made previously by Saudi Minister of Energy Khalid Al Falih, the picture is clear. As Al Falih clearly stated, the only one having ownership rights of Saudi crude oil and gas reserves in the Kingdom is Saudi Aramco, no other player will be involved.
Ongoing diversification efforts of Aramco the last years, as shown by its multi-billion downstream spending spree the last months in Asia (especially Pakistan and South Korea) have put the IPO on hold. At the same time, Aramco is fully engaged in setting up external financing for the slated SABIC acquisition, which would make it in one go the world?s largest downstream company. For the Kingdom, a downstream IPO would not only remove transparancy issues with regards to commercial operations of Aramco, price settings and reserve questions, but would also make it easier to involve foreign partners. Downstream assets also could and will include international assets, partly to support higher interest of investments funds and sovereign wealth funds.
Nasser still did not refer to a full-downstream IPO, but the signals are clear. The Kingdom has changed tax rules, made a new concession agreement, changed Aramco into a joint stock company, and introduced a lot of fiscal reforms to facilitate a listing, but skepticism about the transparency of the Saudi ?national oil company? still exists. The first next step still is the acquisition of SABIC, and the financing of this $70 billion deal. Advisors have already been contracted, while the Saudi sovereign wealth fund PIF, the main shareholder of SABIC, is positive on the sale.
At the same time, as stated above, Saudi minister of Energy Khalid Al Falih has reiterated that Aramco will retain exclusive rights to develop Saudi Arabia?s oil reserves. Al Falih said ?there is no intention whatsoever to chip away at Aramco?s exclusivity and its concession?. This is seen by some investors as a very large risk, even if third party assessments have now shown full reserves of the company. Still, for Riyadh, the position of Aramco and ownership of the oil reserves, is of national security. Saudi Arabia?s current geopolitical position, and the growing investment attractiveness, is still directly linked to the company?s oil reserves. As shown by current developments, the oil giant is focusing on downstream JVs, even within the Kingdom, but there?s no eagerness in upstream JVs. Security of the Kingdom, and its Royal Family, Al Saud, depends 100% on the oil revenue base. With total reserves audited at a total of 268.5 billion barrels, no moves are to be expected to change this situation. Without full transparency in reserves and commercial pricing decisions (as Aramco is still to be considered a NATIONAL oil company), the only way for an IPO is downstream.
Riyadh also will need to have the full ownership of oil and gas reserves in the Kingdom to leverage the latter for its multi-billion or even trillion investment schemes being presented. Without this, no major diversification can be executed and the position of the ruling royal family will also be directly affected. A cash machine like Aramco?s upstream department is simply too valuable to be offered to the markets.
By Dr. Cyril Widdershoven for Oilprice.com